e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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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
(Exact name of Registrant as specified in its charter)
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California
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94-2823865 |
(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 |
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Redding, California
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96002 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (530) 722-3952
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, No Par Value per share
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NASDAQ Global Market |
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in
Rule 405 of the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Note Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those
Sections.
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
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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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the
Registrants knowledge, in definitive proxy or information statements incorporated by
reference to Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No
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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 þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act) Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business
day of the registrants most recently completed second fiscal quarter.
As of the last day of the second fiscal quarter of 2010, the aggregate market value of the
registrants common stock held by non-affiliates of the registrant was $75,004,921 based
on the closing sale price of $4.74 as reported on the NASDAQ Global Market as of June 30,
2010.
Indicate the number of shares outstanding of each of the issuers classes of common stock,
as of the last practicable date.
The number of shares of the registrants no par value Common Stock outstanding as of March
3, 2011 was 16,991,495
DOCUMENTS INCORPORATED BY REFERENCE
None
Bank of Commerce Holdings Form 10-K
Table of Contents
2
PART I
Special Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the Securities Exchange Act
of 1934 (Exchange Act) and the Private Securities Litigation Reform Act of 1995. These
statements are based on managements beliefs and assumptions, and on information available to
management as of the date of this document. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set forth under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements also include statements in which words such as expects, anticipates,
intend, plan, believes, estimate, consider or similar expressions or conditional verbs
such as will, should, would and could are intended to identify such forward looking
statements. Forward-looking statements are not guarantees of future performance. They involve
risks, uncertainties and assumptions. The Companys actual future results and shareholder values
may differ materially from those anticipated and expressed in these forward-looking statements.
Many of the factors that will determine these results and values are beyond the Companys ability
to control or predict. Investors are cautioned not to put undue reliance on any forward-looking
statements. In addition, the Company does not have any intention and assumes no obligation to
update forward-looking statements after the date of the filing of this report, even if new
information, future events or other circumstances have made such statements incorrect or
misleading. Except as specifically noted herein all references to the Company refer to Bank of
Commerce Holdings, a California corporation, and its consolidated subsidiaries.
The following factors, among others, could cause our actual results to differ materially from those
expressed in such forward-looking statements:
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The strength of the United States economy in general and the strength of the local
economies in which we conduct operations, the duration of current financial and economic
volatility and decline and actions taken by the United States Congress and governmental
agencies, including the United States Department of the Treasury (the Treasury), to deal
with challenges to the United States financial system; |
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The effects of, and changes in, trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal Reserve System, or the
Federal Reserve Board |
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Inflation, interest rate, market and monetary fluctuations, the risks presented by a
continued economic recession, which could adversely affect credit quality, collateral
values, investment values and liquidity; |
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Changes in the financial performance and/or condition of our borrowers; |
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Changes in consumer spending, borrowing and savings habits; |
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Changes in the level of our nonperforming assets and charge-offs; |
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Oversupply of inventory and continued deterioration in values of real estate in
California and the United States generally, both residential and commercial; |
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Changes in securities markets, public debt markets and other capital markets; |
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Possible other-than-temporary impairments of securities held by us; |
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The timely development of competitive new products and services and the acceptance of
these products and services by new and existing customers; |
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The willingness of customers to substitute competitors products and services for our
products and services; |
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The impact of changes in financial services policies, laws and regulations, including
laws, regulations and policies concerning taxes, banking, securities and insurance, and
the application thereof by regulatory bodies; |
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Technological changes could expose us to new risks, including potential systems
failures or fraud; |
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The timing and effect of acquisitions we may make, if any, including, without
limitation, the failure to achieve the expected revenue growth and/or expense savings from
such acquisitions; |
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Possible impairment of goodwill that has been recorded in connection with acquisitions
which may have a material adverse impact on our earnings; |
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The effect of changes in accounting policies and practices, as may be adopted from
time-to-time by bank regulatory agencies, the Securities and Exchange Commission (the
SEC), the Public Company Accounting Oversight Board, the Financial Accounting Standards
Board or other accounting standards setters; |
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The impact of current governmental efforts to restructure the United States financial
regulatory system, including changes in the scope and cost of FDIC insurance and other
coverages and changes in the Treasurys Capital Purchase Program; |
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Ability to attract deposits and other sources of liquidity at acceptable costs; |
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Changes in the competitive environment among financial and bank holding companies and
other financial service providers; |
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The loss of critical personnel and the challenge of hiring qualified personnel at
reasonable compensation levels; |
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Geopolitical conditions, including acts or threats of war or terrorism, actions taken
by the United States or other governments in response to acts or threats of war or
terrorism and/or military conflicts, which could impact business and economic conditions
in the United States and abroad; |
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Unanticipated regulatory or judicial proceedings; and |
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Our ability to manage the risks involved in the foregoing. |
If our assumptions regarding one or more of the factors affecting our forward-looking information
and statements proves incorrect, then our actual results, performance or achievements could differ
materially from those expressed in, or implied by, forward-looking information and statements
contained in this prospectus and in the information incorporated by reference in this prospectus.
Therefore, we caution you not to place undue reliance on our forward-looking information and
statements. We will not update the forward-looking statements to reflect actual results or changes
in the factors affecting the forward-looking statements.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis
upon which investors evaluate us. Any investor in our common stock should consider all risks and
uncertainties discussed in BUSINESS RISK FACTORS and in the MD&A.
ITEM 1. BUSINESS
Bank of Commerce Holdings (Company,, Holding Company, We, or Us) is a corporation organized
under the laws of California and a bank holding company. Our principal business is to serve as a
holding company for Redding Bank of Commercetm (Bank), which operates under
two separate names Redding Bank of Commercetm, and Roseville Bank of
Commercetm, a division of Redding Bank of Commerce, and for Bank of Commerce
Mortgagetm, our majority-owned mortgage brokerage subsidiary. We also have two
unconsolidated subsidiaries, Bank of Commerce Holdings Trust and Bank of Commerce Holdings Trust
II, which were organized in connection with our prior issuances of trust preferred securities. Our
common stock is traded on the NASDAQ Global Market under the symbol BOCH.
The Company commenced banking operations in 1982 and currently operates four full service
facilities in two diverse markets in Northern California. We are proud of the Banks reputation as
one of Northern Californias premier banks for business. We provide a wide range of financial
services and products for business and consumer banking. The services offered by the Bank include
those traditionally offered by banks of similar size in California, such as free checking,
interest-bearing checking and savings accounts, money market deposit accounts, sweep arrangements,
commercial, construction and term loans, travelers checks, safe deposit boxes, collection services
and electronic banking activities. The Bank is an affiliate of LPL Financial and offers wealth
management services through that affiliation.
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In order to enhance our noninterest income, we acquired 51.0% of the capital stock of Simonich
Corporation, a successful state of the art mortgage broker of residential real estate loans
headquartered in San Ramon, California, with fourteen offices in two different states and licenses
in California, Oregon, Washington, Idaho and Colorado. The acquisition allows us to penetrate into
the mortgage brokerage services market at our current bank locations and to share in the income on
mortgage transactions nationwide. On July 1, 2009 we changed the mortgage companys name to Bank
of Commerce Mortgagetm in order to enhance our name recognition throughout
Northern California. The services offered by Bank of Commerce Mortgagetm
include brokerage mortgages for single and multi-family residential new financing, refinancing and
equity lines of credit; all loan originations are sold, servicing released to the secondary market
or to correspondent relationships.
We are continuously search for both organic and external expansion opportunities, through internal
growth, strategic alliances, acquisitions, establishing new offices or the delivery of new products
and services.
Systematically, we will reevaluate the short and long-term profitability of all of our lines of
business, and will not hesitate to reduce or eliminate unprofitable locations or lines of business.
We remain a viable, independent bank committed to enhancing shareholder value. This commitment
has been fostered by proactive management and vigilant dedication to our staff, customers, and the
markets we serve.
Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to maintain our customer relationships and build new ones. Our competitors are no longer
just banks; we must compete with a myriad of other financial entities that compete for our core
business. We have developed strategic plans that evaluate additional services and products that
can be delivered to our customers efficiently and profitably. Producing quality returns is, as
always, a top priority.
Our governance structure enables us to manage all major aspects of our business effectively through
an integrated process that includes financial, strategic, risk and leadership planning. Our
management processes, structures and policies and procedures help to ensure compliance with laws
and regulations and provide clear lines for decision-making and accountability. Results are
important, but we are equally concerned with how we achieve those results. Our core values and
commitment to high ethical standards is material to sustaining public trust and confidence in our
Company.
Our primary business strategy is to provide comprehensive banking and related services to small and
mid-sized businesses, not-for-profit organizations, and professional service providers as well as
banking services for consumers, primarily business owners and their key employees. We emphasize
the diversity of our product lines and high levels of personal service and, through our technology,
offer convenient access typically associated with larger financial institutions, while maintaining
the local decision-making authority and market knowledge, typical of a local community bank.
Management intends to pursue our business strategy through the following initiatives:
Utilize the Strength of Our Management Team. The experience, depth and knowledge of our management
team represent one of our greatest strengths and competitive advantages. Our Senior Leadership
Committee establishes short and long-term strategies, operating plans and performance measures and
reviews our performance to plan on a monthly basis. Our Credit Round Table Committee recommends
corporate credit practices and limits, including industry concentration limits and approval
requirements and exceptions. Our Technology Steering Committee establishes technological
strategies, makes technology investment decisions, and manages the implementation process. Our
Asset Liability Management Committee (ALCO) Round Table Committee establishes and monitors
liquidity ranges, pricing, maturities, investment goals, and interest spread on balance sheet
accounts. Our SOX 404 Compliance Team has established the master plan for full documentation of
the Companys internal controls and compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Leverage Our Existing Foundation for Additional Growth. Based on our managements depth of
experience and certain infrastructure investments, we believe that we will be able to take
advantage of
certain economies of scale typically enjoyed by larger organizations to expand our operations both
organically and through strategic cost-effective avenues.
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We believe there will be opportunities to acquire failing institutions or their assets through loss
sharing agreements with the FDIC, buy branches from struggling banks in our market areas looking to
improve their capital metrics, and acquire entire franchises for little to no premium. We also
believe that the investments we have made in our data processing, staff and branch network will be
able to support a much larger asset base. We are committed, however, to control any additional
growth in a manner designed to minimize risk and to maintain strong capital ratios.
Maintain Local Decision-Making and Accountability. We believe we have a competitive advantage over
larger national and regional financial institutions by providing superior customer service with
experienced, knowledgeable management, localized decision-making capabilities and prompt credit
decisions. We believe that our customers want to deal directly with the people who make the
ultimate credit decisions and have provided our Bank managers and loan officers with the authority
commensurate with their experience and history which we believe strikes the right balance between
local decision-making and sound banking practice.
Focus on Asset Quality and Strong Underwriting. We consider asset quality to be of primary
importance and have taken measures to ensure that, despite the turbulent economy and growth in our
loan portfolio, we consistently maintain strong asset quality. As part of our efforts, we utilize
a third party loan review service to evaluate our loan portfolio on three engagements per year to
recommend action on certain loans if deemed appropriate. As of December 31, 2010, we had $22.8
million in nonperforming assets, including other real estate owned of $2.3 million, which as a
percentage of total assets was 2.43%. We also seek to maintain a prudent allowance for loan
losses, which at December 31, 2010 was $12.8 million, representing 2.14% of our loan portfolio, not
including loans held for sale.
Build a Stable Core Deposit Base. We will continue to grow a stable core deposit base of business
and retail customers. In the event that our asset growth outpaces these local core deposit funding
sources, we will continue to utilize Federal Home Loan Bank borrowings and raise deposits in the
national market using deposit intermediaries. We intend to continue our practice of developing a
full deposit relationship with each of our loan customers, their business partners, and key
employees. We will continue to use hot spot consumer depositories with state of the art
technologies in highly convenient locations to enhance our core deposit base.
Our principal executive offices are located at 1901 Churn Creek Road, Redding, California and the
main telephone number is (530) 722-3939.
General
Parent Bank Holding Company. As a bank holding company, the Parent is subject to regulation under
the BHC Act and to inspection, examination and supervision by its primary regulator, the Board of
Governors of the Federal Reserve System (Federal Reserve Board or FRB). The Parent is also
subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended,
and the Securities Exchange Act of 1934, as amended, both as administered by the Securities and
Exchange Commission (SEC). As a listed Company on the NASDAQ Global Market, the Parent is subject
to the rules of the NASDAQ for listed companies.
Subsidiary Bank. The Companys subsidiary bank is subject to regulation and examination primarily
by the Federal Deposit Insurance Corporation (FDIC) and by the California Department of Financial
Institutions (CDFI).
Nonbank Subsidiary. The Companys nonbank subsidiary may be subject to the laws and regulations of
the federal government and/or the State of California.
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Parent Holding Company Activities
Financial in Nature Requirement. As a bank holding company that has elected to become a financial
holding company pursuant to the Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLB Act),
we may affiliate with securities firms and insurance companies and engage in other activities that
are financial in nature or incidental or complementary to activities that are financial in nature.
Financial in Nature activities include securities underwriting, dealing and market making,
sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant
banking, and activities that the FRB, in consultation with the Secretary of the U.S. Treasury,
determines from time to time to be financial in nature or incidental to such financial activity or
is complementary to a financial activity and does not pose a safety and soundness risk.
FRB approval is not required for the Company to acquire a company (other than a bank holding
company, bank or savings association) engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the FRB. Notice of such
acquisitions, however, must be given to the FRB within 30 days of commencing a new financial
activity or acquiring a company engaged in financial in nature activities. Prior FRB approval is
required before the Company may acquire the beneficial ownership or control of more than 5% of the
voting shares or substantially all of the assets of a bank holding company, bank or savings
association.
Because the Holding Company is a financial holding company, if the Bank receives a rating under the
Community Reinvestment Act of 1977, as amended (CRA), of less than satisfactory, the Company will
be prohibited, until the rating is raised to satisfactory or better, from engaging in new
activities or acquiring companies other than bank holding companies, banks or savings associations.
The Company could engage in new activities, or acquire companies engaged in activities that are
closely related to banking under the BHC Act.
In addition, if the FRB finds that the Bank is not well capitalized or well managed, the Holding
Company could be required to enter into an agreement with the FRB to comply with all applicable
capital and management requirements and which may contain additional limitations or conditions.
Until corrected, the Company would not be able to engage in any new activity or acquire companies
engaged in activities that are not closely related to banking under the BHC Act without prior FRB
approval. If the Company failed to correct any such condition within a prescribed period, the FRB
could order the Company to divest the Bank or, in the alternative, to cease engaging in activities
other than those closely related to banking under the BHC Act.
To qualify as well-capitalized, the Bank must, on a consolidated basis: (i) maintain a total
risk-based capital ratio of 10% or greater, (ii) maintain a Tier 1 risk-based capital ratio of 6%
or greater and (iii) not be subject to any order by the FRB to meet a specified capital level. To
qualify as well-managed, the Bank, as the Holding Companys only controlled financial
institution, must have received at its most recent examination or review a composite rating and
rating for management of at least satisfactory.
In determining whether to approve a proposed bank acquisition, federal bank regulators will
consider, among other factors, the effect of the acquisition on competition, financial condition,
and future prospects including current and projected capital ratios and levels, the competence,
experience, and integrity of management and record of compliance with laws and regulations, the
convenience and needs of the communities to be served, including the acquiring institutions record
of compliance under the CRA, and the effectiveness of the acquiring institution in combating money
laundering activities.
Principal Markets
The Company operates in two distinct markets. Redding Bank of Commerce (Bank) has
historically been a leading independent commercial bank in Redding, California, and Shasta County,
California. This market has been expanding, but is still relatively small when compared to the
greater Sacramento market which is the location of Roseville Bank of Commerce, a
division of Redding Bank of Commerce.
Management believes that these two markets complement each other, with the Redding market providing
the stability and the greater Sacramento market providing growth opportunities.
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Principal Products and Services
Through the Bank and its mortgage subsidiaries, the Bank 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 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 currently does not offer trust
services or international banking services.
The services offered by our mortgage subsidiary include single and multi-family residential new
financing, refinancing and equity lines of credit. All mortgage products originated through our
mortgage subsidiary are brokered and are not maintained on the Banks books as loans held for
investment purposes. 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 (1) commercial, (2) real estate
construction, and (3) commercial real estate.
The majority of the Banks loans are direct loans made to individuals and small businesses in the
major market areas of the Bank. 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 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.
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.
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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 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 are 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.
Government Supervision and Regulation
The Holding Company and Bank are subject to extensive federal and state supervision and regulation.
The following discussion describes the elements of the regulatory framework applicable to
financial holding companies and banks and specific information about the Holding Company and its
subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies
is intended primarily for the protection of depositors and the Deposit Insurance Fund rather than
for the protection of shareholders and creditors. The following discussion of laws and regulations
is only a summary. This discussion is qualified in its entirety by reference to such laws and
regulations.
Dividend Restrictions
The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be funded only through
borrowing or other arrangements that might adversely affect a bank holding companys financial
position. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) prohibits
insured depository institutions from paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions, including dividends, if, after such
transaction, the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the banks net income for its last three fiscal years (less any
distributions to shareholders during such period).
In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash
dividend with the prior approval of the Commissioner in an amount not exceeding the greater of the
banks retained earnings, the banks net income for its last fiscal year, or the banks net income
for its current fiscal year.
Regulators also have authority to prohibit a depository institution from engaging in business
practices which are considered to be unsafe or unsound, possibly including payment of dividends or
other payments under certain circumstances even if such payments are not expressly prohibited by
statute. The FRBs policy is that a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully fund each dividend
and its prospective rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition.
Prior to November 14, 2011, unless the Holding 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 Holding 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 Holding 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.
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Interstate Banking
A bank holding company may acquire banks in states other than its home state without regard to the
permissibility of such acquisitions under state law, but subject to any state requirement that the
bank has been organized and operating for a minimum period of time, not to exceed five years, and
the requirement that the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository institutions in the
United States and no more than 30% of such deposits in that state (or such lesser or greater amount
set by state law). Banks may also merge across state lines, therefore creating interstate
branches. Furthermore, a bank is now able to open new branches in a state in which it does not
already have banking operations if the laws of such state permit such de novo branching.
California law authorizes out-of-state banks to enter California by the acquisition of or merger
with a California bank that has been in existence for at least five years, unless the California
bank is in danger of failing or in certain other emergency situations, but limits interstate
branching into California to branching by acquisition of an existing bank.
Capital Standards
In the United States of America, banks, thrifts and bank holding companies are subject to minimum
regulatory capital requirements. Specifically, U.S. banking organizations must maintain a minimum
leverage ratio and two minimum risk-based ratios. The leverage ratio measures regulatory capital as
a percentage of average on-balance-sheet assets as reported in accordance with accounting
principles generally accepted in the United States of America (GAAP). The risk-based ratios
measure regulatory capital as a percentage of both on- and off-balance-sheet credit exposures with
some gross differentiation based on perceived credit risk. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low credit risk, such as
certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as
certain loans.
The current U.S. risk-based capital requirements are based on an internationally agreed framework
for capital measurement that was developed by the Basel Committee on Banking Supervision (BSC) in
1988. The international framework (1988 Accord) accomplished several important objectives. It
strengthened capital levels at large, internationally active banks and fostered international
consistency and coordination. The 1988 Accord also reduced disincentives for banks to hold liquid,
low risk assets. By requiring banks to hold capital against off-balance-sheet exposures, the 1988
Accord represented a significant step forward for regulatory capital measurement. The federal
banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets and
off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and
off-balance-sheet items of 4%.
As of December 31, 2010, the Holding Company and the Bank exceeded the well capitalized
requirements as follows:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Actual |
|
|
Well Capitalized |
|
|
Minimum Capital |
|
|
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
115,541 |
|
|
|
12.48 |
% |
|
|
n/a |
|
|
|
4.00 |
% |
Tier 1 Risk-Based |
|
|
115,541 |
|
|
|
13.74 |
% |
|
|
n/a |
|
|
|
4.00 |
% |
Total Risk-Based |
|
|
126,085 |
|
|
|
15.00 |
% |
|
|
n/a |
|
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding Bank of
Commerce |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
106,747 |
|
|
|
11.60 |
% |
|
|
5.00 |
% |
|
|
4.00 |
% |
Tier 1 Risk-Based |
|
|
106,747 |
|
|
|
13.34 |
% |
|
|
6.00 |
% |
|
|
4.00 |
% |
Total Risk-Based |
|
|
116,791 |
|
|
|
14.59 |
% |
|
|
10.00 |
% |
|
|
8.00 |
% |
Since the adoption of the 1988 Accord, the worlds financial system has become increasingly more
complex and the BSC has been working for several years to develop a new regulatory capital
framework that recognizes new developments in financial products, incorporates advances in risk
measurement and management practices, and more precisely assesses capital charges in relation to
risk (New Accord).
The New Accord encompasses three elements: minimum regulatory capital requirements, supervisory
review, and market discipline. Under the first element, a banking organization must calculate
capital requirements to credit risk, operational risk and market risk. The New Accord does not
change the definition of what qualifies as regulatory capital, the minimum risk-based capital
ratio, or the methodology for determining capital charges for market risk. The New Accord does
provide several methodologies for determining capital requirements for both credit and operational
risk. For credit risk there are two general approaches; the standardized approach (based on the
1988 Accord) and the internal ratings-based (IRB) approach, which uses the institutions internal
estimates of key risk drivers to derive capital requirements.
The New Accord provides three methodologies for determining capital requirements for operational
risk: the basic indicator approach, the standardized approach, and the advanced measurement
approaches (AMA). Under the first two methodologies, capital requirements for operational risk
are fixed percentages of specified, objective risk measures (for example, gross income.) The AMA
provides the flexibility for an institution to develop its own individualized approach for
measuring operational risk, subject to supervisory oversight.
The second pillar of the New Accord, supervisory review, highlights the need for banking
organizations to assess their capital adequacy positions relative to overall risk (rather than to
the minimum capital requirement), and the need for supervisors to review and take appropriate
actions in response to those assessments. The third pillar of the New Accord imposes public
disclosure requirements on institutions that are intended to allow market participants to assess
key information about an institutions risk profile and its associated level of capital.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires each federal
banking agency to take prompt corrective action to resolve the problems of insured depository
institutions, including but not limited to those that fall below one or more prescribed minimum
capital ratios. The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be placed, based on
the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. As of December 31, 2010, the Bank
was considered well capitalized under the regulatory framework for prompt corrective action.
An institution that, based upon its capital levels, is classified as well capitalized,
adequately capitalized or undercapitalized may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound
11
condition or an unsafe or unsound practice warrants such treatment. At each successive lower
capital category, an insured depository institution is subject to more restrictions.
The federal banking agencies, however, may not treat an institution as critically
undercapitalized unless its capital ratio actually warrants such treatment. If an insured
depository institution is undercapitalized, it will be closely monitored by the appropriate federal
banking agency.
Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions are required to
be imposed on insured depository institutions that are critically undercapitalized. Furthermore,
the appropriate federal banking agency is required to either appoint a receiver for the institution
within 90 days, or obtain the concurrence of the FDIC in another form of action.
Fiscal and Monetary Policies
The Companys business and earnings are affected significantly by the fiscal and monetary policies
of the federal government and its agencies. The Company is particularly affected by the policies of
the FRB, which regulates the supply of money and credit in the United States. Among the instruments
of monetary policy available to the FRB are (a) conducting open market operations in United States
government securities, (b) changing the discount rates of borrowings of depository institutions,
(c) imposing or changing reserve requirements against depository institutions deposits, and (d)
imposing or changing reserve requirements against certain borrowings by banks and their affiliates.
These methods are used in varying degrees and combinations to directly affect the availability of
bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The
policies of the FRB may have a material effect on the Companys business, results of operations and
financial condition.
Privacy Provisions of the Gramm-Leach-Bliley Act
Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability
of banks and other financial institutions to disclose nonpublic information about consumers to
nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in
some circumstances, allow consumers to prevent disclosure of certain personal information to
nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information
is transmitted through diversified financial services companies and conveyed to outside vendors.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) implemented a broad range of corporate governance
and accounting measures to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of disclosures under federal securities laws. The Holding
Company is subject to Sarbanes-Oxley because it is required to file periodic reports with the
Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Among other
things, Sarbanes-Oxley and/or its implementing regulations have established new membership
requirements and additional responsibilities for our audit committee, imposed restrictions on the
relationship between the Holding Company and its outside auditors (including restrictions on the
types of non-audit services our auditors may provide to us), imposed additional responsibilities
for our external financial statements on our Chief Executive Officer and Chief Financial Officer,
expanded the disclosure requirements for our corporate insiders, required our management to
evaluate the Holding Companys disclosure controls and procedures and its internal control over
financial reporting, and will require our auditors to issue a report on our internal control over
financial reporting.
12
Patriot Act and Anti-Money Laundering
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (Patriot Act) is intended to strengthen the ability of U.S. law
enforcement agencies and intelligence communities to work together to combat terrorism on a variety
of fronts. The Patriot Act has significant implications for depository institutions, brokers,
dealers and other businesses involved in the transfer of money. The Patriot Act requires the
Company to implement new or revised policies and procedures relating to anti-money laundering,
compliance, suspicious activities, and currency transaction reporting 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.
Economic Emergency Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 (EESA), which was signed into law on October 3,
2008, was enacted to promote liquidity in the financial markets and to minimize further economic
deterioration in the United States. The primary components of EESA are the Troubled Asset Relief
Program and increase in FDIC deposit insurance limits.
EESA authorized the U.S. Treasury Department (Treasury) to establish the Troubled Asset Relief
Program (TARP). Under EESA, $700 billion in total was authorized to purchase troubled assets
from financial institutions, which also includes making equity investments in such qualifying
institutions. The Treasury had until the end of 2009 to use the funds allocated for purchases
under EESA.
Using its authority under TARP, the Treasury also created the Capital Purchase Program (CPP).
The CPP immediately authorized the Treasury to purchase equity from qualifying financial
institutions, thus moving away from purchases of troubled assets as originally contemplated by
TARP. To participate, a qualifying financial institution issues to the Treasury non-voting,
redeemable preferred stock, and warrants for common stock, in an amount ranging from 1%-3% of such
institutions total risk-based assets, not to exceed $25 billion. The terms of the preferred stock
include payment of a dividend of 5% per annum for the first five years, and 9% per annum
thereafter. In addition, the financial institution must issue to the Treasury a ten-year warrant
to purchase shares of common stock, with an aggregate market price equal to 15% of the Treasurys
total investment in the financial institution. Financial institutions participating in the CPP
also must comply with the executive compensation and corporate governance requirements of EESA.
The Holding Company issued $17 million of Series A Preferred Stock under the CPP program.
EESA also provides that FDIC deposit insurance will be temporarily increased from $100,000 to
$250,000 until December 31, 2013, regardless of whether those funds are held in interest-bearing or
noninterest-bearing accounts. Deposits held at the Bank are fully insured to the extent of this
higher limit.
Temporary Liquidity Guarantee Program
On October 13, 2008, FDIC adopted the Temporary Liquidity Guarantee Program (TLGP), using the
authority contained in systemic risk exception to FDICIA. The aim of the TGLP was to strengthen
confidence and encourage liquidity in the banking system by guaranteeing newly issued senior
unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of
non-interest bearing deposit transaction accounts, regardless of dollar amount. The two core
components of the TGLP are the Debt Guarantee Program and the Transaction Account Guarantee
Program.
Under the Debt Guarantee Program, the FDIC guarantees all newly-issued senior unsecured debt issued
by participating entities up to certain prescribed limits. The guarantee does not extend beyond
June 30, 2012. As a result of this guarantee, the unpaid principal and interest of newly-issued
senior unsecured debt would be paid by the FDIC if the issuing insured depository institution
failed or if a bankruptcy petition were filed by its issuing holding company.
13
The Transaction Account Guarantee Program (TAGP) provides participating financial institutions to
offer depositors a temporary, full guarantee by the FDIC for funds held at FDIC-insured depository
institutions in noninterest-bearing transaction accounts above the existing deposit insurance
limit. This coverage became effective on October 14, 2008, and was originally scheduled to
terminate on December 31, 2009. On November 9, 2010 the FDIC Board of Directors issued the final
rule to implement the section of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) that provides temporary unlimited coverage for noninterest bearing transaction
accounts at all FDIC-insured depository institutions. The separate coverage for noninterest-bearing
transaction accounts becomes effective on December 31, 2010, and terminates on December 31, 2012.
Deposits held at our Bank are guaranteed to the fullest extent permitted.
Federal Deposit Insurance Premiums
On February 27, 2009, the FDIC adopted a final rule modifying its risk-based assessment system and
setting initial base assessment rates beginning April 1, 2009 at 12 to 45 basis points with
potential adjustments to each risk category. On May 22, 2009, the FDIC adopted a final rule
imposing a 5 basis point special assessment on each insured depository institutions assets minus
Tier 1 capital as of June 30, 2009, not to exceed 10 basis points times the institutions
assessment base for the second quarter of 2009. On November 12, 2009, the FDIC adopted a final
rule imposing a 13-quarter prepayment of FDIC insurance premiums payable by December 30, 2009.
President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Act). The Act effects changes in the FDIC assessment base with stricter oversight. A new council
of regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks
must keep on hand. FDIC insurance coverage is made permanent at the $250 thousand level retroactive
to January 1, 2008 and unlimited FDIC insurance is provided for noninterest-bearing transaction
accounts in all banks effective December 31, 2010 through the end of 2012. Further, the Act removes
the prohibition on payments of interest on demand deposit accounts as of July 21, 2011. Thus, if a
depositor sweeps any amount in excess of $250 thousand from a noninterest-bearing transaction
account to an interest bearing demand deposit, there is no FDIC insurance coverage on the portion
that is over $250 thousand coverage limit.
The Impact of New Financial Reform Legislation
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Act), a landmark financial reform bill comprised of new rules and
restrictions that will impact banks going forward. It includes key provisions aimed at preventing a
repeat of the 2008 financial crisis and a new process for winding down failing, systemically
important institutions in a manner as close to a controlled bankruptcy as possible. The Act
includes other key provisions as follows:
(1) The Act establishes a new Financial Stability Oversight Council to monitor systemic financial
risks. The Board of Governors of the Federal Reserve (Fed) are given extensive new authorities to
impose strict controls on large bank holding companies with total consolidated assets equal to or
in excess of $50 billion and systemically significant nonbank financial companies to limit the risk
they might pose for the economy and to other large interconnected companies. The Fed can also take
direct control of troubled financial companies that are considered systemically significant.
(2) The Act also establishes a new independent Federal regulatory body for consumer protection
within the Federal Reserve System known as the Bureau of Consumer Financial Protection (the
Bureau), which will assume responsibility for most consumer protection laws (except the Community
Reinvestment Act). It will also be in charge of setting appropriate consumer banking fees and caps.
The Office of Comptroller of the Currency will continue to have authority to preempt state banking
and consumer protection laws if these laws prevent or significantly interfere with the business
of banking.
14
(3) The Act restricts the amount of trust preferred securities (TPS) that may be considered as
Tier 1 Capital. For depository institution holding companies below $15 billion in total assets, TPS
issued before May 19, 2010 will be grandfathered, so their status as Tier 1 capital does not
change. However going forward, TPS will be disallowed as Tier 1 capital. Beginning January 1, 2013,
Bank holding companies above $15 billion in assets will have a three-year phase-in period to fill
the capital gap caused by the disallowance of the TPS issued before May 19, 2010.
(4) The Act effects changes in the FDIC assessment base with stricter oversight. A new council of
regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks must
keep on hand. FDIC insurance coverage is made permanent at the $250 thousand level retroactive to
January 1, 2008 and unlimited FDIC insurance is provided for noninterest-bearing transaction
accounts in all banks effective December 31, 2010 through the end of 2012. Further, the Act removes
the prohibition on payments of interest on demand deposit accounts as of July 21, 2011. Thus, if a
depositor sweeps any amount in excess of $250 thousand from a noninterest-bearing transaction
account to an interest bearing demand deposit, there is no FDIC insurance coverage on the portion
that is over $250 thousand coverage limit.
(5) The Act places certain limitations on investment and other activities by depository
institutions, holding companies and their affiliates.
The impact of the Act on our banking operations is still uncertain due to the massive volume of new
rules still subject to adoption and interpretation.
Future Legislation
Congress will periodically introduce various legislation, including proposals to substantially
change the financial institution regulatory system, is from time to time introduced in Congress.
This legislation may change banking statutes and the operating environment of the Company in
substantial and unpredictable ways. If enacted, this legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the competitive balance
among banks, savings associations, credit unions, and other financial institutions. The Company
cannot predict whether any of this potential legislation will be enacted and, if enacted, the
effect that it, or any implementing regulations, would have on the Companys business, results of
operations or financial condition.
State Regulation and Supervision
The Bank is a California chartered bank insured by the FDIC, and as such is subject to regulation,
supervision and regular examination by the CDFI and the FDIC. As a non-member of the Federal
Reserve System, the primary federal regulator of the Bank is the FDIC. The primary federal
regulator of the Holding Company is the Federal Reserve Board. The regulations of these agencies
affect most aspects of the Banks business and prescribe permissible types of loans and
investments, the amount of required reserves, requirements for branch offices, the permissible
scope of the Banks activities and various other requirements. The Bank is also subject to
applicable provisions of California law, insofar as such provisions are not in conflict with or
preempted by federal banking law. In addition, the Bank is subject to certain regulations of the
FRB dealing primarily with check-clearing activities, establishment of banking reserves,
Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B).
Under California law, a state chartered bank is subject to various restrictions on, and
requirements regarding, its operations and administration including the maintenance of branch
offices and automated teller machines, capital and reserve requirements, deposits and borrowings,
shareholder rights and duties, and investment and lending activities.
15
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and required federal banking
regulators to adopt overall safety and soundness standards for depository institutions related to
internal control, loan underwriting, documentation, and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of credit by a depository institution to an
executive officer, director, principal shareholder or related interest, and reduces deposit
insurance coverage for deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an acceptable compliance plan
as well as have the flexibility to pursue other more appropriate or effective courses of action
given the specific circumstances and severity of an institutions noncompliance with one or more
standards.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act (CRA) activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income neighborhoods. In
addition to substantive penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities.
Enforcement Powers
In addition to measures taken under the prompt corrective action provisions, insured banks may be
subject to potential enforcement actions by the federal regulators for unsafe or unsound practices
in conducting their businesses, or for violation of any law, rule, regulation, or condition imposed
in writing by the regulatory agency or term of a written agreement with the regulatory agency.
Enforcement actions may include: (1) the appointment of a conservator or receiver for the bank; (2)
the issuance of a cease and desist order that can be judicially enforced; (3) the termination of
the banks deposit insurance; (4) the imposition of civil monetary penalties; (5) the issuance of
directives to increase capital; (6) the issuance of formal and informal agreements; (7) the
issuance of removal and prohibition orders against officers, directors and other
institution-affiliated parties; and (8) the enforcement of such actions through injunctions or
restraining orders based upon a judicial determination that the deposit insurance fund or the bank
would be harmed if such equitable relief was not granted. The Commissioner, as the primary
regulator for state-chartered banks, also has a broad range of enforcement measures, from cease and
desist powers and the imposition of monetary penalties to the ability to take possession of a bank,
including causing its liquidation.
Competition
The Company engages in the highly competitive financial services industry. Generally, the lines of
activity and markets served involve competition with other banks, thrifts, credit unions and other
non-bank financial institutions, such as investment banking firms, investment advisory firms,
brokerage firms, investment companies and insurance entities which offer financial services,
located both domestically and through alternative delivery channels such as the Internet. Many of
these competitors enjoy fewer regulatory constraints and some may have lower cost structures. The
methods of competition center around various factors, such as customer services, interest rates on
loans and deposits, lending limits, customer convenience and technological advances.
16
Securities firms, insurance companies and brokerage houses that elect to become financial holding
companies may acquire banks and other financial institutions. Combinations of this type will
significantly change the competitive environment in which we conduct business.
In order to compete with major banks and other competitors in its primary service areas, the
Company relies upon the experience of its executive and senior officers in serving business
clients, and upon its specialized services, local promotional activities and the personal contacts
made by its officers, directors and employees. For customers whose loan demand exceeds the
Companys legal lending limit, the Company may arrange for such loans on a participation basis with
other banks. Competitive pressures in the banking industry significantly increase changes in the
interest rate environment, and reduce net interest margins. Less than favorable economic
conditions can also result in a deterioration of credit quality and an increase in the provisions
for loan losses.
Employees
As of December 31, 2010 the Company employed 313 full-time equivalent employees. Of these
employees, 26 were employed in the Roseville market, 96 were in the Redding market, and the
remaining 191 were employed with the Companys mortgage subsidiary. None of the employees within
the Company are subject to a collective bargaining agreement. Management considers its employee
relations to be excellent.
Available Information
We will provide free of charge upon request, or through links to publicly available filings
accessed through our 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. Our internet address is www.bankofcommerceholdings.com. Additionally, reports may be
obtained through the Securities and Exchange Commissions website at www.sec.gov.
17
ITEM 1A. RISK FACTORS
Our business is subject to various economic risks that could adversely impact our results of
operations and financial condition.
The financial markets and the financial services industry in particular suffered unprecedented
disruption, causing a number of institutions to fail or require government intervention to avoid
failure. These conditions were largely the result of the erosion of the United States and
international credit markets, including a significant and rapid deterioration in the mortgage
lending and related real estate markets and valuation levels. Unemployment nationwide and in
California has increased significantly through this economic downturn and is anticipated to
increase or remain elevated for the foreseeable future. Continued declines in real estate values,
high unemployment and financial stress on borrowers as a result of the uncertain economic
environment could have an adverse effect on our borrowers or their customers, which could adversely
affect our financial condition and results of operations.
We conduct banking operations principally in Northern California. As a result, our business
results are dependent in large part upon the business activity, population, income levels, deposits
and real estate activity in Northern California. There can be no assurance that the economic
conditions that have adversely affected the financial services industry, and the capital, credit
and real estate markets generally, will improve in the near term, in which case we could continue
to experience losses and write-downs of assets, and could face capital and liquidity constraints or
other business challenges. In addition, the State of California is currently experiencing
significant budgetary and fiscal difficulties, which include terminating and furloughing state
employees. The businesses operating in California and Sacramento in particular depend on these
state employees for business, and reduced spending activity by these state employees could have a
material impact on the success or failure of these businesses, some of which are current or
potential future customers of the Bank. A further deterioration in economic conditions,
particularly within our geographic region, could result in the following consequences, any of which
could have a material adverse effect on our business, prospects, financial condition and results of
operations:
|
|
|
Loan delinquencies may further increase causing additional increases in our provision
and allowance for loan losses; |
|
|
|
|
Financial sector regulators may adopt more restrictive practices or interpretations of
existing regulations, or adopt new regulations; |
|
|
|
|
Collateral for loans made by the Bank, especially real estate related, may continue to
decline in value, which in turn could reduce a clients borrowing power, and reduce the
value of assets and collateral associated with our loans held for investment; |
|
|
|
|
Consumer confidence levels may decline and cause adverse changes in payment patterns,
resulting in increased delinquencies and default rates on loans and other credit
facilities and decreased demand for our products and services; and |
|
|
|
|
Performance of the underlying loans in the private label mortgage backed securities we
hold may deteriorate due to the economic downturn, potentially causing
other-than-temporary impairment markdowns to our investment portfolio. |
Nonperforming assets take significant time to resolve and adversely affect our
results of operations and financial condition.
As of December 31, 2010, our total nonperforming assets, including $2.3 million in other real
estate owned, amounted to $22.8 million, or 2.43% of total assets. Nonperforming assets increased
from $15.6 million, or 1.92% of total assets a year earlier. We experienced $11.2 million in net
charge-offs in 2010 compared to $6.7 million in 2009. Our provision for loan and lease losses was
$12.9 million for the twelve months ended December 31, 2010 compared to $9.5 million for the twelve
months ended December 31, 2009. Nonperforming assets adversely affect our net income in various
ways, including but not limited to increased loan provision expense, and forgone loan interest
income.
18
Until economic and market conditions improve, we may expect to continue to incur losses relating to
an increase in nonperforming assets. We generally do not record interest income on nonperforming
loans or other real estate owned, thereby adversely affecting our income, and increasing our loan
administration costs. When we take collateral in foreclosures and similar proceedings, we are
required to mark the related asset to the then fair market value of the collateral, which may
ultimately result in a loss. An increase in the level of nonperforming assets increases our risk
profile and may impact the capital levels our regulators believe are appropriate in light of the
ensuing risk profile.
While we reduce problem assets through loan sales, workouts, restructurings and otherwise,
decreases in the value of the underlying collateral, or in these borrowers performance or
financial condition, whether or not due to economic and market conditions beyond our control, could
adversely affect our business, results of operations and financial condition. In addition, the
resolution of nonperforming assets requires significant commitments of time from management and our
directors, which can be detrimental to the performance of their other responsibilities. There can
be no assurance that we will not experience future increases in nonperforming assets.
We have a concentration risk in real estate related loans.
As of December 31, 2010, approximately 77.09% of our loan portfolio was secured by real
estate, the majority of which is commercial real estate. Of that amount, 6.88% of our total loan
portfolio consisted of construction loans, 43.67% related to commercial real estate, 14.96% related
to residential mortgage loans (including ITIN portfolio) and 11.58% involved real estate loans not
classified in the preceding definitions.
As a result of increased levels of commercial and consumer delinquencies and declining real estate
values, we have experienced increasing levels of net charge-offs. A large percentage of our loan
portfolio is secured by commercial real estate loans which generally carry larger loan balances and
historically have involved a greater degree of financial and credit risks than residential first
mortgage loans. These loans are primarily made based on the cash flow of the borrower and
secondarily on the underlying collateral provided by the borrower, and therefore repayment of these
loans is often dependent on the cash flow of the borrower which may be unpredictable. Continued
increases in commercial and consumer delinquency levels or continued declines in real estate market
values would require increased net charge-offs and increases in the allowance for loan and lease
losses, which could have a material adverse effect on our business, financial condition, results of
operations and prospects.
Monitoring and servicing our Individual Tax Identification Number (ITIN) residential mortgage
loans could prove more costly and time consuming than previously modeled.
In April 2009, we completed a loan swap transaction, whereby we exchanged, without recourse,
certain nonperforming assets and cash in exchange for a pool of performing ITIN loans with an
outstanding balance of approximately $80.4 million. These loans are residential mortgage loans made
to United States residents without a social security number and are geographically dispersed
throughout the United States. This is our first ITIN loan transaction, and as such, is serviced
through a third party. Worsening economic conditions in the United States may cause us to suffer
higher default rates on our ITIN loans and reduce the value of the assets that we hold as
collateral. In addition, if we are forced to foreclose and service these ITIN properties
ourselves, we may realize additional monitoring, servicing and appraisal costs due to the
geographic disbursement of the portfolio which would adversely affect our noninterest expense.
Future loan losses may exceed the allowance for loan losses.
We have established a reserve for possible losses expected in connection with loans in the credit
portfolio. This allowance reflects estimates of the collectability of certain identified loans, as
well as an overall risk assessment of total loans outstanding.
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The determination of the amount of loan loss allowance is subjective; although the method for
determining the amount of the allowance uses criteria such as risk ratings and historical loss
rates, these factors may not be adequate predictors of future loan performance, particularly in the
current economic climate. Accordingly, we cannot offer assurances that these estimates ultimately
will prove correct or that the loan loss allowance will be sufficient to protect against losses
that ultimately may occur. If the loan loss allowance proves to be inadequate, we will need to
make additional provisions to the allowance, which is accounted for as charges to income, which
would adversely impact results of operations and financial condition. Moreover, bank regulators
frequently monitor banks loan loss allowances, and if regulators were to determine that the
allowance was inadequate, they may require us to increase the allowance, which also would adversely
impact results of operations and financial condition.
Defaults may negatively impact us.
A source of risk arises from the possibility that losses will be sustained if a significant number
of borrowers, guarantors and related parties fail to perform in accordance with the terms of their
loans.
We have adopted underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, which management believes are
appropriate to minimize risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying the loan portfolio. These policies and procedures, however, may not
prevent unexpected losses that could materially affect our results of operations.
Interest rate fluctuations, which are out of our control, could harm profitability.
Our income is highly dependent on interest rate differentials and the resulting net interest
margins (i.e., the difference between the interest rates earned on the Banks interest-earning
assets such as loans and securities, and the interest rates paid on the Banks interest-bearing
liabilities such as deposits and borrowings). These rates are highly sensitive to many factors,
which are beyond our control, including general economic conditions, inflation, recession and the
policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board.
Because of our preference for using variable rate pricing on the majority of our loan portfolio
and non-interest bearing demand deposit accounts we are asset sensitive. As a result, we are
generally adversely affected by declining interest rates. In addition, changes in monetary policy,
including changes in interest rates, influence the origination of loans, the purchase of
investments and the generation of deposits. These changes also affect the rates received on loans
and securities and paid on deposits, which could have a material adverse effect on our business,
financial condition and results of operations.
Changes in the fair value of our securities may reduce our shareholders equity and net income.
At December 31, 2010, $189.2 million of our securities were classified as available-for-sale. At
such date, the aggregate net unrealized loss on our available-for-sale securities, net of tax, was
$3.2 million.
We increase or decrease shareholders equity by the amount of change from the unrealized gain or
loss (the difference between the estimated fair value and the amortized cost) of our
available-for-sale securities portfolio, net of the related tax, under the category of accumulated
other comprehensive income/loss. Therefore, a decline in the estimated fair value of this
portfolio will result in a decline in reported shareholders equity, as well as book value per
common share and tangible book value per common share. This decrease will occur even though the
securities are not sold. In the case of debt securities, if these securities are never sold and
there are no credit impairments, the decrease will be recovered over the life of the securities. In
the event there are credit loss related impairments, the credit loss component is recognized in
earnings.
Our available for sale equity holdings consist of shares of the Federal Home Loan Bank of San
Francisco (FHLB). As of December 31, 2010, we held stock in the FHLB totaling $7.9 million. The
stock is carried at cost and is subject to recoverability testing under applicable accounting
standards.
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As of December 31, 2010, we did not recognize an impairment charge related to our FHLB stock
holdings; however, future negative changes to the financial condition of the FHLB may require us to
recognize an impairment charge with respect to such stock holdings.
Conditions in the financial markets may limit our access to additional funding to meet our
liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the
needs of depositors and borrowers. An inability to raise funds through deposits, repurchase
agreements, federal funds purchased, FHLB advances, the sale or pledging as collateral of loans and
other assets could have a substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities could be impaired by factors that affect us
specifically or the financial services industry in general. Factors that could negatively affect
our access to liquidity sources include negative operating results, a decrease in the level of our
business activity due to a market downturn or negative regulatory action against us. Our ability
to borrow could also be impaired by factors that are not specific to us, such as severe disruption
of the financial markets or negative news and expectations about the prospects for the financial
services industry as a whole, as evidenced by turmoil in the domestic and worldwide credit markets
in recent years.
The condition of other financial institutions could negatively affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty,
public perceptions and other relationships. We have exposure to many different industries and
counterparties, and we routinely execute transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks and other institutional
clients.
In the event there are credit loss related impairments, the credit loss component is recognized in
earnings. Many of these transactions expose us to credit risk in the event of a default by a
counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by
us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of
the credit or derivative exposure due to us. Any such losses could have a material adverse effect
on our financial condition and results of operations.
Changes in laws, government regulation and monetary policy may have a material effect on our
results of operations.
Financial institutions have been the subject of substantial legislative and regulatory changes and
may be the subject of further legislation or regulation in the future, none of which is within our
control. Significant new laws or regulations or changes in, or repeals of, existing laws or
regulations may cause our results of operations to differ materially. In addition, the cost and
burden of compliance with applicable laws and regulations have significantly increased and could
adversely affect our ability to operate profitably. Further, federal monetary policy significantly
affects credit conditions for us, as well as for our borrowers, particularly as implemented by the
Federal Reserve Board, primarily through open market operations in United States government
securities, the discount rate for bank borrowings and reserve requirements. A material change in
any of these conditions could have a material impact on us or our borrowers, and therefore on our
results of operations.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law.
Pursuant to the EESA, the Treasury was granted the authority to take a range of actions for the
purpose of stabilizing and providing liquidity to the United States financial markets and has
proposed several programs, including the purchase by the Treasury of certain troubled assets from
financial institutions and the direct purchase by the Treasury of equity of financial institutions.
There can be no assurance, however, as to the actual impact that the foregoing or any other
governmental program will have on the financial markets. The failure of the financial markets to
stabilize and a continuation or worsening of current financial market conditions could materially
and adversely affect our business, financial condition, results of operations, access to credit or
the trading price of our common stock.
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In addition, current initiatives of President Obamas Administration and the possible enactment of
recently proposed bankruptcy legislation may adversely affect our financial condition and results
of operations. There can be no assurance, however, as to the actual impact that the foregoing or
any other governmental program will have on the financial markets.
The failure of the financial markets to stabilize and a continuation or worsening of current
financial market conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit and the trading price of our common stock.
We expect to face increased regulation and supervision of our industry as a result of the existing
financial crisis, and there will be additional requirements and conditions imposed on us to the
extent that we participate in any of the programs established or to be established by the Treasury
or by the federal bank regulatory agencies. Such additional regulation and supervision may
increase our costs and limit our ability to pursue business opportunities. The effects of such
recently enacted, and proposed, legislation and regulatory programs on us cannot reliably be
determined at this time.
Because of our participation in the Troubled Asset Relief Program we are subject to several
restrictions including, without limitation, restrictions on our ability to declare or pay dividends
and repurchase our shares as well as restrictions on compensation paid to our executives.
On November 14, 2008, in exchange for an aggregate purchase price of $17.0 million, we issued
and sold to the Treasury pursuant to the Trouble Asset Relief Program (TARP) Capital Purchase
Program the following: (1) 17,000 shares of our newly designated Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, no par value per share and liquidation preference $1,000 per share
(Series A Preferred Stock), and (2) a warrant to purchase up to 405,405 shares of our common
stock, no par value per share, at an exercise price of $6.29 per share, subject to certain
anti-dilution and other adjustments. The warrant may be exercised for up to ten years after
issuance.
In connection with the issuance and sale of our securities, we entered into a Letter Agreement
including the Securities Purchase Agreement Standard Terms, dated November 14, 2008, with the
Treasury (Agreement). The Agreement contains limitations on the payment of quarterly cash
dividends on our common stock in excess of $0.08 per share, and on our ability to repurchase our
common stock.
Our Series A Preferred Stock diminishes the net income available to our common shareholders and
earnings per common share.
The dividends accrued on the Series A Preferred Stock reduce the net income available to common
shareholders and our earnings per common share. In 2010 our net income of $6.2 million was reduced
to $5.3 million after deducting approximately $0.94 million in dividends to the Treasury plus
accretion on the Series A Preferred Stock. The Series A Preferred Stock is cumulative, which means
that any dividends not declared or paid will accumulate and will be payable when the payment of
dividends is resumed. The dividend rate on the Series A Preferred Stock will increase from 5% to
9% per annum five years after its original issuance if not earlier redeemed. If we are unable to
redeem the Preferred Stock prior to the date of this increase, the cost of capital to us will
increase substantially. Depending on our financial condition at the time, this increase in the
Series A Preferred Stock annual dividend rate could have a material adverse effect on our earnings
and could also adversely affect our ability to pay dividends on our common shares. Shares of Series
A Preferred Stock will also receive preferential treatment in the event of the liquidation,
dissolution or winding up of the Company.
Finally, the terms of the Series A Preferred Stock allow the Treasury to impose additional
restrictions, including those on dividends and unilateral amendments required to comply with
changes in applicable federal law.
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Our holders of the Series A Preferred Stock have certain voting rights that may adversely
affect our common shareholders, and the holders of the Series A Preferred Stock may have interests
different from our common shareholders.
In the event that we fail to pay dividends on the Series A Preferred Stock for a total of at least
six quarterly dividend periods (whether or not consecutive), the Treasury will have the right to
appoint two directors to our Board of Directors until all accrued but unpaid dividends has been
paid. Currently, except as required by law, holders of the Series A Preferred Stock have limited
voting rights. So long as shares of Series A Preferred Stock are outstanding, in addition to any
other vote or consent of shareholders required by law or our Articles of Incorporation, the vote or
consent of holders of at least 66.7% of the shares of Series A Preferred Stock outstanding is
required for:
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Any authorization or issuance of shares ranking senior to the Series A Preferred Stock; |
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Any amendments to the rights of the Series A Preferred Stock so as to adversely affect
the rights, preferences, privileges or voting power of the Series A Preferred Stock; or |
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Consummation of any merger, share exchange or similar transaction unless the shares of
Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such
transaction, are converted into or exchanged for preference securities of the surviving
entity and the shares of Series A Preferred Stock remaining outstanding or such preference
securities have the rights, preferences, privileges and voting power of the Series A
Preferred Stock. |
The holders of our Series A Preferred Stock, including the Treasury, may have different
interests from the holders of our common stock, and could vote to block the foregoing transactions,
even when considered desirable by, or in the best interests of, the holders of our common stock.
We rely heavily on our management team and the loss of key officers may adversely affect
operations.
Our success has been and will continue to be greatly influenced by the ability to retain existing
senior management and, with expansion, to attract and retain qualified additional senior and middle
management. The departure of any of our senior management could have an adverse effect on us.
Our participation in the TARP Capital Purchase Program could also have an adverse effect on our
ability to attract and retain qualified executive officers. Legislation and rules applicable to the
TARP Capital Purchase Program participants include extensive new restrictions on our ability to pay
retention awards, bonuses and other incentive compensation to our Chief Executive Officer during
the period in which the Series A Preferred Stock is outstanding. Other restrictions are not limited
to our Chief Executive Officer and cover other employees whose contributions to revenue and
performance can be significant.
The limitations may adversely affect our ability to recruit and retain these key employees in
addition to our senior executive officers, especially if we are competing for talent against
institutions that are not subject to the same restrictions.
The Federal Reserve, and perhaps the FDIC, is contemplating proposed rules governing the
compensation practices of financial institutions and these rules, if adopted, may adversely affect
our management retention and limit our ability to promote our objectives through our compensation
and incentive programs and, as a result, adversely affect our results of operations and financial
condition.
The full scope and impact of these limitations is uncertain and difficult to predict. The Secretary
of the Treasury has adopted standards that implement certain compensation limitations, but these
standards have not yet been broadly interpreted and remain, in many respects, ambiguous. The new
and potential future legal requirements and implementing standards under the Capital Purchase
Program may have unforeseen or unintended adverse effects on the financial services industry as a
whole, and particularly on Capital Purchase Program participants, including us. It will likely
require significant time, effort and resources on our part to interpret and apply them.
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If any of our regulators believe that we are not in compliance with new and future legal
requirements and implementing standards, it could subject us to regulatory actions or otherwise
adversely affect our management retention and, as a result, our results of operations and financial
condition.
Even if we redeem our Series A Preferred Stock and repurchase the warrant issued to
the Treasury, we will continue to be subject to evolving legal and regulatory requirements that
may, among other things, require increasing amounts of our time, effort and resources to ensure
compliance.
Internal control systems could fail to detect certain events.
We are subject to many operating risks, including, without limitation, data processing system
failures and errors, and customer or employee fraud. There can be no assurance that such an event
will not occur, and if such an event is not prevented or detected by our other internal controls
and does occur, and it is uninsured or is in excess of applicable insurance limits, it could have a
significant adverse impact on our reputation in the business community and our business, financial
condition and results of operations.
Our operations could be interrupted if third party service providers experience difficulty,
terminate their services or fail to comply with banking regulations.
We depend, and will continue to depend to a significant extent, on a number of relationships with
third-party service providers. Specifically, we utilize software and hardware systems for
processing, essential web hosting, debit and credit card processing, merchant processing, Internet
banking systems and other processing services from third-party service providers. If these
third-party service providers experience difficulties or terminate their services, and we are
unable to replace them with other qualified service providers, our operations could be interrupted.
If an interruption were to continue for a significant period of time, our business, financial
condition and results of operations could be materially adversely affected.
Confidential customer information transmitted through the Banks online banking service is
vulnerable to security breaches and computer viruses, which could expose the Bank to litigation and
adversely affect its reputation and ability to generate deposits.
The Bank provides its customers the ability to bank online. The secure transmission of confidential
information over the Internet is a critical element of online banking. The Banks network could be
vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems.
The Bank may be required to spend significant capital and other resources to protect against the
threat of security breaches and computer viruses, or to alleviate problems caused by security
breaches or viruses. To the extent that the Banks activities or the activities of its customers
involve the storage and transmission of confidential information, security breaches and viruses
could expose us and the Bank to claims, litigation and other possible liabilities. Any inability to
prevent security breaches or computer viruses could also cause existing customers to lose
confidence in the Banks systems and could adversely affect its reputation and our ability to
generate deposits.
Potential acquisitions may disrupt our business and dilute shareholder value.
We continuously consider merger and acquisition opportunities and conduct due diligence activities
related to possible transactions with other financial institutions. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and future mergers or
acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions
typically involve the payment of a premium over book and market values, and, therefore, some
dilution of our stocks tangible book value and net income per common share may occur in connection
with any future transaction. In addition, while loss sharing arrangements currently associated with
FDIC-assisted transactions provide some level of risk reduction; these arrangements do not
completely eliminate risk. To the extent we would participate in an FDIC-assisted transaction there
can be no assurances that any positive expected results of such a transaction would fully
materialize.
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Furthermore, failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from an acquisition could have a
material adverse effect on our financial condition and results of operations. We may seek merger or
acquisition partners that are culturally similar, have experienced management and possess either
significant market presence or have potential for improved profitability through financial
management, economies of scale or expanded services. We do not currently have any specific plans,
arrangements or understandings regarding such expansion.
We cannot say with certainty that we will be able to consummate, or if consummated, successfully
integrate future acquisitions or that we will not incur disruptions or unexpected expenses in
integrating such acquisitions. In attempting to make such acquisitions, we anticipate competing
with other financial institutions, many of which have greater financial and operational resources
than us. Acquiring other banks, businesses, or branches involves various risks commonly associated
with acquisitions, including, among other things:
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Potential exposure to unknown or contingent liabilities of the target company; |
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Exposure to potential asset quality issues of the target company; |
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Difficulty and expense of integrating the operations and personnel of the target
company; |
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Potential disruption to our business; |
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The possible loss of key employees and customers of the target company; |
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Difficulty in estimating the value of the target company; and |
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Potential changes in banking or tax laws or regulations that may affect the target
company. |
We are subject to extensive regulation which could adversely affect our business.
Our operations are subject to extensive regulation by federal, state and local governmental
authorities and are subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of our operations. Given the current disruption in the
financial markets and potential new regulatory initiatives, including the Obama Administrations
recent financial regulatory reform proposal, new regulations and laws that may affect us are
increasingly likely. Because our business is highly regulated, the laws, rules and regulations
applicable to us are subject to modification and change. There are currently proposed laws, rules
and regulations that, if adopted, would impact our operations.
These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted
in the future, which could (1) make compliance much more difficult or expensive, (2) restrict our
ability to originate, broker or sell loans or accept certain deposits, (3) further limit or
restrict the amount of commissions, interest or other charges earned on loans originated or sold by
us, or (4) otherwise adversely affect our business or prospects for business. Moreover, banking
regulators have significant discretion and authority to address what regulators perceive to be
unsafe or unsound practices or violations of laws or regulations by financial institutions and
holding companies in the performance of their supervisory and enforcement duties. The exercise of
regulatory authority by banking regulators over us may have a negative impact on our financial
condition and results of operations. Additionally, in order to conduct certain activities,
including acquisitions, we are required to obtain regulatory approval. There can be no assurance
that any required approvals can be obtained, or obtained without conditions or on a timeframe
acceptable to us.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial
condition.
We expect to pay significantly higher FDIC premiums in the future. As the large number of bank
failures continues to deplete the Deposit Insurance Fund, the FDIC adopted a revised risk-based
deposit insurance assessment schedule in February 2009, which raised deposit insurance premiums. In
2010, the FDIC approved a rule requiring financial institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010 through and including
2012 in order to re-capitalize the Deposit Insurance Fund.
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Accordingly, the Bank prepaid the appropriate deposit insurance premiums and maintained an
outstanding prepaid deposit insurance balance of $2.4 million at December 31, 2010, which continue
to be amortized over the assessment period. There can be no assurance that the FDIC will not
increase premiums or levy additional special assessments, either of which could have a material
adverse effect on our results of operations and financial condition.
Shares eligible for future sale could have a dilutive effect.
Shares of our common stock eligible for future sale, including those that may be issued in
connection with our various stock option and equity compensation plans, in possible acquisitions,
and any other offering of our common stock for cash, and the issuance of 405,405 shares underlying
the warrant issued to the Treasury pursuant to the TARP Capital Purchase Program, could have a
dilutive effect on the market for our common stock and could adversely affect its market price. Our
Articles of Incorporation authorize 50,000,000 shares of which 16,911,495 shares were outstanding
as of December 31, 2010. There are 300,080 shares subject to common stock options outstanding with
a weighted average exercise price of $8.17 per share.
Changes in accounting standards may impact how we report our consolidated financial condition and
consolidated results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial
condition and results of operations. From time to time, the Financial Accounting Standards Board
changes the financial accounting and reporting standards that govern the preparation of our
financial statements. These changes can be difficult to predict and can materially impact how we
record and report our financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in a restatement of prior
period financial statements.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to
the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural
disasters could harm our operations directly through interference with communications, including
the interruption or loss of our websites, which would prevent us from gathering deposits,
originating loans and processing and controlling our flow of business, as well as through the
destruction of facilities and our operational, financial and management information systems.
California has also experienced energy shortages, which, if they recur, could impair the value of
the real estate in those areas affected. Although we have implemented several back-up systems and
protections and maintain business interruption insurance, these measures may not protect us fully
from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in
California could have a material adverse effect on our business, prospects, financial condition and
results of operations.
The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell shares of common stock owned by you at times or at prices you find attractive.
Stock price volatility may make it difficult for you to resell your common stock when you want and
at prices you find attractive. Our stock price can fluctuate significantly in response to a variety
of factors including, among other things:
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Actual or anticipated variations in quarterly results of operations; |
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Recommendations by securities analysts; |
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Operating and stock price performance of other companies that investors deem comparable
to us; |
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News reports relating to trends, concerns and other issues in the financial services
industry, including the failures of other financial institutions in the current economic
downturn; |
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Perceptions in the marketplace regarding us and/or our competitors; |
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Public sentiments toward the financial services and banking industry generally; |
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New technology used, or services offered, by competitors; |
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Significant acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our competitors; |
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Failure to integrate acquisitions or realize anticipated benefits from acquisitions; |
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Changes in government regulations; and |
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Geopolitical conditions such as acts or threats of terrorism or military conflicts. |
General market fluctuations, industry factors and general economic and political conditions and
events, such as economic slowdowns or recessions, interest rate changes or credit loss trends,
could also cause our stock price to decrease regardless of operating results as evidenced by the
current volatility and disruption of capital and credit markets.
Our profitability measures could be adversely affected if we are unable to effectively deploy the
capital raised in our latest offering.
On February 11, 2010, we filed a Form S-1 Registration Statement (the Registration Statement)
with the SEC to offer $30.0 million of shares of our common stock in an underwritten public
offering (Offering). Additionally, we granted the underwriters in the Offering an option to
purchase up to an additional $4.5 million of common stock to cover over-allotment, if any.
On March 23, 2010, we filed a Form S-1/A Registration Statement (the registration statement)
with the SEC to offer 7,200,000 shares of our common stock in the Offering. In the Registration
Statement, we set out our intent to use the net proceeds of the Offering for general corporate
purposes, including contributing additional capital to the Bank, supporting our ongoing and future
anticipated growth, which may include opportunistic acquisitions of all or parts of other financial
institutions, including FDIC-assisted transactions, and positioning us for eventual redemption of
our Series A Preferred Stock issued to the Treasury. Although we are periodically engaged in
discussions with potential acquisition candidates, we are not currently party to any purchase or
merger agreement.
On April 14, 2010 the Company announced that the underwriters of the Offering of common shares
fully exercised their over-allotment option, which resulted in the issuance of an additional
1,080,000 shares of common stock, and approximately $4.4 million in additional net proceeds. The
option was granted in connection with the Companys public offering of 7,200,000 shares of common
stock at a public offering price of $4.25 per share. With the additional proceeds from the exercise
of the over-allotment option, the Company realized total net proceeds from the offering of
approximately $33.0 million, after deducting the underwriting discount and offering expenses. The
exercise of the over-allotment option brings the total number of shares of common stock sold by the
Company in the offering to 8,280,000.
Only a limited trading market exists for our common stock, which could lead to significant price
volatility.
Our common stock is traded on the NASDAQ Global Market under the trading symbol BOCH, but there
have historically been low trading volumes in our common stock. The limited trading market for our
common stock may cause fluctuations in the market value of our common stock to be exaggerated,
leading to price volatility in excess of that which would occur in a more active trading market of
our common stock. Future sales of substantial amounts of common stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing market price of the
common stock. In addition, even if a more active market in our common stock develops, we cannot
assure you that such a market will continue.
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Anti-takeover provisions in our articles of incorporation could make a third party
acquisition of us difficult.
In order to approve a merger or similar business combination with the owner of 20% or more of
our common stock (an Interested Shareholder), our Articles of Incorporation contain provisions
that would require a supermajority vote of 66.7% of the outstanding shares of the common stock
(excluding the shares held by the Interested Shareholder or its affiliates). These provisions
further require that the per share consideration to be paid in such a transaction would have to
equal or exceed the greater of (a) the highest per share price paid by the Interested Shareholder
(1) within two years of the transaction proposal announcement date, or (2) the date the Interested
Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two
years before the transaction announcement) and (b) the fair market value of the Common Stock on (1)
the transaction proposal announcement date, or (2) the date the Interested Shareholder acquired a
20% -plus ownership interest (if the acquisition occurred less than two years before the
transaction announcement).
The operation of these provisions could result in the Company becoming a less attractive
target for a would-be acquirer. As a consequence, it is possible that shareholder would lose an
opportunity to be paid a premium for their shares in an acquisition transaction.
There may be future sales or other dilutions of our equity which may adversely affect the market
price of our common stock.
We are not restricted from issuing additional shares of common stock, including securities that are
convertible into or exchangeable for, or that represent the right to receive our common stock. In
addition, we are not prohibited from issuing additional securities which are senior to our common
stock. Because our decision to issue securities in any future offering will depend in part on
market conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of any future offerings other than the Offering. Thus, our shareholders bear the
risk of any future stock issuances reducing the market price of our common stock and diluting their
stock holdings in us.
The exercise of the underwriters over-allotment option to be granted in connection with the
Offering, the exercise of any options granted to our directors and employees, the exercise of the
outstanding warrants for our common stock as referenced above, the issuance of shares of common
stock in acquisitions and other issuances of our common stock could have an adverse effect on the
market price of the shares of our common stock. In addition, the existence of options and warrants
to acquire shares of our common stock may materially adversely affect the terms upon which we may
be able to obtain additional capital in the future through the sale of equity securities. Any
future issuances of shares of our common stock will be dilutive to existing shareholders.
The holders of our preferred stock and trust preferred securities have rights that are senior to
those of our holders of common stock and that may impact our ability to pay dividends on our common
stock to our common shareholders and reduce net income available to our common shareholders.
At December 31, 2010, our subsidiary trusts had outstanding $15.0 million of trust preferred
securities. These securities are effectively senior to shares of common stock due to the priority
of the underlying junior subordinated debt. As a result, we must make payments on our trust
preferred securities before any dividends can be paid on our common stock; moreover, in the event
of our bankruptcy, dissolution, or liquidation, the obligations outstanding with respect to our
trust preferred securities must be satisfied before any distributions can be made to our
shareholders. While we have the right to defer dividends on the trust preferred securities for a
period of up to five years, if any such election is made, no dividends may be paid to our common or
preferred shareholders during that time.
We are required to pay cumulative dividends on the $17.0 million in Series A Preferred Stock issued
to the Treasury in the TARP Capital Purchase Program at an annual rate of 5% for the first five
years and 9% thereafter, unless we redeem the shares earlier.
28
We may not declare or pay dividends on our common stock or repurchase shares of our common stock
without first having paid all accrued cumulative preferred dividends that are due. Until January
2012, we also may not increase our per share common stock dividend rate or repurchase shares of our
common shares without the Treasurys consent, unless the Treasury has transferred to third parties
all the Series A Preferred Stock originally issued to it.
Our future ability to pay dividends and repurchase stock is subject to restrictions.
Since we are a holding company with no significant assets other than the Bank and our
majority-owned mortgage company, we have no material source of income other than dividends received
from the Bank and the mortgage company. Therefore, our ability to pay dividends to our shareholders
will depend on the Banks and mortgage companys ability to pay dividends to us.
Moreover, banks and financial holding companies are both subject to certain federal and state
regulatory restrictions on cash dividends. We are also restricted from paying dividends if we have
deferred payments of the interest on, or an event of default has occurred with respect to, our
trust preferred securities or Series A Preferred Stock. Additionally, terms and conditions of our
Series A Preferred Stock place certain restrictions and limitations on our common stock dividends
and repurchases of our common stock.
Potential Volatility of Deposits
The Banks depositors could choose to withdraw their deposits from the Bank and then put it into
alternative investments, causing an increase in our funding costs and reducing net interest income.
Checking, savings and money market account balances can decrease when customers perceive that
alternative investments, such as the stock market, as providing a better risk/return tradeoff. When
customers move funds out of bank deposits into other investments, the Bank will lose a relatively
low cost source of funds, increasing funding costs.
At December 31, 2010, time certificates of deposit in excess of $100,000 represented approximately
36% of the dollar value of the total deposits of the Company. As such, these deposits are
considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such
deposits could adversely affect the liquidity of our profitability, business prospects, results of
operations and cash flows. The Company monitors activity of volatile liability deposits on a
quarterly basis.
Negative Publicity could Damage our Reputation
Reputation risk, or the risk to the Companys earnings and capital from negative public opinion, is
inherent in the financial services business. Negative public opinion could adversely affect our
ability to keep and attract customers and expose us to adverse legal and regulatory consequences.
Negative public opinion could result from actual or alleged conduct in any number of activities,
including lending practices, corporate governance or acquisitions, and from actions taken by
government regulators and community organizations in response to that conduct.
Mortgage banking interest rate and market risk
Changes in interest rates greatly affect the mortgage banking business. Our mortgage subsidiary
originates, funds and services mortgage loans, which subjects the Company to various risks,
including credit, liquidity and interest rate risks. Based on market conditions and other factors,
the Company reduces unwanted credit and liquidity risks by selling some or all of the long-term
fixed-rate mortgage loans and adjustable rate mortgages originated.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity
in the nonconforming secondary markets, our subsidiary mortgage banking revenue continued to be
strong. Interest rate and market risk can be substantial in the mortgage business. Changes in
interest rates may potentially impact total origination fees.
29
Interest rates impact the amount and timing of origination because consumer demand for new
mortgages and the level of refinancing activity are sensitive to changes in mortgage interest
rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage
originations and fees. Given the time it takes for consumer behavior to fully react to interest
rate changes, as well as the time required for processing a new application, providing the
commitment, and selling the loan, interest rate changes will impact origination fees with a lag.
The amount and timing of the impact on origination fees will depend on the magnitude, speed and
duration of the change in interest rates. A decline in interest rates increases the propensity for
refinancing.
As part of subsidiary mortgage banking activities, we enter into commitments to fund
residential mortgage loans at specified times in the future. A mortgage loan commitment is an
interest rate lock that binds us to lend funds to a potential borrower at a specified interest rate
and within a specified period of time, up to 60 days after inception of the rate lock. Outstanding
loan commitments expose the Company to the risk that the price of the mortgage loans underlying the
commitments might decline due to increases in mortgage interest rates from inception of the rate
lock to the funding of the loan.
Mortgage banking revenue can be volatile from quarter to quarter
The Company earns revenue from fees for originating mortgage loans. When rates rise, the demand for
mortgage loans tends to fall, reducing the revenue from loan originations. It is also possible
that, because of the recession and deteriorating housing market, even if interest rates were to
fall, mortgage originations may also fall, with a corresponding impact on origination fees.
30
ITEM 1B. UNRESOLVED STAFF COMMENTS
None to report.
ITEM 2. PROPERTIES
The Companys principal administrative offices and technology center consists of approximately
12,000 square feet of space on property adjacent to the main office at 1901 Churn Creek Road,
Redding, California 96002. The Banks main office is housed in a two-story building with
approximately 21,000 square feet of space located at 1951 Churn Creek Road, Redding, California,
96002. The Bank owns the buildings and the 1.25 acres of land on which the buildings are situated.
The Bank also owns the land and building located at 1177 Placer Street, Redding, California,
96001, in which the Bank uses approximately 11,650 square feet of space for its banking operations.
The Company also leases approximately 3,787 square feet for the location of another branch which
provides commercial and retail services. This branch is located at 3455 Placer Street, Redding,
California. The lease agreement expires on August 21, 2017.
The Companys Roseville Bank of Commerce is located on the first floor of a three-story building
with approximately 8,550 square feet of space located at 1504 Eureka Road, Roseville, California.
The Company leases the space pursuant to a triple net lease expiring on May 31, 2012.
The Companys Bank of Commerce Mortgage is located at 3130 Crow Canyon Place, San Ramon,
California. Bank of Commerce Mortgage occupies 13,613 square feet of space on the third floor of
this four-story building. The office space is leased under a non-cancelable operating lease
expiring December 31, 2014.
In addition, Bank of Commerce Mortgage has nine branch leases as of December 31, 2010. All of which
are located in California except for one branch located in Colorado. All of these leases are on
month to month terms.
We believe that the facilities are adequate to meet our current needs and that additional
facilities are available to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened legal actions arising in the ordinary
course of business. The Company maintains reserves for losses from legal actions that are both
probable and estimable. In the opinion of management the disposition of claims currently pending
will not have a material effect on the Companys consolidated financial position or results of
operations.
ITEM 4. (REMOVED AND RESERVED)
31
PART II
|
|
|
ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES |
The principal market on which the Companys common stock is traded is the NASDAQ Global
Market. The Companys common stock is listed under the trading symbol BOCH. The following table
sets forth the high and low closing sales prices of the Companys common stock on the NASDAQ Global
Market for the periods indicated:
Sales
Price Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended: |
|
High |
|
|
Low |
|
|
Volume |
|
March 31, 2010 |
|
$ |
5.68 |
|
|
$ |
4.30 |
|
|
|
1,770,615 |
|
June 30, 2010 |
|
$ |
5.45 |
|
|
$ |
4.55 |
|
|
|
1,611,878 |
|
September 30, 2010 |
|
$ |
4.85 |
|
|
$ |
3.75 |
|
|
|
930,147 |
|
December 31, 2010 |
|
$ |
4.25 |
|
|
$ |
3.47 |
|
|
|
616,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
$ |
5.05 |
|
|
$ |
3.90 |
|
|
|
123,989 |
|
June 30, 2009 |
|
$ |
6.52 |
|
|
$ |
4.08 |
|
|
|
74,922 |
|
September 30, 2009 |
|
$ |
6.30 |
|
|
$ |
4.50 |
|
|
|
129,689 |
|
December 31, 2009 |
|
$ |
5.99 |
|
|
$ |
5.10 |
|
|
|
156,391 |
|
There were approximately 770 shareholders of the Companys common stock as of December 31, 2010,
including those held in street name, and the market price on that date was $4.25 per share.
Dividends
Cash dividends of $0.06 were paid on January 14, 2010, March 24, 2010, and July 7, 2010, and a cash
dividend of $0.03 was paid on October 7, 2010, respectively to shareholders of record as of
December 31, 2009, March 15, 2010, June 30, 2010, and September 30, 2010.
The Companys ability to pay dividends is subject to certain regulatory requirements. The Federal
Reserve Board (FRB) generally prohibits a bank holding company from declaring or paying a cash
dividend which would impose undue pressure on the capital of subsidiary banks or would be funded
only through borrowing or other arrangements that might adversely affect a financial services
holding companys financial position. The FRBs policy is that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net income is
sufficient to fully fund each dividend and its prospective rate of earnings retention appears
consistent with its capital needs, asset quality and overall financial condition. The power of the
board of directors of an insured depository institution to declare a cash dividend or other
distribution with respect to capital is subject to statutory and regulatory restrictions which
limit the amount available for such distribution depending upon the earnings, financial condition
and cash needs of the institution, as well as general business conditions.
In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the banks net income for its last three fiscal years (less any
distributions to shareholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner of the Department of Financial Institutions in an amount not exceeding the greatest of
the banks retained earnings, the banks net income for its last fiscal year, or the banks net
income for its current fiscal year.
32
Securities Authorized for Issuance Under Equity Compensation Plans
We currently maintain one equity-based compensation plan which was approved by the shareholders in
2008. The following table sets forth, for each of the Companys equity-based compensation plan, the
number of shares of common stock subject to outstanding options and rights, the weighted-average
exercise price of outstanding options, and the number of shares available for future award grants
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
|
|
|
|
|
|
|
future issuance under |
|
|
Number of securities to |
|
|
|
|
|
equity compensation |
|
|
be issued upon exercise |
|
Weighted average |
|
plans (excluding |
|
|
of outstanding options, |
|
exercise price of |
|
securities reflected in |
Plan Category |
|
warrants and rights |
|
outstanding options |
|
column (a)) |
Equity compensation
plans approved by
security holders |
|
|
300,080 |
|
|
$ |
8.17 |
|
|
|
586,500 |
|
Equity compensation
plans not approved
by security holders |
|
None |
|
|
None |
|
|
None |
|
|
Total |
|
|
300,080 |
|
|
$ |
8.17 |
|
|
|
586,500 |
|
|
33
Stock Performance Graph
The following graph compares the Companys cumulative total return to shareholders during the past
five years with that of the NASDAQ Composite Stock Index and the SNL Securities $500-$1 billion
Bank Asset-Size Index (the SNL Securities Index). The stock price performance shown on the
following graph is not necessarily indicative of future performance of the Companys Common Stock.
Bank of Commerce Holdings
Five Year Performance Graph
Stock Performance Graph (1)
|
|
|
SNL Securities LC (C) 2010
|
|
(888) 275-2822 |
|
|
|
(1) |
|
Assumes $100 invested on December 31, 2005, in the Companys Common Stock, the NASDAQ, and the
SNL Securities Index. The model assumes reinvestment of dividends. Source: SNL Securities (share
prices for the Companys Common Stock was furnished to SNL Securities through the NASDAQ). |
Sales of Unregistered Securities
Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase
Agreement Standard Terms (Securities Purchase Agreement) the Company issued to the United
States Department of the Treasury (Treasury) 17,000 shares of our Series A Preferred Stock for a
total price of $17.0 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. Except under limited
circumstances, the Series A Preferred Stock is non-voting.
34
As part of its purchase of the Series A Preferred Stock, the Treasury received a warrant
(Warrant) to purchase 405,405 shares of our 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. Pursuant to the Securities Purchase
Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of
common stock issued upon exercise of the Warrant.
Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1
capital. The Series A Preferred Stock and the Warrant were issued in a private placement exempt
from registration pursuant to Section 4(2) of the Securities Act. Upon the request of the Treasury
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.
Prior to November 14, 2011, unless we have redeemed the Series A Preferred Stock or the Treasury
has transferred the Series A Preferred Stock to a third party, the consent of the Treasury 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 the Treasury were allocated based on the relative fair value of the Warrant as
compared with the fair value of the preferred stock. The fair value of the Warrant was determined
using a valuation model which incorporates assumptions including our common stock price, dividend
yield, stock price volatility and the risk-free interest rate. The fair value is determined based
on assumptions regarding the discount rate (market rate) on our Series A Preferred Stock which was
estimated to be approximately 9% at the date of issuance. The discount will be accreted to par
value over a five-year term, which is the expected life of our Series A Preferred Stock. Capital
Purchase Program participants may opt out by repaying the capital without raising additional
capital subject to consultation with the appropriate federal regulator.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
No shares were repurchased during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
(c) |
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
That May Yet be |
|
|
(a) |
|
(b) |
|
As Part of Publicly |
|
Purchased Under |
|
|
Total Number of |
|
Average Price |
|
Announced Plans |
|
the Plans or |
2010 Period |
|
Shares Purchased |
|
Paid Per Share |
|
or Programs |
|
Programs |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The selected consolidated financial data set forth below for the five years ended December 31,
2010, have been derived from the Companys audited consolidated financial statements and should be
read in conjunction with Managements Discussion and Analysis of Financial Condition and Results
of Operations and the Companys audited consolidated financial statements and notes thereto,
included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Thousands (Except Ratios and Per Share Data) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
$ |
42,391 |
|
|
$ |
41,329 |
|
|
$ |
37,690 |
|
|
$ |
41,128 |
|
|
$ |
37,610 |
|
Net Interest Income |
|
|
32,993 |
|
|
|
28,994 |
|
|
|
21,348 |
|
|
|
22,012 |
|
|
|
22,035 |
|
Provision for Loan Losses |
|
|
12,850 |
|
|
|
9,475 |
|
|
|
6,520 |
|
|
|
3,291 |
|
|
|
226 |
|
Total Noninterest Income |
|
|
19,818 |
|
|
|
10,063 |
|
|
|
2,623 |
|
|
|
4,535 |
|
|
|
1,928 |
|
Total Noninterest Expense |
|
|
30,328 |
|
|
|
20,624 |
|
|
|
15,296 |
|
|
|
15,744 |
|
|
|
13,333 |
|
Total Revenues |
|
|
62,209 |
|
|
|
51,392 |
|
|
|
40,313 |
|
|
|
45,753 |
|
|
|
39,539 |
|
Net Income |
|
$ |
6,220 |
|
|
$ |
6,005 |
|
|
$ |
2,194 |
|
|
$ |
6,107 |
|
|
$ |
6,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
939,133 |
|
|
$ |
813,406 |
|
|
$ |
774,214 |
|
|
$ |
618,327 |
|
|
$ |
583,442 |
|
Total Gross Portfolio Loans |
|
|
600,796 |
|
|
|
601,439 |
|
|
|
527,463 |
|
|
|
494,748 |
|
|
|
414,191 |
|
Allowance for Loan Losses |
|
|
12,841 |
|
|
|
11,207 |
|
|
|
8,429 |
|
|
|
8,233 |
|
|
|
4,904 |
|
Total Deposits |
|
|
648,702 |
|
|
|
640,464 |
|
|
|
555,282 |
|
|
|
473,631 |
|
|
|
439,407 |
|
Shareholders Equity |
|
$ |
103,727 |
|
|
$ |
68,807 |
|
|
$ |
62,578 |
|
|
$ |
46,164 |
|
|
$ |
43,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets 2 |
|
|
0.69 |
% |
|
|
0.75 |
% |
|
|
0.33 |
% |
|
|
1.04 |
% |
|
|
1.20 |
% |
Return on Average Shareholders Equity 3 |
|
|
6.50 |
% |
|
|
9.01 |
% |
|
|
4.99 |
% |
|
|
13.39 |
% |
|
|
15.59 |
% |
Dividend Payout |
|
|
41.18 |
% |
|
|
34.81 |
% |
|
|
127.04 |
% |
|
|
46.47 |
% |
|
|
40.36 |
% |
Average Equity to Average Assets |
|
|
10.55 |
% |
|
|
8.28 |
% |
|
|
8.91 |
% |
|
|
9.43 |
% |
|
|
9.49 |
% |
Tier 1 Risk-Based Capital Holding Company 4 |
|
|
13.74 |
% |
|
|
12.06 |
% |
|
|
11.58 |
% |
|
|
9.97 |
% |
|
|
11.42 |
% |
Total Risk-Based Capital Holding Company |
|
|
15.00 |
% |
|
|
13.31 |
% |
|
|
12.84 |
% |
|
|
11.22 |
% |
|
|
12.54 |
% |
Net Interest Margin 5 |
|
|
4.06 |
% |
|
|
3.94 |
% |
|
|
3.47 |
% |
|
|
3.98 |
% |
|
|
4.26 |
% |
Average Earning Assets to Total Average Assets |
|
|
89.63 |
% |
|
|
91.42 |
% |
|
|
92.86 |
% |
|
|
93.74 |
% |
|
|
94.20 |
% |
Nonperforming Assets to Total Assets 6 |
|
|
2.43 |
% |
|
|
1.92 |
% |
|
|
2.98 |
% |
|
|
2.01 |
% |
|
|
0.00 |
% |
Net Charge-offs to Average Loans |
|
|
1.84 |
% |
|
|
1.14 |
% |
|
|
1.22 |
% |
|
|
0.00 |
% |
|
|
-0.09 |
% |
Allowance for Loan Losses to Total Loans |
|
|
2.14 |
% |
|
|
1.86 |
% |
|
|
1.60 |
% |
|
|
1.66 |
% |
|
|
1.18 |
% |
Nonperforming Loans to Allowance for Loan Losses |
|
|
159.73 |
% |
|
|
113.50 |
% |
|
|
239.10 |
% |
|
|
150.72 |
% |
|
|
0.00 |
% |
Efficiency Ratio 7 |
|
|
57.43 |
% |
|
|
52.80 |
% |
|
|
63.81 |
% |
|
|
59.31 |
% |
|
|
55.64 |
% |
Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding basic |
|
|
14,951 |
|
|
|
8,711 |
|
|
|
8,713 |
|
|
|
8,858 |
|
|
|
8,760 |
|
Average Common Shares Outstanding diluted |
|
|
14,951 |
|
|
|
8,711 |
|
|
|
8,724 |
|
|
|
8,938 |
|
|
|
8,932 |
|
Book Value Per Common Share |
|
$ |
4.97 |
|
|
$ |
5.72 |
|
|
$ |
5.23 |
|
|
$ |
5.27 |
|
|
$ |
4.96 |
|
Basic Earnings Per Common Share |
|
$ |
0.35 |
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
|
$ |
0.69 |
|
|
$ |
0.75 |
|
Diluted Earnings Per Common Share |
|
$ |
0.35 |
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
|
$ |
0.68 |
|
|
$ |
0.74 |
|
Cash Dividends Per Common Share |
|
$ |
0.18 |
|
|
$ |
0.24 |
|
|
$ |
0.32 |
|
|
$ |
0.33 |
|
|
$ |
0.29 |
|
|
|
|
1 |
|
Regulatory Capital Ratios and Asset Quality Ratios are end of period ratios. With the
exception of end of period ratios, all ratios are based on average daily balances during the
indicated period. |
|
2 |
|
Return on average assets is net income divided by average total assets. |
|
3 |
|
Return on average equity is net income divided by average shareholders equity. |
|
4 |
|
Regulatory capital ratios are defined in detail in the table on page 67 |
|
5 |
|
Net interest margin equals net interest income as a percent of average
interest-earning assets. |
|
6 |
|
Nonperforming assets include all nonperforming loans (nonaccrual loans, loans 90 days
past due and still accruing interest and restructured loans that are nonperforming) and real estate
acquired by foreclosure. |
|
7 |
|
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. |
36
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of financial condition as of December 31, 2010 and 2009 and results
of operations for each of the years in the three-year period ended December 31, 2010 should be read
in conjunction with our consolidated financial statements and related notes thereto, included in
Part II Item 8 of this report. Average balances, including balances used in calculating certain
financial ratios, are generally comprised of average daily balances.
The disclosures set forth in this item are qualified by important factors detailed in Part I
captioned Forward-Looking Statements and Item 1A captioned Risk Factors of this report and other
cautionary statements set forth elsewhere in the report.
2010 Highlights
Due to conservative loan underwriting, active servicing of problem credits and maintenance of a
healthy net interest margin, we have remained profitable during the economic downturn and have
positioned our Company to take advantage of growth opportunities in the coming years. During 2010
we recorded net income of $6.2 million, and net income to common shareholders of $5.3 million, or
$0.35 per diluted share, after deducting preferred dividend payments made to the Treasury and
accretion of preferred shares under the TARP Capital Purchase Program. Net income for 2010 was
marginally better than 2009 results of $6.0 million. During 2010, the Company successfully
completed a public offering of common shares, which resulted in the sale of 8,280,000 shares of
common stock, resulting in net proceeds of $33.0 million. The increase in common shares
outstanding caused diluted earnings per share to decrease by $0.23 per share from $0.58 per share
in 2009. The Company continued to pay dividends on common stock in 2010, but decreased the per
share amount from $0.06 to $0.03 to ensure that dividend payout ratios remain consistent to periods
prior to the common stock offering. As of December 31, 2010, the Company had total assets of $939.1
million, total portfolio loans of $600.7 million, an allowance for loan and lease losses of $12.8
million, or 2.14% of total loans, deposits outstanding of $648.7 million and shareholders equity
of $103.7 million.
Overview
Our Company was established to make a profitable return while serving the financial needs of the
business and professional communities which make up our markets. We are in the financial services
business, and no line of financial services is beyond our charter so long as it serves the needs of
our customers. Our mission is to provide our shareholders with a safe and profitable return on
investment over the long term. Management will attempt to minimize risk to our shareholders by
making prudent business decisions, maintaining adequate levels of capital and reserves, and
communicating effectively with shareholders.
Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to both maintain customer relationships and build new ones. Our competitors are no longer
just banks. We must compete with financial powerhouses that want our core business. We have
developed strategic plans that evaluate additional services and products that can be delivered to
our customers efficiently and profitably. Producing quality returns is, as always, a top priority.
It is also our vision of the Company to remain independent, expanding our presence through internal
growth and the addition of strategically important full service and focused service locations. We
will pursue attractive opportunities to enter related lines of business and to acquire financial
institutions with complementary lines of business. We will strive to continue our expansion into
profitable markets in order to build franchise value. We will distinguish ourselves from the
competition by a commitment to efficient delivery of products and services in our target markets
to businesses and professionals, while maintaining personal relationships with mutual loyalty.
37
Our long term success rests on the shoulders of the leadership team and its ability to effectively
enhance the performance of the Company. As a financial services company, we are in the business of
taking and managing risks. Whether we are successful depends largely upon whether we take the
right risks and get paid appropriately for those risks. Our governance structure enables us to
manage all major aspects of the Companys business effectively through an integrated process that
includes financial, strategic, risk and leadership planning.
We define risks to include not only credit, market and liquidity risk, the traditional concerns for
financial institutions, but also operational risks, including risks related to systems, processes
or external events, as well as legal, regulatory and reputation risks. Our management processes,
structures, and policies help to ensure compliance with laws and regulations and provide clear
lines for decision-making and accountability. Results are important, but equally important is how
we achieve those results. Our core values and commitment to high ethical standards is material to
sustaining public trust and confidence in our Company.
Risk Management
Overview
Through our corporate governance structure, risk and return is evaluated to produce sustainable
revenues, reduce risks of earnings volatility and increase shareholder value. The financial
services industry is exposed to four major risks; liquidity, credit, market and operational.
Liquidity risk is the inability to meet liability maturities and withdrawals, fund asset growth and
otherwise meet contractual obligations at reasonable market rates. Credit risk is the inability of
a customer to meet its repayment obligations. Market risk is the fluctuation in asset and liability
values caused by changes in market prices and yields, and Operational risk is the potential for
losses resulting from events involving people, processes, technology, legal issues, external
events, regulation, or reputation.
Board Committees
Our corporate governance structure begins with our Board of Directors. The Board of Directors
evaluates risk through the Chief Executive Officer (CEO) and four Board Committees:
|
|
Loan Committee reviews credit risks and the adequacy of the allowance for loan and lease
losses. |
|
|
|
ALCO reviews liquidity and market risks. |
|
|
|
Audit and Qualified Legal Compliance Committee reviews the scope and coverage of internal
and external audit activities; and |
|
|
|
Nominating and Corporate Governance Committee evaluates corporate governance structure,
charters, committee performance and acts in best interests of the corporation and its
shareholders with regard to the appointment of director nominees. |
These committees review reports from management, the Companys auditors, and other outside sources.
On the basis of materials that are available to them and on which they rely, the committees review
the performance of the Companys management and personnel, and establish policies, but neither the
committees nor their individual members (in their capacities as members of the Board of Directors)
are responsible for daily operations of the Company. In particular, risk management activities
relating to individual loans are undertaken by Company personnel in accordance with the policies
established by the committees of the Board of Directors.
Senior Leadership Committees
To ensure that our risk management goals and objectives are accomplished, oversight of our risk
taking and risk management activities are conducted through five Senior Leadership committees
comprised of members of management:
38
|
|
The Senior Leadership Committee establishes short and long-term strategies and operating
plans. The committee establishes performance measures and reviews performance to plan on a
monthly basis: |
|
|
|
The Credit Round Table Committee recommends corporate credit administration practices and
limits including industry concentration limits, approval requirements, and exceptions: |
|
|
|
The Technology Steering Committee establishes technological strategies, makes technology
investment decisions, and manages the implementation process: |
|
|
|
The ALCO Round Table Committee establishes and monitors liquidity ranges, pricing,
maturities, investment goals, and interest spread on balance sheet accounts: and |
|
|
|
The SOX 404 Compliance Committee has established the master plan for full documentation of
the Companys internal controls and compliance with Section 404 of the Sarbanes-Oxley Act of
2002. |
Risk Management Controls
We use various controls to manage risk exposure within the Company. Budgeting and planning
processes provide for early indication of unplanned results or risk levels. Models are used to
estimate market risk and net interest income sensitivity. Segmentation analysis is used to estimate
expected and unexpected credit losses. Compliance with regulatory guidelines plays a significant
role in risk management as well as corporate culture and the actions of management. Our code of
ethics provides the guidelines for all employees to conduct themselves with the highest integrity
in the delivery of service to our clients.
Liquidity Risk Management
Liquidity Risk
Liquidity risk is the inability to meet liability maturities and withdrawals, fund asset growth and
otherwise meet contractual obligations at reasonable market rates. Liquidity management involves
maintaining ample and diverse funding capacity, liquid assets and other sources of cash to
accommodate fluctuations in asset and liability levels due to business shocks or unanticipated
events. ALCO is responsible for establishing our liquidity policy and the accounting department is
responsible for planning and executing the funding activities and strategies.
Sources of liquid assets consist of the repayments and maturities of loans, selling of loans,
short-term money market investments, and cashflows, maturities and sales from the
available-for-sale security portfolio. Increased available-for-sale security balances were
responsible for the major use of liquidity, followed by growth in the loan portfolio. The
weighted-average life of the available-for-sale security portfolio is 7.7 years.
Liquidity is generated from liabilities through deposit growth and Federal Home Loan Bank
borrowings. We emphasize preserving and maximizing customer deposits and other customer-based
funding sources. Deposit marketing strategies are reviewed for consistency with liquidity policy
objectives.
We have available correspondent banking lines of credit through correspondent relationships
totaling approximately $10.0 million and available secured borrowing lines of approximately $46.6
million with the Federal Home Loan Bank of San Francisco. In addition, we periodically obtain
secured borrowings from the Federal Reserve Bank of San Francisco (Reserve Bank) and had $44.5
million in available borrowing lines at the Reserve Bank. While these sources are expected to
continue to provide significant amounts of liquidity in the future, their mix, as well as the
possible use of other sources, will depend on future economic and market conditions. Liquidity is
also provided through cash flows generated through our operations.
Our liquid assets (cash and amounts due from banks, interest bearing deposits held at other banks,
and available-for-sale securities) totaled $252.5 million or 26.89% of total assets at December 31,
2010, $148.3 million or 18.2% of total assets at December 31, 2009 and $216.9 million or 28.01% of
total assets at December 31, 2008. In 2010, the Holding Companys primary sources of funding were
proceeds from the issuance of common stock, and cash dividends from the Bank.
39
The Holding Company expects to receive dividends from the Bank in 2011. See Note 24 to the
Consolidated Financial Statements for a discussion of the restrictions on the Banks ability to pay
dividends.
To accommodate future growth and business needs, we develop an annual capital expenditure budget
during strategic planning sessions. We expect that our earnings, acquisition of core deposits and
wholesale borrowing arrangements will be sufficient to support liquidity needs in 2011.
Other Borrowings
We actively use Federal Home Loan Bank (FHLB) advances as a source of wholesale funding to
provide liquidity and to implement leverage strategies. At December 31, 2010, the Company had three
short term advances outstanding. Two of the advances were fixed rate, and one floated to three
month LIBOR plus one basis point. The advances did not contain call or put features. As of December
31, 2010, the Company had $141.0 million in FHLB advances outstanding compared to $70.0 million at
December 31, 2009 and $120.0 million at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Securities sold under
agreements to repurchase
with weighted average
interest rates of 0.34%,
0.49% and 0.62% at
December 31, 2010, 2009
and 2008, respectively |
|
$ |
13,547,562 |
|
|
$ |
9,620,867 |
|
|
$ |
13,853,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
borrowings with weighted
average interest rates of
0.29%, 0.85% and 2.41% at
December 31, 2010, 2009
and 2008, respectively |
|
|
141,000,000 |
|
|
|
70,000,000 |
|
|
|
120,000,000 |
|
|
|
|
|
|
|
|
|
|
|
Total Other Borrowings |
|
$ |
154,547,562 |
|
|
$ |
79,620,867 |
|
|
$ |
133,853,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Securities sold under agreements to repurchase: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end |
|
$ |
18,820,233 |
|
|
$ |
12,359,119 |
|
|
$ |
14,581,881 |
|
Average balance during the year |
|
|
12,274,351 |
|
|
|
11,006,007 |
|
|
|
13,038,870 |
|
Weighted average interest rate during year |
|
|
0.42 |
% |
|
|
0.46 |
% |
|
|
1.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end |
|
$ |
147,000,000 |
|
|
$ |
130,000,000 |
|
|
$ |
120,000,000 |
|
Average Balance during the year |
|
|
112,783,562 |
|
|
|
103,317,808 |
|
|
|
83,048,645 |
|
Weighted average interest rate during year |
|
|
0.56 |
% |
|
|
1.93 |
% |
|
|
3.40 |
% |
Credit Risk Management
Credit risk arises from the inability of a customer to meet its repayment obligations. Credit risk
exists in our outstanding loans, letters of credit and unfunded loan commitments. We manage credit
risk based on the risk profile of the borrower, repayment sources and the nature of underlying
collateral given current events and conditions.
Commercial portfolio credit risk management
Commercial credit risk management begins with an assessment of the credit risk profile of the
individual borrower based on an analysis of the borrowers financial position in light of current
industry, economic or geopolitical trends.
As part of the overall credit risk assessment of a borrower, each commercial credit is assigned a
risk grade and is subject to approval based on existing credit approval standards. Risk grading is
a substantial factor in determining the adequacy of the allowance for loan and lease losses.
40
Credit decisions are determined by Credit Administration to certain limitations and approvals from
the Loan Committee above certain limitations. Credit risk is continuously monitored by Credit
Administration for possible adjustment if there has been a change in the borrowers ability to
perform under its obligations. Additionally, we manage the size of our credit exposure through loan
sales and loan participation agreements. The primary sources of repayment of our commercial loans
are from the borrowers operating cash flows and the borrowers conversion of short-term assets to
cash. The net assets of the borrower or guarantor are usually identified as a secondary source of
repayment. The principal factors affecting our 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 our service area. We manage our commercial loan portfolio by
monitoring our borrowers payment performance and their respective financial condition and make
periodic adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. Our
evaluations of our borrowers are facilitated by managements knowledge of local market conditions
and periodic reviews by a consultant of our credit administration policies.
Real estate portfolio credit risk management
The principal source of repayment of our real estate construction loans is the sale of the
underlying collateral or the availability of permanent financing from the Company or other 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.
We manage our credit risk associated with real estate construction lending by establishing a
loan-to-value ratio on projects on an as-completed basis, inspecting project status in advance of
disbursements, and matching maturities with expected completion dates. Generally, we require a
loan-to-value ratio of not more than 80% on single family residential construction loans. Our
specific underwriting standards and methods for each principal line of lending include
industry-accepted analysis and modeling and certain proprietary techniques. Our underwriting
criteria are designed to comply with applicable regulatory guidelines, including required
loan-to-value ratios. Our credit administration policies contain mandatory lien position and debt
service coverage requirements, and the Bank generally requires a guarantee from individuals owning
20% or more of the borrowing entity.
Concentrations of credit risk
Portfolio credit risk is evaluated with the goal that concentrations of credit exposure do not
result in unacceptable levels of risk. Concentrations of credit exposure can be measured in various
ways including industry, product, geography, and customer relationship. We review non-real estate
commercial loans by industry and real estate loans by geographic location and property type.
Nonperforming assets
Our practice is to place an asset on nonaccrual status when one of the following events occurs:
(1) Any installment of principal or interest is 90 days or more past due (unless in managements
opinion the loan is well-secured and in the process of collection), (2) management determines the
ultimate collection of principal or interest to be unlikely, or (3) the terms of the loan have been
renegotiated due to a serious weakening of the borrowers financial condition. Nonperforming loans
include impaired loans which may be on nonaccrual, are 90 days past due and still accruing, or have
been restructured and are not in compliance with their modified terms.
Allowance for loan and lease losses (ALLL)
The allowance for loan and lease losses represents managements best estimate of probable losses in
the loans and leases portfolio.
41
Within the allowance, reserves are allocated to segments of the portfolio based on specific formula
components. Changes to the allowance for credit losses are reported in the Consolidated Statement
of Income in the provision for loan and lease losses.
We perform periodic and systematic detailed evaluations of our lending portfolio to identify and
estimate the inherent risks and assess the overall collectability. We evaluate general conditions
such as the portfolio composition, size and maturities of various segmented portions of the
portfolio such as secured, unsecured, construction, and Small Business Administration (SBA). We
also evaluate concentrations of borrowers, industries, geographical sectors, loan product, loan
classes and collateral types, volume and trends of loan delinquencies and nonaccrual; criticized
and classified assets and trends in the aggregate in significant credits identified as watch list
items.
Our 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 based on certain observable data that management believes most reflects the
underlying credit losses being estimated. Changes in the amount of each component of the allowance
for loan losses are directionally consistent with changes in the observable data, taking into
account the interaction of the components over time.
An essential element of the methodology for determining the allowance for loan and lease losses is
our credit risk evaluation process, which includes credit risk grading of individual, commercial,
construction, commercial real estate, and consumer loans. Loans are assigned credit risk grades
based on our 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 or as management become aware of information affecting the borrowers ability to fulfill its
obligations. Credit risk grades carry a dollar weighted risk percentage.
For individually impaired loans, we measure impairment based on the present value of expected
future principal and interest cash flows discounted at the loans effective interest rate, except
that as a practical expedient, 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 and the associated inherent credit risk. This reserve is
carried as a liability on the consolidated balance sheet.
We make provisions to the ALLL on a regular basis through charges to operations that are reflected
in our consolidated statements of income as provision expense 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.
Various regulatory agencies periodically review our ALLL as an integral part of their examination
process. Such agencies may require us to provide additions to the allowance based on their judgment
of information available to them at the time of their examination. There is uncertainty concerning
future economic trends. Accordingly, it is not possible to predict the effect future economic
trends may have on the level of the provisions for possible loan losses in future periods. The ALLL
should not be interpreted as an indication that charge-offs in future periods will occur in the
stated amounts or proportions.
42
Market Risk Management
General
Market risk is the potential loss due to adverse changes in market prices and interest rates.
Market risk is inherent in our operating positions and activities including customers loans,
deposit accounts, securities and long-term debt. Loans and deposits generate income and expense,
respectively, and the value of cash flows changes based on general economic levels, and most
importantly, the level of interest rates.
The goal for managing our assets and liabilities is to maximize shareholder value and earnings
while maintaining a high quality balance sheet without exposing the Company to undue interest rate
risk. The absolute level and volatility of interest rates can have a significant impact on our
profitability. Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. We do not operate a trading
account, and do not hold a position with exposure to foreign currency exchange. We face market risk
through interest rate volatility. Net interest income or margin risk is measured based on rate
shocks over different time horizons versus a current stable interest rate environment. Assumptions
used in these calculations are similar to those used in the planning and budgeting model. The
overall interest rate risk position and strategies are reviewed on an ongoing basis with ALCO.
Securities Portfolio
The securities portfolio is central to our asset liability management strategies. The decision to
purchase or sell securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity and regulatory requirements. We
classify our securities as available-for-sale or held-to-maturity at the time of purchase. We
do not engage in trading activities. Securities held-to-maturity is carried at cost adjusted for
the accretion of discounts and amortization of premiums. Securities available-for-sale may be sold
to implement our asset liability management strategies and in response to changes in interest
rates, prepayment rates and similar factors. Securities available-for-sale are recorded at fair
value and unrealized gains or losses, net of income taxes, are reported as a component of
accumulated other comprehensive income(loss), in a separate component of shareholders equity. Gain
or loss on sale of securities is based on the specific identification method.
Operational Risk Management
Operational risk is the potential for loss resulting from events involving people, processes,
technology, legal or regulatory issues, external events, and reputation. In keeping with the
corporate governance structure, the Senior Leadership committee is responsible for operational risk
controls. Operational risks are managed through specific policies and procedures, controls and
monitoring tools. Examples of these include reconciliation processes, transaction monitoring and
analysis and system audits. Operational risks fall into two major categories, business specific and
company wide. The Senior Leadership committee works to ensure consistency in policies, processes
and assessments. With respect to company wide risks, the Senior Leadership committee works directly
with members of our Board of Directors to develop policies and procedures for information security,
business resumption plans, compliance and legal issues.
Critical Accounting Policies
General
Our significant accounting principles are described in Note 2 to the consolidated financial
statements and are essential to understanding Managements Discussion and Analysis of Results of
Operations and Financial Condition. Bank of Commerce Holdings consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP).
43
The financial information contained within our statements is, to a significant extent, financial
information that is based on measures of the financial effects of transactions and events that have
already occurred. Some of our accounting principles require significant judgment to estimate
values of assets or liabilities. In addition, certain accounting principles require significant
judgment in applying the complex accounting principles to transactions to determine the most
appropriate treatment.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due
to the level of risk associated with certain invested assets and the level of uncertainty related
to changes in the fair value of these assets, it is possible that changes in risks in the near term
could have a material adverse impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be
other-than-temporary. A significant judgment in the valuation of investments is the determination
of when an other-than-temporary impairment has occurred. The ALCO Committee reviews the
investment portfolio on at least a quarterly basis, with ongoing analysis as new information
becomes available. Any decline that is determined to be other-than-temporary is recorded as an
other-than-temporary impairment (OTTI) loss in the results of operations in the period in which
the determination occurred.
An investment is impaired if the fair value of the investment is less than its cost
adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an
investment is impaired, the impairment is evaluated to determine whether it is temporary or
other-than-temporary. When an investment is impaired, we assess whether to sell the
security, or it is more likely than not that we will be required to sell the security before
recovery of its amortized cost basis less any current-period credit losses.
For debt securities that are considered other than temporarily impaired and that we do not intend
to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate
the amount of the impairment into the amount that is credit related (credit loss component) and the
amount due to all other factors. The credit loss component is recognized in earnings and is
calculated as the difference between the investments amortized cost basis and the present value of
its expected future cash flows. The remaining differences between the investments fair value and
the present value of future expected cash flows is deemed to be due to factors that are not credit
related and is recognized in other comprehensive income. Significant judgment is required in the
determination of whether an OTTI has occurred for an investment.
The Company follows a consistent and systematic process for determining and recording an OTTI loss.
The Company has designated the ALCO Committee responsible for the OTTI process. The ALCO
Committees assessment of whether an OTTI loss should be recognized incorporates both quantitative
and qualitative information.
The ALCO Committees assessment of whether an OTTI loss should be recognized incorporates both
quantitative and qualitative information. The ALCO Committee considers a number of factors
including, but not limited to: (a) the length of time and the extent to which the fair value has
been less than amortized cost, (b) the financial condition and near term prospects of the issuer,
(c) our intent and ability to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value, (d) whether the debtor is current on interest and principal payments
and (e) general market conditions and industry or sector specific outlook.
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is managements best estimate of the probable losses that
may be sustained in our loan portfolio at the balance sheet date. The allowance is based on two
basic principles of accounting: (1) that losses be accrued when they are probable of occurring and
estimable and (2) that losses 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.
44
We perform periodic and systematic detailed evaluations of our lending portfolio using several
analytical tools and benchmarks to calculate a range of probable outcomes and estimate the inherent
risks and assess the overall collectability. Although, no single statistic or measurement
determines the adequacy of the allowance, we consider general conditions such as the portfolio
composition, size and maturities of various segmented portions of the portfolio.
Additional factors include concentrations of borrowers, industries, geographical sectors, loan
product, loan classes and collateral types; volume and trends of loan delinquencies and nonaccrual;
criticized and classified assets and trends in the aggregate in significant credits identified as
watch list items. There are several components to the determination of the adequacy of the ALLL.
Each of these components is determined based upon estimates that can and do change when the actual
events occur. For those segments that require an ALLL, we estimate loan losses on a monthly basis
based upon its ongoing loan review process and analysis of loan performance. We follow a systematic
and consistently applied approach to select the most appropriate loss measurement methods and
support our conclusions and rationale with written documentation. One method of estimating loan
losses for groups of loans is through the application of loss rates to the groups aggregate loan
balances. Such rates typically reflect historical loss experience for each group of loans, adjusted
for relevant economic factors over a defined period of time. We evaluate and modify our loss
estimation model as needed to ensure that the resulting loss estimate is consistent with GAAP.
When a loan is individually 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 we may measure impairment based on a loans observable market price
or the fair value of collateral, if the loan is collateral dependent. When developing the estimate
of future cash flows for a loan, we consider all available information reflecting past events and
current conditions, including the effect of existing environmental factors.
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments.
The cost is determined based on the fair value of the award on the grant date. The grant date fair
value is measured using the Black Scholes option-pricing model with assumptions made regarding
volatility, the risk-free interest rate, expected dividends, assumed forfeiture rate and expected
term. The grant date fair value is recognized in the statement of income over the service period
of the award.
Revenue recognition
Our primary source of revenue is 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. Another source of revenue is 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. Interest income is recorded on an accrual
basis. Note 2 to the Consolidated Financial Statements offers an explanation of the process for
determining when the accrual of interest income is discontinued on an impaired loan.
Income Taxes
We account for income taxes under the asset and liability method. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
currently enacted tax rates applied to such taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. If future income should prove non-existent or less
than the amount of deferred tax assets within the tax years to which they may be applied, the asset
may not be realized and our net income will be reduced.
45
Mortgages Held for Sale
Mortgages held for sale are generated through two pipelines; (1) Bank of Commerce Mortgage and (2)
the Banks purchase program with Bank of Commerce Mortgage. In both cases our majority owned
subsidiary Bank of Commerce Mortgage originates residential mortgage loans within Bank of
Commerces geographic market, as well as on a nationwide basis. In scenario (1) above, the loans
are funded through a warehouse line of credit with the Bank, and are accounted for as loans held
for sale at the Mortgage Subsidiary. Under scenario (2) above, the Bank purchases the mortgages at
origination from the Mortgage Subsidiary, and are classified as held for sale at the Bank.
All mortgage loans originated through either pipeline represent loans collateralized by one-to four
family residential real estate and are made to borrowers in good credit standing. These loans are
typically sold to primary mortgage market aggregators (Fannie Mae (FNMA), Freddie Mac (FHLMC), and
Ginnie Mae (GNMA)) and to third party investors including the servicing rights. Mortgages held for
sale are carried at the lower of cost of fair value. Cost generally approximates fair value, given
the short duration of these assets. Gains and losses on loan sales are recorded in noninterest
income, and direct loan origination costs and fees are deferred at origination of the loan and are
recognized in noninterest income upon sale of a loan. We generally sell all servicing rights
associated with the mortgage loans. Accordingly, there are no separately recognized servicing
assets or liabilities resulting from the sale of mortgage loans.
Derivative Loan Commitments
Our majority owned subsidiary, Bank of Commerce Mortgage enters into forward delivery contracts to
sell residential mortgage loans at specific prices and dates in order to hedge the interest rate
risk in its portfolio of mortgage loans held for sale and its residential mortgage loan
commitments. Generally, the Company enters into a best efforts interest rate lock commitment (IRLC)
with borrowers and forward delivery contracts with investors associated with mortgage loans
receivable held for sale. Our derivative instruments consist primarily of IRLCs executed with
borrowers and mandatory forward purchase commitments with investor lenders. These derivative
instruments are accounted for as fair value hedges, with the changes in fair value reflected in
earnings as a component of mortgage brokerage fee income.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities
and to determine fair value disclosures. We base our fair values on the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Securities available for sale, derivatives, and loans held
for sale, if any, are recorded at fair value on a recurring basis. Additionally, from time to time,
we may be required to record certain assets at fair value on a non-recurring basis, such as certain
impaired loans held for investment and securities held to maturity that are other-than-temporarily
impaired. These non-recurring fair value adjustments typically involve write-downs of individual
assets due to application of lower-of-cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of
observable inputs and minimize the use of unobservable inputs when developing fair value
measurements. Whenever there is no readily available market data, Management uses its best estimate
and assumptions in determining fair value, but these estimates involve inherent uncertainties and
the application of Managements judgment. As a result, if other assumptions had been used, our
recorded earnings or disclosures could have been materially different from those reflected in these
financial statements. For detailed information on our use of fair value measurements and our
related valuation methodologies, see Note 25 to the Consolidated Financial Statements in Item 8 of
this Form 10-K.
Other Real Estate Owned
Real estate acquired by foreclosure is carried at the lower of the recorded investment in the
property or its fair value less estimated selling costs.
46
Prior to foreclosure, the value of the underlying loan is written down to the fair value of the
real estate to be acquired, less costs to sell, by a charge to the allowance for loan losses, if
necessary. Fair value of other real estate is generally determined based on an appraisal of the
property. Any subsequent write-downs are charged against noninterest expenses. Operating expenses
of such properties, net of related income, and gains and losses on their disposition are included
in other expenses.
Gain recognition on the disposition of real estate is dependent upon the transaction meeting
certain criteria relating to the nature of the property sold and the terms of the sale. This
includes the buyers initial and continuing investment, the degree of continuing involvement by the
Company with the property after the sale, and other matters. Under certain circumstances, revenue
recognition may be deferred until these criteria are met.
Financial Highlights Results of Operations
The following discussion and analysis provides a comparison of the results of operations for
the five years ended December 31, 2010. This discussion should be read in conjunction with the
consolidated financial statements and related notes.
Key Financial Ratios
|
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|
|
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|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Profitability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.69 |
% |
|
|
0.75 |
% |
|
|
0.33 |
% |
|
|
1.04 |
% |
|
|
1.20 |
% |
Return on average equity |
|
|
6.50 |
% |
|
|
9.01 |
% |
|
|
4.99 |
% |
|
|
13.39 |
% |
|
|
15.59 |
% |
Average earning assets to total average assets |
|
|
89.63 |
% |
|
|
91.42 |
% |
|
|
92.86 |
% |
|
|
93.74 |
% |
|
|
94.20 |
% |
Interest Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
4.06 |
% |
|
|
3.94 |
% |
|
|
3.47 |
% |
|
|
3.98 |
% |
|
|
4.26 |
% |
Asset Quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans |
|
|
2.14 |
% |
|
|
1.86 |
% |
|
|
1.60 |
% |
|
|
1.66 |
% |
|
|
1.18 |
% |
Nonperforming assets to total assets |
|
|
2.43 |
% |
|
|
1.92 |
% |
|
|
2.98 |
% |
|
|
2.01 |
% |
|
|
0.00 |
% |
Net charge-offs to average loans |
|
|
1.84 |
% |
|
|
1.14 |
% |
|
|
1.22 |
% |
|
|
0.00 |
% |
|
|
-0.09 |
% |
Liquidity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to deposits |
|
|
92.60 |
% |
|
|
93.87 |
% |
|
|
93.28 |
% |
|
|
102.67 |
% |
|
|
93.08 |
% |
Liquidity ratio |
|
|
41.86 |
% |
|
|
38.84 |
% |
|
|
22.56 |
% |
|
|
18.49 |
% |
|
|
27.96 |
% |
Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital Bank |
|
|
13.34 |
% |
|
|
11.57 |
% |
|
|
11.58 |
% |
|
|
9.97 |
% |
|
|
11.42 |
% |
Total risk-based capital Bank |
|
|
14.59 |
% |
|
|
12.83 |
% |
|
|
12.84 |
% |
|
|
11.22 |
% |
|
|
12.54 |
% |
Efficiency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio |
|
|
57.43 |
% |
|
|
52.80 |
% |
|
|
63.81 |
% |
|
|
59.31 |
% |
|
|
55.64 |
% |
The above table represents key financial performance ratios that our Senior Leadership Team
monitors on a monthly basis in comparison with Uniform Bank Performance Report peer data. Uniform
Bank Performance Reports are available on all Federal Deposit Insurance Corporation insured
financial institutions and are used to measure quality performance to peer groupings and may be
obtained online at www.fdic.gov. Management monitors the high-performing sector of the peer
group and uses this data to examine strategies of other high-performing financial institutions and
to establish the financial performance goals of the Company on an annual basis. These goals are
then communicated through budgets, strategies, planning and projections to the Senior Leadership
Team for implementation. Results are monitored both to plan and to peer group at the Board of
Directors level on a monthly basis.
47
Balance Sheet
The Companys total assets were $939.1 million as of December 31, 2010 compared to $813.4
million as of December 31, 2009. The $125.7 million or 15.5% increase in total assets was centered
in the investment portfolio and to a lesser extent, the Companys held for sale loan portfolio. The
investment portfolio increased $109.2 million while the held for sale mortgage portfolio increased
$15.7 million. Management executed a investment leverage strategy in 2010 and invested in highly
liquid agency mortgage-backed securities and other agency debt, highly credit rated municipal
securities, and highly credit rated corporate securities. The increase in held for sale mortgage
portfolio reflects significant increases in mortgage loan originations associated with the
Companys affiliate, Bank of Commerce Mortgage. The held for investment loan portfolio remained
flat to the prior year and reflected tepid loan demand in the Companys markets.
Total deposits increased $8.2 million or 1.29% over December 31, 2009. While deposit growth was
modest in 2010, management made solid gains in core deposit growth. Management defines core
deposits as non-maturity deposits including interest and non-interest bearing demand deposits,
money market accounts, and savings accounts. Demand deposits increased $20.0 million or 8.6% when
compared to December 31, 2009 while money market and savings accounts increased $18.2 million or
27.9% over the same period. Time deposits decreased $30.0 million or 8.8% over December 31, 2009
and reflects the planned maturity and non-renewal of brokered time deposits along with some deposit
mitigation to non-maturity deposits.
Asset Quality
Our loan portfolio remains strained. The commercial and industrial, and real estate portfolios
continued to experience deterioration in 2010. Both portfolios have been negatively impacted by the
current economic recession and significant weakness in the real estate market. Net charge-offs were
$11.2 million for the year ended December 31, 2010 as compared to $6.7 million for the year ended
December 31, 2009. The charge-offs were generally equally divided between in the Companys
residential, commercial real estate, and commercial and industrial portfolios. Management remains
committed to working with our customers experiencing financial difficulties to find potential
solutions that benefit both parties.
Capital
The capital ratios of Bank of Commerce Holdings continue to be above the well-capitalized
guidelines established by regulatory agencies. The Company successfully raised $33.0 million in net
equity proceeds in 2010. The increased level of capital increased the Companys total risk-based
capital ratio to 15.00% as compared to 13.31% on December 31, 2009. The Companys strong equity
position will allow management to continue to pursue and evaluate strategic opportunities within
our markets and consider opportunities outside of our current footprint.
Sources of Income
We derive our income from two principal sources: (1) net interest income, which is the
difference between the interest income we receive on interest-earning assets and the interest
expense we pay on interest-bearing liabilities, and (2) fee income, which includes fees earned on
deposit services, income from payroll processing, electronic-based cash management services,
mortgage brokerage fee income and merchant credit card processing services. Our income depends to
a great extent on net interest income. These interest rate characteristics are highly sensitive to
many factors, which are beyond our control, including general economic conditions, inflation,
recession, and the policies of various governmental and regulatory agencies, and the Federal
Reserve Board in particular. Because of our predisposition to variable rate pricing on our assets
and level of time deposits, we are considered asset sensitive. Consequently, we benefit in a rising
rate environment and we are affected adversely by declining interest rates.
48
Net interest income reflects both our net interest margin, which is the difference between the
yield we earn on our assets and the interest rate we pay for deposits and our other sources of
funding, and the amount of earning assets we hold. As a result, changes in either our net interest
margin or the amount of earning assets we hold could affect our net interest income and our
earnings.
Increase or decreases in interest rates could adversely affect our net interest margin. Although
the yield we earn on our assets and our funding costs tend to move in the same direction in
response to changes in interest rates, one can rise or fall faster than the other, and cause our
net interest margin to expand or contract. Many of our assets are tied to prime rate, so they may
adjust faster in response to changes in interest rates. As a result, when interest rates fall, the
yield we earn on our assets may fall faster than the re-pricing opportunities of our liabilities,
causing our net interest margin to contract until the re-pricing of liabilities catches up.
Changes in the slope of the yield curve or the spread between short-term and long-term
interest rates could also reduce our net interest margin. Normally, the yield curve is upward
sloping, which means that short-term rates are lower than long-term rates. Because our liabilities
tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we
could experience pressure on our net interest margin as our cost of funds increases relative to the
yield we can earn on our assets.
We assess our interest rate risk by estimating the effect on our earnings under various scenarios
that differ based on assumptions about the direction, magnitude and speed of interest rate changes
and the slope of the yield curve.
There is always the risk that changes in interest rates could reduce our net interest income and
our earnings in material amounts, especially if actual conditions turn out to be materially
different than what we assumed. For example, if interest rates rise or fall faster than we assumed
or the slope of the yield curve changes, we may incur significant losses on debt securities we hold
as investments. To reduce our interest rate risk, we may rebalance our investment and loan
portfolios, refinance our debt and take other strategic actions which may result in losses or
expenses.
Mortgage brokerage services are performed by Bank of Commerce Mortgage subsidiary. Mortgage
brokerage services offers residential real estate loans with fourteen offices in two different
states and licenses in California, Oregon, Washington, Idaho and Colorado. Mortgages that are
originated are sold, servicing included, in the secondary market or directly to correspondent
financial institutions. We derive fee income from our mortgage brokerage services.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
We reported net income of $6.2 million and net income to common shareholders of $5.3 million
for the year ended December 31, 2010, representing an increase of approximately $200,000 or 3.33%,
over net income of $6.0 million and net income to common shareholders of $5.1 million for the year
ended December 31, 2009. During 2010, our net interest margin increased modestly as the Company
continued to fund earning assets with low cost deposits and wholesale borrowings. The downward
repricing of wholesale borrowings continued to provide positive benefit to our net interest margin.
Consistent with 2009, gains on the sale of securities contributed significantly to our 2010
earnings. In 2010, the Company also benefited from the settlement of the irrevocable loss guarantee
(Put Reserve) associated with the ITIN loan portfolio (see Note 28), which increased noninterest
income by $1.8 million.
During 2010, we increased provisions for loan and lease losses significantly. Increased provisions
are directly attributed to further deterioration in the Commercial and Industrial portfolio and
continuing weakness in our real estate portfolio. Our provision for loan and lease losses increased
to $12.9 million in 2010 from $9.5 million in 2009. Ongoing credit quality reviews and current
appraisals identified impairment within the portfolio and significantly contributed to increased
provisions in 2010.
49
Nonperforming assets as a percentage of total assets increased to 2.43% compared to 1.92% in 2009.
The majority of the increase in nonperforming assets is primarily related to the ITIN loan
portfolio. The current recession with the accompanying depressed residential real estate market
continues to stress these assets. Accordingly, management has taken an aggressive and prudent
stance in monitoring these credits, and will continue to do so in 2011.
Return on average assets (ROA) was 0.69% in 2010 and 0.75% in 2009. Return on average common equity
(ROE) was 6.50% in 2010 compared 9.01% in 2009. Diluted earnings per share for 2010 and 2009 were
$0.35 and $0.58, respectively, which was a year-over-year decrease of 39.7%. The decrease in
diluted earnings per share is a direct result from the additional common shares outstanding. During
2010, the Company successfully completed a public offering of common stock, whereby issuing
8,280,000 of common stock at $4.25 per share with net equity proceeds of $33.0 million.
Our average total assets increased to $906.1 million in 2010 or 12.7% from $804.2 million in 2009.
Total deposits grew by $8.2 million or 1.3% over 2009; the deposit growth was centered in
noninterest bearing demand accounts and savings accounts. Total gross loans decreased by $0.6
million or 0.11% over 2009; decreases in the real estate construction portfolio were offset by
increases to the home equity line portfolio, the remaining mix remained consistent with 2009.
During the first quarter of 2010 the Company purchased a pool of performing home equity revolving
and non revolving loans which accounted for the majority of the increase in the home equity
portfolio.
The yield on the loan portfolio decreased 30 basis points to 5.78% compared to 6.08% in 2009.
Yields on all earning assets decreased 40 basis points to 5.22% compared to 5.62% in 2009. Our
income is highly dependent on interest rate differentials and the resulting net interest margins
(i.e., the difference between the interest rates earned on the Banks interest-earning assets such
as loans and securities, and the interest rates paid on the Banks interest-bearing liabilities
such as deposits and borrowings).
These rates are highly sensitive to many factors, which are beyond our control, including general
economic conditions, inflation, recession and the policies of various governmental and regulatory
agencies, in particular, the Federal Reserve Board (FRB). Because of our predisposition to
variable rate pricing on our assets and level of time deposits, we are normally considered asset
sensitive. However, with the current historically low interest rate environment, the market rates
on many of our variable-rate loans are below their respective floors. Consequently, we would not
immediately benefit in a rising rate environment. As such, we are currently considered liability
sensitive in the 100bp to 300bp upward rate shock, and asset sensitive for 400bp upward rate shock.
As a result, management anticipates that, in a rising interest rate environment, our net interest
income and margin would generally be expected to decline, as well as in a declining interest rate
environment. However, given that the model assumes a static balance sheet, no assurance can be
given that under such circumstances we would experience the described relationships to declining or
increasing interest rates.
During 2010, the Company entered into a series of deferred starting interest rate swap contracts to
mitigate a portion of future interest rate risk. The contracts were forward starting with the first
one becoming effective on March 1, 2012. Management designated the deferred interest
rate swap contracts as cash flow hedges of interest payments. During 2011, the Company settled the
deferred interest rate swap contracts and removed the hedge designation. As a result of the
settlement of the deferred interest rate swap contracts, the Company realized $3.0 million in cash
proceeds from the counterparty. Management intends on reclassifying the gains realized on the
hedge instruments into earnings from other comprehensive income, as a reduction of interest
expense, in the same periods during which the hedged forecasted transaction affects earnings on the
basis it is probable the forecasted transaction will occur. As such, the Companys margin will
benefit from the future reclassifications of these gains by lowering interest expense on Federal
Home Loan advances. This benefit is expected to begin in March 2012.
Funding costs decreased by 50 basis points to 1.37% compared with 1.87% in 2009, reflecting the
current lower cost rate environment.
50
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
We reported net income of $6.0 million and net income to common shareholders of $5.1 million
for the year ended December 31, 2009, representing an increase of approximately $2.87 million or
130.7%, over net income of $2.19 million for the year ended December 31, 2008.
The increase can be primarily attributed to loan growth funded with low cost deposits and
re-pricing wholesale borrowings with the resulting effect expanding our net interest margin and net
income for the year.
During 2009, we increased provisions for loan and lease losses significantly. Increased provisions
are directly attributed to deterioration in the Commercial and Industrial portfolio and continuing
weakness in our real estate portfolio.
Our provision for loan and lease losses increased to $9.5 million in 2009 from $6.5 million in
2008. Ongoing credit quality reviews identified impairment within the portfolio and greatly
contributed to the increased provisions in 2009.
Nonperforming assets as a percentage of total assets decreased to 1.92% compared to 2.98% in 2008.
The decrease in nonperforming assets is primarily attributed to a bulk sale of nonperforming assets
in the second quarter of 2009. On April 17, 2009, we completed a Loan Swap transaction which
included the purchase of a portfolio of Individual Tax Identification Number (ITIN) residential
mortgage loans. The ITIN portfolio was purchased from a private equity firm in exchange for a
combination of approximately $14.0 million in nonperforming loans and cash of approximately $67.0
million. The nonperforming loans were transferred without recourse. At the settlement date, the
mortgage loan pool contained 859 single family residential mortgages with an average principal
balance of approximately $96,596, a weighted average credit score of 647, a weighted average loan
to value ratio of 89%, a weighted average yield of 7.44% and all loans were fully documented. The
ITIN mortgage pool is geographically dispersed throughout the United States.
Return on average assets (ROA) was 0.75% in 2009 and 0.33% in 2008. Return on average common equity
(ROE) was 9.01% in 2009 compared 4.99% in 2008. Diluted earnings per share for 2009 and 2008 were
$0.58 and $0.25, respectively, which was a year-over-year increase of 132.0%. Our average total
assets increased to $804.2 million in 2009 or 21.4% from $662.3 million in 2008. Total deposits
grew by $85.2 million or 15.3% over 2008; the deposit growth was centered in certificates of
deposit followed by interest-bearing checking accounts. Total loans grew by $73.9 million or 14.0%
over 2008; loan growth was centered in residential mortgage loans.
The yield on the loan portfolio decreased 39 basis points to 6.08% compared to 6.47% in 2008.
Yields on total earning assets decreased 51 basis points to 5.62% compared to 6.13% in 2008. Our
income is highly dependent on interest rate differentials and the resulting net interest margins
(i.e., the difference between the interest rates earned on the Banks interest-earning assets such
as loans and securities, and the interest rates paid on the Banks interest-bearing liabilities
such as deposits and borrowings).
These rates are highly sensitive to many factors, which are beyond our control, including general
economic conditions, inflation, recession and the policies of various governmental and regulatory
agencies, in particular, the Federal Reserve Board (FRB). Because of our predisposition to
variable rate pricing on our assets and level of time deposits, we are considered asset sensitive.
Consequently, we benefit in a rising rate environment and we are adversely affected by declining
interest rates.
Funding costs decreased 115 basis points to 1.87% compared with 3.02% in 2008, reflecting the
current lower cost rate environment.
51
Net Interest Income and Net Interest Margin
Our primary source of income is derived from net interest income. Net interest income
represents the excess of interest and fees earned on 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 increased $4.0 million to $33.0 million in 2010 compared to $29.0 million in
2009 and $21.3 million in 2008, representing a 13.79% increase in 2010 over 2009, and a 35.82%
increase in 2009 over 2008. The average balance of total earning assets increased to $812.1 million
in 2010 compared to $735.2 million in 2009, which reflects a 10.46% increase.
Portfolio loans, the largest component of average earning assets, increased $50.9 million or 8.63%
compared with the prior year period. During the period, yields on average earning assets decreased
by 40 basis points to 5.22%.
The decrease in yields on average earning assets is primarily due to two factors; relatively higher
yielding loans either maturing or being reclassified as nonaccrual and current year additions to
the available for sale investment portfolio at relatively lower market rates.
52
The following table sets forth our daily average balance sheet, related interest income or expense
and yield or rate paid for the periods indicated. The yield on tax-exempt securities has not been
adjusted to a tax-equivalent yield basis.
Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
|
Balance |
|
|
Interest |
|
|
Yield/Rate |
|
Interest Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans1 |
|
$ |
640,213 |
|
|
$ |
37,000 |
|
|
|
5.78 |
% |
|
$ |
589,336 |
|
|
$ |
35,860 |
|
|
|
6.08 |
% |
|
$ |
518,759 |
|
|
$ |
33,582 |
|
|
|
6.47 |
% |
Tax-exempt securities |
|
|
42,172 |
|
|
|
1,692 |
|
|
|
4.01 |
% |
|
|
28,384 |
|
|
|
1,164 |
|
|
|
4.10 |
% |
|
|
24,399 |
|
|
|
1,197 |
|
|
|
4.91 |
% |
US government securities |
|
|
27,423 |
|
|
|
617 |
|
|
|
2.25 |
% |
|
|
8,606 |
|
|
|
343 |
|
|
|
3.99 |
% |
|
|
13,637 |
|
|
|
553 |
|
|
|
4.06 |
% |
Mortgage backed securities |
|
|
48,972 |
|
|
|
1,466 |
|
|
|
2.99 |
% |
|
|
53,722 |
|
|
|
3,107 |
|
|
|
5.78 |
% |
|
|
37,328 |
|
|
|
1,916 |
|
|
|
5.13 |
% |
Federal funds sold |
|
|
995 |
|
|
|
2 |
|
|
|
0.20 |
% |
|
|
13,438 |
|
|
|
32 |
|
|
|
0.24 |
% |
|
|
17,987 |
|
|
|
303 |
|
|
|
1.68 |
% |
Other securities |
|
|
52,322 |
|
|
|
1,614 |
|
|
|
3.08 |
% |
|
|
41,305 |
|
|
|
823 |
|
|
|
1.99 |
% |
|
|
2,918 |
|
|
|
139 |
|
|
|
4.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Earning Assets |
|
$ |
812,097 |
|
|
$ |
42,391 |
|
|
|
5.22 |
% |
|
$ |
734,791 |
|
|
$ |
41,329 |
|
|
|
5.62 |
% |
|
$ |
615,028 |
|
|
$ |
37,690 |
|
|
|
6.13 |
% |
Cash & due from banks |
|
|
28,748 |
|
|
|
|
|
|
|
|
|
|
|
26,841 |
|
|
|
|
|
|
|
|
|
|
|
16,298 |
|
|
|
|
|
|
|
|
|
Bank premises |
|
|
9,814 |
|
|
|
|
|
|
|
|
|
|
|
10,322 |
|
|
|
|
|
|
|
|
|
|
|
11,097 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
55,440 |
|
|
|
|
|
|
|
|
|
|
|
32.257 |
|
|
|
|
|
|
|
|
|
|
|
19,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Assets |
|
$ |
906,099 |
|
|
|
|
|
|
|
|
|
|
$ |
804,211 |
|
|
|
|
|
|
|
|
|
|
$ |
662,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
$ |
141,983 |
|
|
$ |
968 |
|
|
|
0.68 |
% |
|
$ |
145,542 |
|
|
$ |
1,015 |
|
|
|
0.70 |
% |
|
$ |
138,743 |
|
|
$ |
2,173 |
|
|
|
1.57 |
% |
Savings deposits |
|
|
76,718 |
|
|
|
921 |
|
|
|
1.20 |
% |
|
|
62,846 |
|
|
|
963 |
|
|
|
1.53 |
% |
|
|
56,914 |
|
|
|
1,576 |
|
|
|
2.77 |
% |
Certificates of deposit |
|
|
321,051 |
|
|
|
6,151 |
|
|
|
1.92 |
% |
|
|
317,417 |
|
|
|
7,628 |
|
|
|
2.40 |
% |
|
|
234,493 |
|
|
|
8,552 |
|
|
|
3.65 |
% |
Repurchase agreements |
|
|
12,274 |
|
|
|
52 |
|
|
|
0.42 |
% |
|
|
11,006 |
|
|
|
51 |
|
|
|
0.46 |
% |
|
|
13,043 |
|
|
|
173 |
|
|
|
1.33 |
% |
Other borrowings |
|
|
134,255 |
|
|
|
1,306 |
|
|
|
0.97 |
% |
|
|
122,057 |
|
|
|
2,678 |
|
|
|
2.19 |
% |
|
|
98,518 |
|
|
|
3,868 |
|
|
|
3.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest Liabilities |
|
$ |
686,281 |
|
|
$ |
9,398 |
|
|
|
1.37 |
% |
|
$ |
658,868 |
|
|
$ |
12,335 |
|
|
|
1.87 |
% |
|
$ |
541,711 |
|
|
$ |
16,342 |
|
|
|
3.02 |
% |
Noninterest bearing demand |
|
|
92,433 |
|
|
|
|
|
|
|
|
|
|
|
69,250 |
|
|
|
|
|
|
|
|
|
|
|
70,933 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
31,748 |
|
|
|
|
|
|
|
|
|
|
|
9,467 |
|
|
|
|
|
|
|
|
|
|
|
5,660 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
95,637 |
|
|
|
|
|
|
|
|
|
|
|
66,626 |
|
|
|
|
|
|
|
|
|
|
|
43,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and
Shareholders Equity |
|
$ |
906,099 |
|
|
|
|
|
|
|
|
|
|
$ |
804,211 |
|
|
|
|
|
|
|
|
|
|
$ |
662,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income and Net
Interest Margin |
|
|
|
|
|
$ |
32,993 |
|
|
|
4.06 |
% |
|
|
|
|
|
$ |
28,994 |
|
|
|
3.94 |
% |
|
|
|
|
|
$ |
21,348 |
|
|
|
3.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on loans includes fee income (expense) of approximately $250,475, ($21,607)
and $76,857 for the years ended December 31, 2010, 2009 and 2008 respectively.
During the year ending December 31, 2010, the Company leveraged the net proceeds from the common
stock issuance by purchasing approximately $100.0 million in agencies and highly credit rated
available for sale securities. Pursuant to these transactions, the available for sale portfolio was
repositioned to mitigate interest rate risk. Accordingly, some existing portfolio securities with
higher stated yields were sold, while the securities purchased carried lower stated yields. As a
result, for the year ending December 31, 2010 the weighted average yield on the available for sale investment portfolio decreased by ninety seven
basis points compared to year ending December 31, 2009.
Average deposits and borrowings increased by $27.4 million over the same period a year ago. The
yield on funding costs decreased to 1.37% compared with 1.87% for the same period a year ago. The
Company utilizes retail deposits, brokered deposits and FHLB borrowings as its main sources of
funding.
|
|
|
1 |
|
Average nonaccrual loans and average
loans held for sale of $20.5 and $30.6 million are included respectively |
53
The following tables set forth changes in interest income and expense for each major category of
interest earning assets and interest-bearing liabilities, and the amount of change attributable to
volume and rate changes for the periods indicated. Changes not solely attributable to rate or
volume has been allocated to volume. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis.
Analysis of Changes in Net Interest Income
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 over 2009 |
|
|
2009 over 2008 |
|
|
|
Variance |
|
|
Variance |
|
|
|
|
|
|
Variance |
|
|
Variance |
|
|
|
|
|
|
due to |
|
|
due to |
|
|
|
|
|
|
due to |
|
|
due to |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Volume |
|
|
Rate |
|
|
Total |
|
|
Volume |
|
|
Rate |
|
|
Total |
|
Increase (Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Interest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans |
|
$ |
2,490 |
|
|
|
($1,350 |
) |
|
$ |
1,140 |
|
|
$ |
3,791 |
|
|
|
($1,512 |
) |
|
$ |
2,279 |
|
Tax-exempt securities |
|
|
547 |
|
|
|
(19 |
) |
|
|
528 |
|
|
|
115 |
|
|
|
(147 |
) |
|
|
(32 |
) |
US government securities |
|
|
386 |
|
|
|
(112 |
) |
|
|
274 |
|
|
|
(203 |
) |
|
|
(7 |
) |
|
|
(210 |
) |
Mortgage backed securities |
|
|
(517 |
) |
|
|
(1,124 |
) |
|
|
(1,641 |
) |
|
|
1,009 |
|
|
|
182 |
|
|
|
1,191 |
|
Federal funds sold |
|
|
(26 |
) |
|
|
(4 |
) |
|
|
(30 |
) |
|
|
(8 |
) |
|
|
(99 |
) |
|
|
(107 |
) |
Other securities |
|
|
453 |
|
|
|
338 |
|
|
|
791 |
|
|
|
480 |
|
|
|
38 |
|
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) |
|
|
3,333 |
|
|
|
(2,271 |
) |
|
|
1,062 |
|
|
|
5,184 |
|
|
|
(1,545 |
) |
|
|
3,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Interest Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand |
|
|
(30 |
) |
|
|
(17 |
) |
|
|
(47 |
) |
|
|
(254 |
) |
|
|
(904 |
) |
|
|
(1,158 |
) |
Savings accounts |
|
|
114 |
|
|
|
(156 |
) |
|
|
(42 |
) |
|
|
(85 |
) |
|
|
(528 |
) |
|
|
(613 |
) |
Certificates of deposit |
|
|
(317 |
) |
|
|
(1,160 |
) |
|
|
(1,477 |
) |
|
|
1,263 |
|
|
|
(2,188 |
) |
|
|
(925 |
) |
Repurchase agreements |
|
|
4 |
|
|
|
(3 |
) |
|
|
1 |
|
|
|
(37 |
) |
|
|
(84 |
) |
|
|
(121 |
) |
Other borrowings |
|
|
(164 |
) |
|
|
(1,208 |
) |
|
|
(1,372 |
) |
|
|
5 |
|
|
|
(1,195 |
) |
|
|
(1,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) |
|
|
(393 |
) |
|
|
(2,544 |
) |
|
|
(2,937 |
) |
|
|
892 |
|
|
|
(4,899 |
) |
|
|
(4,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) |
|
$ |
3,726 |
|
|
$ |
273 |
|
|
$ |
3,999 |
|
|
$ |
4,292 |
|
|
$ |
3,354 |
|
|
$ |
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A combination of reduced funding costs and an increase in the volume of earning assets improved the
Companys net interest margin. The increased volume of earning assets contributed an additional
$3.3 million in interest income.
The majority of the increase in earning assets resulted from increases in average portfolio loans,
and to a lesser extent the available for sale investment portfolio. In addition, the continued
decline in interest rates on earning assets resulted in a reduction of $2.3 million to interest
income. Accordingly, the net effect of changes in rate and volume of earning assets resulted in
$1.1 million increase in interest income.
The Companys volume in average deposits and borrowings did not increase significantly for the year
ending December 31, 2010 compared to the year ending December 31, 2009. However, the Company did
benefit from the continued decline in interest expense relating to retail and wholesale funding.
These benefits were mainly derived from the refinancing of existing FHLB borrowings at lower
interest rates, and the maturing of certificates of deposits that carried higher rates than the
market currently offered. As a result, the Company realized a decrease in interest expense of $2.5
million. Accordingly, the net effect of changes in rate and volume of interest bearing liabilities
resulted in a decrease of $2.9 million in interest expense.
54
Noninterest Income
The following table sets forth a summary of noninterest income for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
260 |
|
|
$ |
390 |
|
|
$ |
311 |
|
Payroll and benefit processing fees |
|
|
448 |
|
|
|
452 |
|
|
|
453 |
|
Earnings on cash surrender value- |
|
|
|
|
|
|
|
|
|
|
|
|
Bank owned life insurance |
|
|
438 |
|
|
|
418 |
|
|
|
340 |
|
Net gain on sale of securities available-for-sale |
|
|
1,981 |
|
|
|
2,438 |
|
|
|
628 |
|
Net loss on sale of derivative swap transaction |
|
|
|
|
|
|
|
|
|
|
(225 |
) |
Net gain on transfer of financial assets |
|
|
|
|
|
|
341 |
|
|
|
|
|
Gain on settlement of put reserve |
|
|
1,750 |
|
|
|
|
|
|
|
|
|
Mortgage brokerage fee income |
|
|
14,214 |
|
|
|
5,327 |
|
|
|
21 |
|
Other income |
|
|
727 |
|
|
|
697 |
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest income |
|
$ |
19,818 |
|
|
$ |
10,063 |
|
|
$ |
2,623 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest income includes service charges on deposit accounts, payroll processing fees, earnings
on key life investments, gains on the sale of securities investments, mortgage brokerage fee
income, and income pertaining to the settlement of the put reserve.
Noninterest income for 2010 was $19.8 million or 31.9% of total gross revenues compared to $10.1
million or 19.6% of total gross revenues in 2009. The increase in noninterest income is primarily
due to an increase in mortgage brokerage fee income associated with our purchase of an equity
interest in the Simonich Corporation, and the settlement of the put reserve.
Mortgage brokerage fee income is primarily derived from origination fees on residential mortgage
loans and from the sale of mortgage loans to financial institutions. Loan origination fees and
sales fees earned on brokered loans are recorded as income when the loans are sold. Mortgage
Services brokerage fee income increased substantially as a result of increased origination volume,
due to the historically low interest rate environment. In addition, for the year ending December
31, 2010, the Company recognized a full twelve months of mortgage broker fee income compared to
approximately seven months for the year ending December 31, 2009.
In August of 2010, the Company settled and terminated the put reserve provided on the ITIN loan
pool purchase. Prior to the release, the put reserve carried a balance of $2.1 million; at
termination the Company received $1.8 million in cash and returned $0.3 million in cash to the
seller from the deposit account. Accordingly, the Company recognized a gain upon settlement. As
such, no portion of the remaining outstanding principal balance of the ITIN loan portfolio has an
accompanying loss guarantee.
The put reserve was part of the April 17, 2009 loan swap transaction in which the Company
purchased a pool of Individual Tax Identification Number (ITIN) residential mortgages in exchange
for a combination of certain nonperforming loans and cash. The put reserve was an irrevocable first
loss
guarantee from the seller that provided us the right to put back delinquent ITIN loans to the
seller that were 90 days or more delinquent up to an aggregate amount of $3.5 million. This
guarantee was backed by a seller cash deposit with the Company that was restricted for this sole
purpose. The sellers cash deposit was classified as a deposit liability in the Companys balance
sheet. At the end of the term of this loss guarantee, the Company was required to return the cash
deposit to the seller to the extent not used to fund losses in the ITIN portfolio. During the
period from March 2010 to September 2010, thirteen ITIN loans with an aggregate principal amount of
$1.4 million were returned to the seller under the loss guarantee, reducing the deposit liability
to approximately $2.1 million prior to reaching the settlement with the seller to eliminate the
loss guarantee arrangement.
55
Our investment strategy requires that we reposition our investment portfolio within certain
parameters to minimize risks to comprehensive income, and to mitigate interest rate risk.
Accordingly, the Company continued to reposition the portfolio during year ending December 31,
2010. As a result, the Company realized gain on sales of securities of $2.0 million during 2010.
Noninterest Expense
The following table sets forth a summary of noninterest expense for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Salaries & related benefits |
|
$ |
15,903 |
|
|
$ |
10,882 |
|
|
$ |
7,751 |
|
Occupancy & equipment expense |
|
|
3,660 |
|
|
|
3,405 |
|
|
|
2,501 |
|
Write down of other real
estate owned |
|
|
1,571 |
|
|
|
161 |
|
|
|
735 |
|
FDIC insurance premium |
|
|
1,016 |
|
|
|
1,274 |
|
|
|
383 |
|
Data processing fees |
|
|
270 |
|
|
|
282 |
|
|
|
276 |
|
Professional service fees |
|
|
1,726 |
|
|
|
820 |
|
|
|
667 |
|
Deferred compensation expense |
|
|
493 |
|
|
|
478 |
|
|
|
461 |
|
Stationery & supplies |
|
|
258 |
|
|
|
185 |
|
|
|
262 |
|
Postage |
|
|
198 |
|
|
|
147 |
|
|
|
134 |
|
Directors expenses |
|
|
266 |
|
|
|
299 |
|
|
|
294 |
|
Goodwill impairment |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
4,935 |
|
|
|
2,691 |
|
|
|
1,832 |
|
|
|
|
|
|
|
|
|
|
|
Total Noninterest expense |
|
$ |
30,328 |
|
|
$ |
20,624 |
|
|
$ |
15,296 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense includes salaries and benefits, occupancy, write down of other real estate
owned, FDIC insurance assessments, director fees, and other expenses.
Noninterest expense increased $9.7 million or 47.1% to $30.3 million in 2010. The increase in
noninterest expense is primarily due to increased salaries and related benefits pertaining to the
Mortgage Services subsidiary, write downs of other real estate owned, professional fees associated
with loan credit quality evaluations, and a full twelve months consolidation of the Mortgage
Services subsidiary.
The increase in salaries and related benefits is primarily due to the timing of the purchase of an
equity interest in the Simonich Corporation. The Company consolidated an additional $4.6 million in
related salaries and benefits of the Mortgage Services for the year ending December 31, 2010
compared to a consolidation of seven months of expense for the year ending December 31, 2009. In
addition, in 2010, Mortgage Services transitioned existing independent contractors to FTEs, and
increased staff due to growth in general operations. As a result, the Company experienced an
increase in salaries and related benefits for the period.
In 2010, the Company determined a valuation adjustment to the carrying value of the Companys other
real estate owned was necessary. The values were adjusted downward, reflecting the continued
deterioration in local real estate market conditions. As a result, the Company recognized a $1.6
million impairment charge
to earnings.
For the year ending December 31, 2010, professional fees increased approximately $1.0 million.
During the reporting period, the Company increased the solicitation of outside professionals to
conduct credit quality reviews pertaining to the Companys loan portfolio. In addition, during the
reporting period, the Company increased the engagements of legal counsel. The increase in these
services coincides with the continued monitoring of the Companys nonperforming loans.
56
Other expenses increased by $2.3 million during 2010. The increase is primarily due to increased
credit administration expenses including appraisal expense associated with the Companys real
estate loan portfolio, prior period tax expenses, and overall increased activities associated with
the Mortgage Services general operations. Furthermore, due to the timing of the purchase of
Simonich Corporation, the Company consolidated twelve months of Mortgage Services related other
expenses, compared to approximately seven months in the prior period. Other expenses recorded by
Mortgage Services include expenses for business travel, telephone, insurance and licensing fees.
Income Taxes
Our provision for income taxes includes both federal and state income taxes and reflects the
application of federal and state statutory rates to our income before taxes. The principal
difference between statutory tax rates and our effective tax rate is the benefit derived investing
in tax-exempt securities and preferential state tax treatment for qualified enterprise zone loans.
We continue to participate in a California Affordable Housing project which affords federal and
state tax credits. Increases and decreases in the provision for taxes reflect changes in our income
before taxes.
The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Income tax provision
(benefit) |
|
$ |
3,159 |
|
|
$ |
2,690 |
|
|
|
($40 |
) |
Effective tax rate |
|
|
32.79 |
% |
|
|
30.02 |
% |
|
|
-1.83 |
% |
Non-controlling interests are presented in the income statement such that the consolidated income
statement includes income and income tax expense from both the Company and non-controlling
interests. The effective tax rate is calculated by dividing income tax expense by income before tax
expense for the consolidated entity.
Asset Quality
We concentrate our portfolio lending activities primarily within El Dorado, Placer,
Sacramento, Shasta, and Tehama counties in California, and the location of the Banks four full
services branches, specifically identified as Northern California. We manage our credit risk
through diversification of our loan portfolio and the application of underwriting policies and
procedures and credit monitoring practices. Although we have a diversified loan portfolio, a
significant portion of our borrowers ability to repay the loans is dependent upon the professional
services and investor commercial real estate sectors.
Generally, the loans are secured by real estate or other assets located in California and are
expected to be repaid from cash flows of the borrowers business or cash flows from real estate
investments.
Although we have a diversified loan portfolio, a significant portion of its borrowers ability to
repay the loans is dependent upon the professional services, commercial real estate market and the
residential real estate development industry sectors. The loans are secured by real estate or other
assets primarily 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.
57
Management has taken cautious steps to ensure the proper funding of loan reserves. Credit quality,
expense control and the bottom line remain managements top focus.
The Companys practice is to place an asset on nonaccrual status when one of the following events
occurs: (1) any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well-secured and in the process of collection), (2) management
determines the ultimate collection of principal or interest to be unlikely or, (3) the terms of the
loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, 90 days past due and still accruing, or have been
restructured and are not performing to their modified terms. Accruals are resumed on loans only
when they are brought fully current with respect to interest and principal and when the loan is
estimated to be fully collectible. Restructured loans are those loans on which concessions in terms
have been granted because of the borrowers financial or legal difficulties. Interest is generally
accrued on such loans in accordance with the new terms, after a period of sustained performance by
the borrower.
One exception to the 90 days past due policy for non-accruals is the banks pool of home equity
loans and lines purchased from a private equity firm. The purchase of this pool of loans included
a put option allowing the bank to sell a portion of the loan pool back to the private equity firm
in the event of default by the borrower. At 90 days past due a loan in this pool will be sold
back to the private equity firm for the outstanding principal balance, unless a workout plan has
been put in place with the borrower. Once this put reserve is exhausted, the bank will charge off
any loans that go more than 90 days past due. In accordance to this policy, management does not
expect to classify any of the loans from this pool as nonaccrual. Management believes that charging
the loan off at the time it becomes impaired would be more conservative than placing it in
nonaccrual status.
The following table sets forth the amounts of loans outstanding by category as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands) |
|
As of December 31, |
|
|
|
2010 |
|
|
% |
|
|
2009 |
|
|
% |
|
|
2008 |
|
|
% |
|
|
2007 |
|
|
% |
|
|
2006 |
|
|
% |
|
Commercial &
industrial |
|
$ |
133,199 |
|
|
|
22.17 |
% |
|
$ |
133,080 |
|
|
|
23.13 |
% |
|
$ |
164,083 |
|
|
|
31.11 |
% |
|
$ |
173,704 |
|
|
|
35.11 |
% |
|
$ |
125,725 |
|
|
|
30.36 |
% |
Real Estate loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
41,327 |
|
|
|
6.88 |
% |
|
|
59,524 |
|
|
|
9.90 |
% |
|
|
84,218 |
|
|
|
15.97 |
% |
|
|
106,977 |
|
|
|
21.62 |
% |
|
|
110,693 |
|
|
|
26.73 |
% |
Commercial |
|
|
262,340 |
|
|
|
43.67 |
% |
|
|
260,024 |
|
|
|
42.23 |
% |
|
|
217,914 |
|
|
|
41.31 |
% |
|
|
175,013 |
|
|
|
35.37 |
% |
|
|
159,370 |
|
|
|
38.48 |
% |
ITIN loan pool |
|
|
70,585 |
|
|
|
11.75 |
% |
|
|
78,250 |
|
|
|
13.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other first
lien
mortgages |
|
|
19,299 |
|
|
|
3.21 |
% |
|
|
20,525 |
|
|
|
3.38 |
% |
|
|
20,285 |
|
|
|
3.85 |
% |
|
|
10,787 |
|
|
|
2.18 |
% |
|
|
4,278 |
|
|
|
1.04 |
% |
Equity loans |
|
|
69,590 |
|
|
|
11.58 |
% |
|
|
45,601 |
|
|
|
7.58 |
% |
|
|
39,915 |
|
|
|
7.57 |
% |
|
|
26,818 |
|
|
|
5.42 |
% |
|
|
12,986 |
|
|
|
3.14 |
% |
Installment |
|
|
2,303 |
|
|
|
0.38 |
% |
|
|
2,223 |
|
|
|
0.37 |
% |
|
|
145 |
|
|
|
0.03 |
% |
|
|
226 |
|
|
|
0.05 |
% |
|
|
202 |
|
|
|
0.05 |
% |
Other loans |
|
|
2,153 |
|
|
|
0.36 |
% |
|
|
2,212 |
|
|
|
0.37 |
% |
|
|
903 |
|
|
|
0.16 |
% |
|
|
1,223 |
|
|
|
0.25 |
% |
|
|
937 |
|
|
|
0.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans |
|
|
600,796 |
|
|
|
100.00 |
|
|
|
601,439 |
|
|
|
100.00 |
|
|
|
527,463 |
|
|
|
100.00 |
% |
|
|
494,748 |
|
|
|
100.00 |
% |
|
$ |
414,191 |
|
|
|
100.00 |
% |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan
fees and costs |
|
|
90 |
|
|
|
|
|
|
|
209 |
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
232 |
|
|
|
|
|
|
|
298 |
|
|
|
|
|
Allowance for
Loan losses |
|
|
12,841 |
|
|
|
|
|
|
|
11,207 |
|
|
|
|
|
|
|
8,429 |
|
|
|
|
|
|
|
8,233 |
|
|
|
|
|
|
|
4,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans |
|
$ |
587,865 |
|
|
|
|
|
|
$ |
590,023 |
|
|
|
|
|
|
$ |
518,947 |
|
|
|
|
|
|
$ |
486,283 |
|
|
|
|
|
|
$ |
408,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
The following table provides a breakdown of our real estate construction portfolio as of
December 31, 2010:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of gross loan |
|
Loan Type |
|
Balance |
|
|
portfolio |
|
|
Commercial real estate construction |
|
$ |
18,356 |
|
|
|
3.06 |
% |
Commercial lots |
|
|
14,951 |
|
|
|
2.49 |
% |
1-4 family subdivision loans |
|
|
5,592 |
|
|
|
0.93 |
% |
1-4 family individual residential lots |
|
|
1,757 |
|
|
|
0.29 |
% |
1-4 family construction speculative |
|
|
671 |
|
|
|
0.11 |
% |
|
Total Real estate-construction |
|
$ |
41,327 |
|
|
|
6.88 |
% |
|
The following table provides a breakdown of commercial real estate portfolio as of December 31,
2010:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Gross loan |
|
Loan Type |
|
Balance |
|
|
portfolio |
|
|
Commercial- investor |
|
$ |
194,285 |
|
|
|
32.34 |
% |
Commercial-owner occupied |
|
|
68,055 |
|
|
|
11.33 |
% |
|
Total Commercial |
|
|
262,340 |
|
|
|
43.67 |
% |
|
Net portfolio loans decreased by $2.2 million or 0.37% to $587.9 million at December 31, 2010
compared to $590.0 million at December 31, 2009. Decreases in real estate construction, and the
ITIN pool were offset by an increase in home equity loans.
Home equity loans increased by $24.0 million for the year ending December 31, 2010 compared to
December 31, 2009. A substantial portion of the increase can be attributed to the purchase of a
pool of home equity term loans and lines of credit in 2010. On March 12, 2010, the Company
purchased a pool of residential mortgage home equity loans with a par value of $22.0 million. At
the settlement date the mortgage home equity loan pool consisted of 562 loans with an average
principle balance of approximately $39,200, a weighted average credit score of 744, a weighted
average loan to value of 86.44%, and a weighted average yield of 7.76%. Fifty one percent of the
mortgage home equity loan pool is located in the state of Michigan; the remaining balance is
geographically disbursed throughout the United States. The purchased home equity loan pool was
recorded at a fair value of $21.7 million.
The other considerable change is reflected in the real estate construction portfolio; the real
estate construction portfolio reflects 6.88% of the loan mix versus 9.90% at December 31, 2009. The
decrease in the mix of real estate construction loans was due to lower origination volume, and the
maturing of the existing portfolio.
Mortgages held for sale
Mortgages held for sale are generated through two pipelines; (1) Bank of Commerce Mortgage and (2)
the Banks purchase program with Bank of Commerce Mortgage. In both cases our majority owned
subsidiary Bank of Commerce Mortgage originates residential mortgage loans within Bank of
Commerces geographic market, as well as on a nationwide basis. In scenario (1) above, the loans
are funded through a warehouse line of credit with the Bank, and are accounted for as loans held
for sale at the Mortgage Subsidiary. Under scenario (2) above, the Bank purchases the mortgages at
origination from the Mortgage Subsidiary, and are classified as held for sale at the Bank.
All mortgage loans originated through either pipeline represent loans collateralized by one-to four
family residential real estate and are made to borrowers in good credit standing. These loans are
typically sold to primary mortgage market aggregators (Fannie Mae (FNMA), Freddie Mac (FHLMC), and
Ginnie Mae (GNMA)) and to third party investors including the servicing rights.
59
Mortgages held for sale are carried at the lower of cost of fair value. Cost generally approximates
fair value, given the short duration of these assets. Gains and losses on loan sales are recorded
in noninterest income, and direct loan origination costs and fees are deferred at origination of
the loan and are recognized in noninterest income upon sale of a loan. We generally sell all
servicing rights associated with the mortgage loans. Accordingly, there are no separately
recognized servicing assets or liabilities resulting from the sale of mortgage loans. As of
December 31, 2010, the Company had $43.0 million in mortgages are held for sale. These loans are
not included in net portfolio loans listed in the table above.
Nonperforming Assets
The following table sets forth a summary of our nonperforming assets, including other real
estate owned as of the dates indicated:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
Nonperforming assets |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Commercial & industrial |
|
$ |
2,302 |
|
|
$ |
237 |
|
|
$ |
2,279 |
|
|
$ |
|
|
|
$ |
|
|
Secured by
1-4 family, closed end 1st lien |
|
1,166 |
|
|
|
623 |
|
|
|
1,047 |
|
|
|
|
|
|
|
|
|
Secured by 1-4 family revolving |
|
|
97 |
|
|
|
199 |
|
|
|
350 |
|
|
|
83 |
|
|
|
|
|
Secured by RE - 1-4 construction |
|
|
242 |
|
|
|
849 |
|
|
|
6,989 |
|
|
|
9,022 |
|
|
|
|
|
Secured by RE other construction |
|
|
100 |
|
|
|
|
|
|
|
9,489 |
|
|
|
3,304 |
|
|
|
|
|
Secured by NFNR |
|
|
7,066 |
|
|
|
5,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loan portfolio |
|
$ |
10,973 |
|
|
$ |
7,667 |
|
|
$ |
20,154 |
|
|
$ |
12,409 |
|
|
$ |
|
|
|
Nonaccrual ITIN loan pool |
|
$ |
9,538 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Nonaccrual home equity loan pool |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 days past due and still accruing interest |
|
|
|
|
|
|
5,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
2,288 |
|
|
|
2,880 |
|
|
|
2,934 |
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
22,799 |
|
|
$ |
15,599 |
|
|
$ |
23,088 |
|
|
$ |
12,409 |
|
|
$ |
|
|
|
Nonperforming assets adversely affect our net income in various ways. Until economic and market
conditions improve, we may expect to continue to incur losses relating to nonperforming assets. We
generally do not record interest income on nonperforming loans or other real estate owned, thereby
adversely affecting our income, and increasing our loan administration costs. When we take
collateral in foreclosures and similar proceedings, we mark the respective assets to their fair
market value which may result in the recognition of a loss. An increase in the level of
nonperforming assets increases our risk profile and may impact the capital levels our regulators
believe are appropriate in light of the ensuing risk profile. While we reduce problem assets
through loan sales, workouts, restructurings and otherwise, decreases in the value of the
underlying collateral, or in these borrowers performance or financial condition, whether or not
due to economic and market conditions beyond our control, could adversely affect our business,
results of operations and financial condition. In addition, the resolution of nonperforming assets
requires significant commitments of time from management and our directors, which can be
detrimental to the performance of their other responsibilities.
On March 12, 2010, the Company completed a loan swap transaction which included the purchase of a
pool of residential mortgage home equity loans with a par value of $22.0 million. As of December
31, 2010, the Company has allocated $758 thousand towards this pool or 4.25% of the outstanding
principal balance. An accompanying $1.5 million put reserve was also part of the loan swap
transaction and represents a credit enhancement. As such, management considers this put reserve in
estimating probable losses in the home equity portfolio.
60
As of December 31, 2010, the remaining put reserve totals $1.2 million or 6.57% of the outstanding
principal balance. The put reserve is an irrevocable first loss guarantee from the seller that
provided us the
right to put back delinquent home equity loans to the seller that were 90 days or more delinquent
up to an aggregate amount of $1.5 million. This guarantee is backed by a seller cash deposit with
the Company that is restricted for this sole purpose. The sellers cash deposit is classified as a
deposit liability in the Companys balance sheet. At the end of the term of this loss guarantee,
the Company is required to return the cash deposit to the seller to the extent not used to fund
losses in the home equity portfolio.
The ITIN loan pool represents residential mortgage loans made to legal United States residents
without a social security number and are geographically dispersed throughout the United States. The
ITIN loan portfolio is serviced through a third party.
Worsening economic conditions in the United States may cause us to suffer higher default rates on
our ITIN loans and reduce the value of the assets that we hold as collateral. In addition, if we
are forced to foreclose and service these ITIN properties ourselves, we may realize additional
monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which
will adversely affect our noninterest expense.
As part of the original ITIN loan transaction, we obtained an irrevocable first loss guarantee from
the seller that provided us the right to put back delinquent ITIN loans to the seller that were 90
days or more delinquent up to an aggregate amount of $3.5 million. This guarantee was backed by a
seller cash deposit with the Company that was restricted for this sole purpose. The sellers cash
deposit was classified as a deposit liability in the Companys balance sheet. At the end of the
term of this loss guarantee, the Company was required to return the cash deposit to the seller to
the extent not used to fund losses in the ITIN portfolio.
The Company accounted for the loans returned to the seller under the loss guarantee by
derecognizing the loan, debiting cash and relieving the deposit liability. During the period from
March 2010 to September 2010, thirteen ITIN loans with an aggregate principal amount of $1.4
million were returned to the seller under the loss guarantee, reducing the deposit liability to
approximately $2.1 million prior to reaching the settlement with the seller to eliminate the loss
guarantee arrangement. At the date of settlement, the Company received $1.8 million in cash and
returned $0.3 million in cash to the seller from the deposit account. Accordingly, the Company
recognized a gain upon settlement. As such, no portion of the remaining outstanding principal
balance of the ITIN loan portfolio has an accompanying loss guarantee.
In conjunction with settlement of the loss guarantee, $1.8 million was expensed in provisions for
loan losses, and specifically allocated in the Allowance for Loan Losses (ALLL) against the ITIN
portfolio. The gain on settlement and the increase in loan loss provisions were two separate and
distinct events. However, the two events are linked because upon eliminating the irrevocable loss
guarantee from the seller, an increase in our ALLL related to the ITIN loans was necessary; the
following factors were considered in determining the specific ALLL allocation to the ITIN
Portfolio:
|
|
|
Increasing delinquencies 20% of the portfolio was delinquent 30 days or more as of
12/31/2010 |
|
|
|
|
Servicer modification efforts were generally extending beyond a typical timeframe |
|
|
|
|
Mortgage insurance A small number of mortgage insurance claims have been denied and
management has not been able to identify a trend regarding any potential future denials |
|
|
|
|
Sale of other real estate owned (OREO) An emerging trend in the lengthening
disposition of ITIN other real estate owned had developed including the potential for
decreased recoveries and consequently increased net charge offs. |
The specific ITIN ALLL allocation now represents approximately 4.05% of total outstanding principal
compared to 1.56% as of December 31, 2009.
Nonperforming assets were 2.43% of total assets as of December 31, 2010 compared to 1.92% at
December 31, 2009. For the year ending December 31, 2010, there were $33.9 million in impaired
loans of which $20.5 million were in nonaccrual status.
61
Of these, $9.5 million or one hundred and seven are ITIN loans with a weighted average balance of
approximately $89,142 each, and all in various stages of collection; the majority, or $6.5 million,
of the nonperforming ITINs are classified as Troubled Debt Restructurings and on nonaccrual status.
The remaining balance of $3.0 million is in the process of foreclosure.
The remaining nonaccrual loans consist of five commercial and industrial loans, one commercial lot
loan, two residential lot loans, seven commercial real estate loans, four residential mortgages,
and one home equity line of credit.
The Company periodically restructures loans and grants concessions to borrowers due to economic or
legal reasons relating to the borrowers financial condition that it would not otherwise consider.
Accordingly, loans restructured in these situations are classified as troubled debt restructurings.
The Company does not necessarily place a troubled debt restructuring on nonaccrual status. Rather,
if the borrower is current at the time of the restructuring, and continues to pay as agreed, the
loan is reported as current.
As of December 31, 2010, the Company has ninety three restructured loans that qualified as troubled
debt restructurings, of which fifty were performing according to their restructured terms. As of
December 31, 2010, the Company had $24.6 million in troubled debt restructurings compared to $10.7
million as of December 31, 2009.
The following table sets forth a summary of the Companys restructured loans that qualify as
troubled debt restructurings:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Troubled debt restructurings |
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
Nonaccrual |
|
$ |
11,977 |
|
|
$ |
4,937 |
|
Accruing |
|
|
12,668 |
|
|
|
5,730 |
|
|
Total troubled debt restructurings |
|
$ |
24,645 |
|
|
$ |
10,667 |
|
|
Troubled debt restructurings (TDRs) represented 4.10% of total portfolio loans as of December 31,
2010 compared to 1.77% at December 31, 2009. The increase in TDRs was centered in our ITIN
portfolio which accounted for $6.5 million of the $14.0 million increase from December 31, 2009. As
of December 31, 2010, thirty-four or $3.4 million of the sixty-six ITIN TDRs are accruing and
considered performing assets. The balance of the year-over-year increase in TDRs was primarily in
commercial real estate loans. All of the Companys restructured loans met the terms for TDR
classification.
Refer to Note 6 in the consolidated financial statements for further discussion pertaining to the
key features of the modifications, including the significant terms modified.
62
The following table summarizes the activity in the ALLL reserves for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Beginning balance |
|
$ |
11,207 |
|
|
$ |
8,429 |
|
|
$ |
8,233 |
|
|
$ |
4,904 |
|
|
$ |
4,316 |
|
Provision for loan loss charged to expense |
|
|
12,850 |
|
|
|
9,475 |
|
|
|
6,520 |
|
|
|
3,291 |
|
|
|
226 |
|
Loans charged off |
|
|
(12,089 |
) |
|
|
(6,871 |
) |
|
|
(6,329 |
) |
|
|
|
|
|
|
(299 |
) |
Loan loss recoveries |
|
|
873 |
|
|
|
174 |
|
|
|
5 |
|
|
|
38 |
|
|
|
661 |
|
|
|
|
Ending balance |
|
$ |
12,841 |
|
|
$ |
11,207 |
|
|
$ |
8,429 |
|
|
$ |
8,233 |
|
|
$ |
4,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross portfolio loans outstanding at period end |
|
$ |
600,707 |
|
|
$ |
601,230 |
|
|
$ |
527,376 |
|
|
$ |
494,516 |
|
|
$ |
413,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans |
|
|
2.14 |
% |
|
|
1.86 |
% |
|
|
1.60 |
% |
|
|
1.66 |
% |
|
|
1.18 |
% |
Nonaccrual loans at period end: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,302 |
|
|
$ |
237 |
|
|
$ |
2,279 |
|
|
$ |
|
|
|
$ |
|
|
Construction |
|
|
342 |
|
|
|
849 |
|
|
|
16,478 |
|
|
|
12,326 |
|
|
|
|
|
Commercial real estate |
|
|
7,066 |
|
|
|
5,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
10,704 |
|
|
|
623 |
|
|
|
1,047 |
|
|
|
|
|
|
|
|
|
Home equity |
|
|
97 |
|
|
|
199 |
|
|
|
350 |
|
|
|
83 |
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
$ |
20,511 |
|
|
$ |
7,667 |
|
|
$ |
20,154 |
|
|
$ |
12,409 |
|
|
$ |
|
|
Accruing troubled-debt restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
2,804 |
|
|
$ |
2,219 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Commercial real estate |
|
|
3,621 |
|
|
|
3,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
6,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing restructured loans |
|
$ |
12,668 |
|
|
$ |
5,730 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other accruing impaired loans |
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
1,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
33,916 |
|
|
$ |
13,397 |
|
|
$ |
20,154 |
|
|
$ |
13,985 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonaccrual loans at
period end |
|
|
62.61 |
% |
|
|
146.17 |
% |
|
|
41.82 |
% |
|
|
66.35 |
% |
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans to total loans |
|
|
3.41 |
% |
|
|
1.28 |
% |
|
|
3.82 |
% |
|
|
2.51 |
% |
|
|
0.00 |
% |
Allocation of Allowance for Loan and Lease Losses by product type:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2010 |
|
Dec. 31, 2009 |
|
Dec. 31, 2008 |
|
Dec. 31, 2007 |
|
Dec. 31, 2006 |
|
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
|
|
|
Loan |
|
|
Amount |
|
Category |
|
Amount |
|
Category |
|
Amount |
|
Category |
|
Amount |
|
Category |
|
Amount |
|
Category |
|
Balance at end of
period applicable
to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
financial |
|
$ |
4,393 |
|
|
|
34.21 |
% |
|
$ |
5,306 |
|
|
|
47.35 |
% |
|
$ |
3,249 |
|
|
|
38.55 |
% |
|
$ |
1,946 |
|
|
|
23.64 |
% |
|
$ |
2,111 |
|
|
|
43.05 |
% |
Commercial real
estate
constructions |
|
|
1,271 |
|
|
|
9.90 |
% |
|
$ |
1,188 |
|
|
|
10.60 |
% |
|
$ |
1,913 |
|
|
|
22.70 |
% |
|
$ |
4,627 |
|
|
|
56.20 |
% |
|
$ |
1,244 |
|
|
|
25.37 |
% |
Commercial real
estate other |
|
|
2,422 |
|
|
|
18.86 |
% |
|
$ |
2,348 |
|
|
|
20.95 |
% |
|
$ |
2,225 |
|
|
|
26.40 |
% |
|
$ |
1,295 |
|
|
|
15.73 |
% |
|
$ |
1,210 |
|
|
|
24.67 |
% |
ITIN loan pool |
|
|
2,857 |
|
|
|
22.25 |
% |
|
|
1,227 |
|
|
|
10.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other residential |
|
|
1,632 |
|
|
|
12.71 |
% |
|
|
853 |
|
|
|
7.61 |
% |
|
$ |
692 |
|
|
|
8.21 |
% |
|
$ |
213 |
|
|
|
2.59 |
% |
|
$ |
139 |
|
|
|
2.83 |
% |
Consumer |
|
|
46 |
|
|
|
0.36 |
% |
|
|
35 |
|
|
|
0.31 |
% |
|
$ |
42 |
|
|
|
0.50 |
% |
|
$ |
41 |
|
|
|
0.50 |
% |
|
$ |
24 |
|
|
|
0.49 |
% |
Unallocated |
|
|
220 |
|
|
|
1.71 |
% |
|
|
250 |
|
|
|
2.23 |
% |
|
$ |
308 |
|
|
|
3.64 |
% |
|
$ |
111 |
|
|
|
1.34 |
% |
|
$ |
176 |
|
|
|
3.59 |
% |
|
Total allowance for
loan and lease
losses |
|
$ |
12,841 |
|
|
|
100.00 |
% |
|
$ |
11,207 |
|
|
|
100.00 |
% |
|
$ |
8,429 |
|
|
|
100.00 |
% |
|
$ |
8,233 |
|
|
|
100.00 |
% |
|
$ |
4,904 |
|
|
|
100.00 |
% |
|
63
Loan Maturity Schedule
The following table sets forth the maturity and repricing distribution of our commercial, real
estate and other loans outstanding as of December 31, 2010, which, based on remaining scheduled
repayments of principal, were due within the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Within One Year |
|
After One Through Five Years |
|
|
After Five Years |
|
|
Total |
|
|
Commercial & financial |
|
$ |
64,181 |
|
|
$ |
40,002 |
|
|
$ |
29,016 |
|
|
$ |
133,199 |
|
Real estate loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
25,841 |
|
|
|
11,099 |
|
|
|
4,387 |
|
|
|
41,327 |
|
Commercial |
|
|
10,800 |
|
|
|
74,068 |
|
|
|
177,472 |
|
|
|
262,340 |
|
ITIN loan pool |
|
|
|
|
|
|
|
|
|
|
70,585 |
|
|
|
70,585 |
|
Other mortgage |
|
|
1,029 |
|
|
|
5,176 |
|
|
|
13,094 |
|
|
|
19,299 |
|
Equity lines |
|
|
994 |
|
|
|
21,430 |
|
|
|
47,166 |
|
|
|
69,590 |
|
Installment |
|
|
2,142 |
|
|
|
161 |
|
|
|
|
|
|
|
2,303 |
|
Other loans |
|
|
781 |
|
|
|
1,272 |
|
|
|
100 |
|
|
|
2,153 |
|
|
|
|
Total gross loans |
|
$ |
105,768 |
|
|
$ |
153,208 |
|
|
$ |
341,820 |
|
|
$ |
600,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans due after one year
with: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rates |
|
$ |
|
|
|
$ |
61,857 |
|
|
$ |
110,137 |
|
|
$ |
171,994 |
|
Variable Rates |
|
|
|
|
|
|
91,351 |
|
|
|
231,683 |
|
|
|
323,034 |
|
|
|
|
Total |
|
$ |
|
|
|
$ |
153,208 |
|
|
$ |
341,820 |
|
|
$ |
495,028 |
|
|
Available-for-sale securities
The following table presents information regarding the amortized cost, and maturity structure
of the investment portfolio at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over One through |
|
|
Over Five through |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Within One Year |
|
|
Five Years |
|
|
Ten Years |
|
|
Over Ten Years |
|
|
Total |
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
U.S. government & agencies |
|
$ |
|
|
|
|
|
|
|
$ |
7,054 |
|
|
|
1.35 |
% |
|
$ |
19,760 |
|
|
|
2.37 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
26,814 |
|
|
|
2.10 |
% |
Obligations of state and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,543 |
|
|
|
3.56 |
% |
|
|
59,461 |
|
|
|
4.34 |
% |
|
|
67,004 |
|
|
|
4.25 |
% |
Mortgage backed securities
and collateralized mortgage
obligations |
|
|
7,963 |
|
|
|
1.42 |
% |
|
|
38,547 |
|
|
|
2.84 |
% |
|
|
7,364 |
|
|
|
3.36 |
% |
|
|
11,178 |
|
|
|
3.69 |
% |
|
|
65,052 |
|
|
|
2.87 |
% |
Corporate securities |
|
|
|
|
|
|
|
|
|
|
12,212 |
|
|
|
3.21 |
% |
|
|
16,807 |
|
|
|
3.79 |
% |
|
|
|
|
|
|
|
|
|
|
29,019 |
|
|
|
3.54 |
% |
Other asset backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,569 |
|
|
|
1.74 |
% |
|
$ |
4,569 |
|
|
|
1.74 |
% |
|
Total |
|
$ |
7,963 |
|
|
|
1.42 |
% |
|
$ |
57,813 |
|
|
|
2.74 |
% |
|
|
51,474 |
|
|
|
3.15 |
% |
|
$ |
75,208 |
|
|
|
4.08 |
% |
|
$ |
192,458 |
|
|
|
3.32 |
% |
|
The maturities for the collateralized mortgage obligations and mortgage backed securities are
presented by expected average life, rather than contractual maturity. The yield on tax-exempt
securities has not been adjusted to a tax-equivalent yield basis.
64
Deposit Structure
We obtain deposits primarily from local businesses and professionals as well as through
certificates of deposits, savings and checking accounts. The following table sets forth the
distribution of our average daily balances for the periods indicated.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
NOW accounts |
|
$ |
38,843 |
|
|
|
0.58 |
% |
|
$ |
58,437 |
|
|
|
0.51 |
% |
|
$ |
51,215 |
|
|
|
0.88 |
% |
Savings |
|
|
76,718 |
|
|
|
1.20 |
% |
|
|
62,846 |
|
|
|
1.53 |
% |
|
|
56,914 |
|
|
|
2.77 |
% |
Money market accounts |
|
|
103,140 |
|
|
|
0.72 |
% |
|
|
87,105 |
|
|
|
0.84 |
% |
|
|
87,528 |
|
|
|
1.97 |
% |
Certificates of deposit |
|
|
321,051 |
|
|
|
1.92 |
% |
|
|
317,417 |
|
|
|
2.40 |
% |
|
|
234,493 |
|
|
|
3.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
539,752 |
|
|
|
1.49 |
% |
|
|
525,805 |
|
|
|
1.83 |
% |
|
|
430,150 |
|
|
|
2.87 |
% |
Noninterest bearing deposits |
|
|
92,433 |
|
|
|
|
|
|
|
69,250 |
|
|
|
|
|
|
|
70,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average total deposits |
|
$ |
632,185 |
|
|
|
|
|
|
$ |
595,055 |
|
|
|
|
|
|
$ |
501,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average other borrowings |
|
$ |
146,529 |
|
|
|
0.93 |
% |
|
$ |
133,063 |
|
|
|
2.06 |
% |
|
$ |
111,561 |
|
|
|
3.62 |
% |
The following table sets forth the remaining maturities of certificates of deposit in amounts of
$100,000 or more as of December 31, 2010:
Deposit Maturity Schedule
(Dollars in thousands)
|
|
|
|
|
|
|
2010 |
|
|
Maturing in: |
|
|
|
|
Three months or less |
|
$ |
67,135 |
|
Three through six months |
|
|
42,820 |
|
Six through twelve months |
|
|
47,165 |
|
Over twelve months |
|
|
76,570 |
|
|
Total |
|
$ |
233,690 |
|
|
Capital Management and Adequacy
We use capital to fund organic growth, pay dividends and repurchase our shares. The objective
of effective capital management is to produce above market long-term returns by using capital when
returns are perceived to be high and issuing capital when costs are perceived to be low. Our
potential sources of capital include retained earnings, common and preferred stock issuance, and
issuance of subordinated debt and trust preferred securities.
Overall capital adequacy is monitored on a day-to-day basis by our management and reported to our
Board of Directors on a monthly basis. The regulators of the Bank measure capital adequacy by
using a risk-based capital framework and by monitoring compliance with minimum leverage ratio
guidelines. Under the risk-based capital standard, assets reported on our balance sheet and certain
off-balance sheet items are assigned to risk categories, each of which is assigned a risk weight.
This standard characterizes an institutions capital as being Tier 1 capital (defined as
principally comprising shareholders equity) and Tier 2 capital (defined as principally
comprising the qualifying portion of the ALLL). The minimum ratio of total risk-based capital to
risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of
the total risk-based capital is to be comprised of common equity; the balance may consist of debt
securities and a limited portion of the ALLL.
65
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average
assets. Management believes as of December 31, 2010 and 2009, that the Company and the Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 2010, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an institution must maintain minimum
Total Risk-Based, Tier 1 Risk-Based and Tier 1 Leverage ratios as set forth in the following table.
There are no conditions or events since the notification that management believes have changed the
Banks category. The Company and the Banks capital amounts and ratios are presented in the table.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well |
|
|
Minimum |
|
|
|
|
|
|
|
Actual |
|
|
Capitalized |
|
|
Capital |
|
December 31, 2010 |
|
Capital |
|
|
Ratio |
|
|
Requirement |
|
|
Requirement |
|
|
The Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
115,541 |
|
|
|
12.48 |
% |
|
|
n/a |
|
|
|
4.00 |
% |
Tier 1 Risk-Based |
|
|
115,541 |
|
|
|
13.74 |
% |
|
|
n/a |
|
|
|
4.00 |
% |
Total Risk-Based |
|
|
126,085 |
|
|
|
15.00 |
% |
|
|
n/a |
|
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
$ |
106,747 |
|
|
|
11.60 |
% |
|
|
5.00 |
% |
|
|
4.00 |
% |
Tier 1 Risk-Based |
|
|
106,747 |
|
|
|
13.34 |
% |
|
|
6.00 |
% |
|
|
4.00 |
% |
Total Risk-Based |
|
|
116,791 |
|
|
|
14.59 |
% |
|
|
10.00 |
% |
|
|
8.00 |
% |
Cash dividends of $0.06 were paid on January 14, 2010, March 24, 2010, July 7, 2010, to
shareholders of record as of December 31, 2009, March 15, 2010, and June 30, 2010, respectively.
Cash dividends of $0.03 were paid on October 7, 2010, to shareholders of record as of September 30,
2010.
The United States Department of Treasury (Treasury) introduced the Capital Purchase Program on
October 14, 2008, under which the Treasury was authorized make up to $250 billion in equity capital
available to qualifying healthy financial institutions. Bank of Commerce Holdings qualified for
this highly selective program and received capital investment in
November of 2008. This capital
investment enabled us to leverage into both investments and residential loans intended to support
the housing markets, as well as to increase local lending limits to support our communities.
On March 23, 2010, we filed a Form S-1/A Registration Statement (the Registration Statement) with
the SEC to offer 7,200,000 shares of our common stock in an underwritten public offering
(Offering). In the Registration Statement, we set out our intent to use the net proceeds of the
Offering for general corporate purposes, including contributing additional capital to the Bank,
supporting our ongoing and future anticipated growth, which may include opportunistic acquisitions
of all or parts of other financial institutions, including FDIC-assisted transactions, and
positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury.
On March 29, 2010 the Company announced the successful closing of the Offering. The Company
received net proceeds from the Offering of approximately $28.8 million, after underwriting
discounts and commissions and estimated expenses. On April 14, 2010 the underwriters exercised
their overallotment option adding additional net proceeds of approximately $4.2 million to the
Companys equity, for a total of $33.0 million in net proceeds received through the Offering.
Although we are periodically engaged in discussions with potential acquisition candidates, we are
not currently party to any purchase or merger agreement. With our strong capital position, we find
significantly more opportunities now for loan growth, investment portfolio purchases and attractive
loan and asset purchases.
66
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.
Lending Transactions with Related Parties
The business we conduct with directors, officers, significant shareholders and other related
parties (collectively, Related Parties) is restricted and governed by various laws and
regulations, including Regulation O as promulgated and enforced by the Federal Reserve.
Furthermore, it is our policy to conduct business with Related Parties on an arms length basis at
current market prices with terms and conditions no more favorable than we provide in the normal
course of business.
Some of our directors, officers and principal shareholders of the Company and their associates were
customers of and had banking transactions with the Bank in the ordinary course of business during
2010 and the Bank expects to have such transactions in the future. All loans and commitments to
loans included in such transactions were made in compliance with the applicable laws on
substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons of similar creditworthiness, and in our opinion
did not involve more than a normal risk of collectability or present other unfavorable features.
The following table presents a summary of aggregate activity involving related party borrowers for
the years ended December 31, 2010 and 2009:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Balance at beginning of year |
|
$ |
9,469 |
|
|
$ |
7,911 |
|
New loan additions |
|
|
1,248 |
|
|
|
1,418 |
|
Advances on existing lines of credit |
|
|
15,704 |
|
|
|
11,497 |
|
Principal repayments |
|
|
(17,017 |
) |
|
|
(11,642 |
) |
Reclassification |
|
|
(176 |
) |
|
|
285 |
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
9,228 |
|
|
$ |
9,469 |
|
|
Impact of Inflation
Inflation affects our financial position as well as operating results. It is our opinion that
the effects of inflation for the three years ended December 31, 2010 on the financial statements
have not been material.
Commitments
Off-Balance Sheet Financial Instruments - In the ordinary course of business, we enter into
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.
67
Our off-balance sheet credit risk exposure is the contractual amount of commitments to extend
credit and stand-by letters of credit. We apply the same credit standards to these contracts we
use for loans recorded on the balance sheet.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Off-balance sheet commitments: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
146,915 |
|
|
$ |
122,872 |
|
Standby letters of credit |
|
|
3,509 |
|
|
|
4,844 |
|
Guaranteed commitments outstanding |
|
|
1,299 |
|
|
|
1,325 |
|
|
|
|
$ |
151,723 |
|
|
$ |
129,041 |
|
|
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 us 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 us 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 us 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.
We have mortgage loan purchase agreements with various mortgage bankers. We are obligated to
perform certain procedures in accordance with these agreements.
The agreements provide for conditions whereby we may be required to repurchase mortgage loans for
various reasons among which are either (1) a mortgage loan is originated in violation of the
mortgage bankers requirement, (2) we breach any term of the agreement and (3) an early payment
default occurs from a mortgage originated by us. The mortgage loan repurchase agreements are
consistent with the standard representations and warranties of the loan sales agreements and the
impact is considered immaterial to the consolidated financial statements.
The Company entered into a mandatory forward loan volume commitment agreement with a purchaser of
mortgage loans. Under the agreement, the Company is committed to deliver $264,000,000 loan volume
over the period from March 1, 2010 through January 30, 2011. Upon failure to deliver minimum loan
volume quarterly, the Company is responsible to pay a non-delivery fee to the purchaser. As of
December 31, 2010, the Company met the volume commitments.
68
Commitments and Contingent Liabilities
The following table presents a summary of significant contractual obligations extending beyond
one year as of December 31, 2010, and maturing as indicated:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than 5 |
|
Indeterminate |
|
|
Total |
|
One Year |
|
13 Years |
|
35 Years |
|
years |
|
Maturity (1) |
|
Preferred Stock and
Warrants |
|
$ |
17,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,000 |
|
|
$ |
|
|
|
$ |
|
|
Junior Subordinated
Debentures |
|
|
15,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,465 |
|
|
|
|
|
FHLB Borrowings |
|
|
141,000 |
|
|
|
126,000 |
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations |
|
|
2,802 |
|
|
|
775 |
|
|
|
1,094 |
|
|
|
663 |
|
|
|
270 |
|
|
|
|
|
Repurchase
Agreements |
|
|
13,548 |
|
|
|
13,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1) |
|
|
648,702 |
|
|
|
204,551 |
|
|
|
98,408 |
|
|
|
8,808 |
|
|
|
|
|
|
|
336,935 |
|
|
Total |
|
$ |
838,517 |
|
|
$ |
344,874 |
|
|
$ |
114,502 |
|
|
$ |
26,471 |
|
|
$ |
15,735 |
|
|
$ |
336,935 |
|
|
|
|
|
|
(1) |
|
Represents interest-bearing and non-interest bearing checking, money market, savings
accounts, and time deposits. |
69
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that values of assets and liabilities or revenues will be adversely
affected by changes in market conditions such as interest rates. The risk is inherent in the
financial instruments associated with our operations and activities including loans, deposits,
securities, short-term borrowings, long-term debt and derivatives. Market-sensitive assets and
liabilities are generated through loans and deposits associated with our banking business, our
Asset Liability Management (ALM) process, and credit risk mitigation activities. Traditional loan
and deposit products are reported at amortized cost for assets or the amount owed for liabilities.
These positions are subject to changes in economic value based on varying market conditions.
Interest rate risk is the effect of changes in economic value of our loans and deposits, as well as
our other interest rate sensitive instruments and is reflected in the levels of future income and
expense produced by these positions versus levels that would be generated by current levels of
interest rates. We seek to mitigate interest rate risk as part of the ALM process.
Interest rate risk represents the most significant market risk exposure to our financial
instruments. Our overall goal is to manage interest rate sensitivity so that movements in interest
rates do not adversely affect net interest income. Interest rates risk is measured as the potential
volatility in our net interest income caused by changes in market interest rates. Lending and
deposit gathering creates interest rate sensitive positions on our balance sheet. Interest rate
risk from these activities as well as the impact of ever changing market conditions is mitigated
using the ALM process. We do not operate a trading account and do not hold a position with exposure
to foreign currency exchange or commodities. We face market risk through interest rate volatility.
The Board of Directors has overall responsibility for our interest rate risk management policies.
We have an Asset/Liability Management Committee (ALCO) which establishes and monitors guidelines
to control the sensitivity of earnings to changes in interest rates. The internal ALCO Roundtable
group maintains a net interest income forecast using different rate scenarios via a simulation
model. This group updates the net interest income forecast for changing assumptions and differing
outlooks based on economic and market conditions.
The simulation model used includes measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-related products (demand deposit
accounts, other assets and other liabilities). These measures recognize the relative sensitivity of
these accounts to changes in market interest rates, as demonstrated through current and historical
experience, recognizing the timing differences of rate changes. In the simulation of net interest
margin and net income the forecast balance sheet is processed against five rate scenarios. These
five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in
the future and four additional rate ramp scenarios ranging for +
400 to 400 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero.
The formal policies and practices we adopted to monitor and manage interest rate risk exposure
measure risk in two ways: (1) repricing opportunities for earning assets and interest-bearing
liabilities, and (2) changes in net interest income for declining interest rate shocks of 100 to
400 basis points. Because of our predisposition to variable rate pricing and noninterest bearing
demand deposit accounts, we are normally considered asset sensitive. However, with the current
historically low interest rate environment, the market rates on many of our variable-rate loans are
below their respective floors. Consequently, we would not immediately benefit in a rising rate
environment. As such, we are currently considered liability sensitive in the 100bp to 300bp upward
rate shock, and asset sensitive for 400bp upward rate shock. As a result, management anticipates
that, in a rising interest rate environment, our net interest income and margin would generally be
expected to decline, as well as in a declining interest rate environment. However, given that the
model assumes a static balance sheet, no assurance can be given that under such circumstances we
would experience the described relationships to declining or increasing interest rates.
To estimate the effect of interest rate shocks on our net interest income, management uses a model
to prepare an analysis of interest rate risk exposure. Such analysis calculates the change in net
interest income
70
given a change in the federal funds rate of 100, 200, 300 or 400 basis points up or down. All
changes are measured in dollars and are compared to projected net interest income. The most recent
model results, at December 31, 2010, indicate the estimated annualized reduction in net interest
income attributable to a 100, 200, 300 and 400 basis point declines in the federal funds rate was
$156,137, $1,224,031, $1,941,061 and $2,133,823 respectively. At December 31, 2009, the estimated
annualized reduction in net interest income attributable to a 100, 200 and 300 basis point decline
in the federal funds rate was $1,239,230, $1,901,994 and $2,458,129 respectively, with a similar
and opposite results attributable to a 100, 200 or 300 basis point increase in the federal funds
rate.
The Federal Reserve currently has the federal funds rate targeted between zero to twenty five basis
points. Accordingly, the Company is focused on the affects of interest rate shocks on our net
interest income during a rising rate environment. The most recent model results, as December 31,
2010, indicate the estimated annualized decrease in net interest income attributable to a 100, 200,
300 basis point increases in the federal funds rate was $384,223, $370,357, and $52,930
respectively. The 400 basis point increase results in an estimated increase in annualized net
interest income of $348,804.
The ALCO has established a policy limitation to interest rate risk of -28% of the net interest
margin and -40% of the present value of equity. The securities portfolio is integral to our asset
liability management process. The decision to purchase or sell securities is based upon the current
assessment of economic and financial conditions, including the interest rate environment,
liquidity, regulatory requirements and the relative mix of our cash positions.
The following table sets forth the most recent model results relating to the distribution of
repricing opportunities for the Banks earning assets and interest-bearing liabilities. It also
reports the GAP (different volumes of rate sensitive assets and liabilities) repricing interest
earning assets and interest-bearing liabilities at different time intervals, the cumulative GAP,
the ratio of rate sensitive assets to rate sensitive liabilities for each repricing interval, and
the cumulative GAP to total assets.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP Analysis |
|
|
|
|
|
|
|
|
|
Within 3 |
|
|
3 Months to |
|
|
One Year to |
|
|
Over Five |
|
|
|
|
|
|
Months |
|
|
One Year |
|
|
Five Years |
|
|
Years |
|
|
Total |
|
|
Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
$ |
13,374 |
|
|
$ |
6,514 |
|
|
$ |
53,932 |
|
|
$ |
115,415 |
|
|
$ |
189,235 |
|
Other investments |
|
|
11,655 |
|
|
|
28,815 |
|
|
|
|
|
|
|
|
|
|
|
40,470 |
|
Loans, gross |
|
|
163,033 |
|
|
|
148,148 |
|
|
|
162,426 |
|
|
|
127,190 |
|
|
|
600,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-earning Assets |
|
$ |
188,062 |
|
|
$ |
183,477 |
|
|
$ |
216,358 |
|
|
$ |
242,605 |
|
|
$ |
830,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand interest bearing |
|
$ |
23,921 |
|
|
$ |
40,564 |
|
|
$ |
57,208 |
|
|
$ |
40,565 |
|
|
$ |
162,258 |
|
Savings accounts |
|
|
6,705 |
|
|
|
20,951 |
|
|
|
35,102 |
|
|
|
20,894 |
|
|
|
83,652 |
|
Certificates of deposit |
|
|
79,792 |
|
|
|
124,759 |
|
|
|
107,216 |
|
|
|
|
|
|
|
311,767 |
|
Other borrowings |
|
|
44,013 |
|
|
|
126,000 |
|
|
|
|
|
|
|
|
|
|
|
170,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing Liabilities |
|
$ |
154,431 |
|
|
$ |
312,274 |
|
|
$ |
199,526 |
|
|
$ |
61,459 |
|
|
$ |
727,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP in dollars |
|
$ |
33,631 |
|
|
$ |
(128,797 |
) |
|
$ |
16,832 |
|
|
$ |
181,146 |
|
|
$ |
102,812 |
|
Cumulative GAP in dollars |
|
$ |
33,631 |
|
|
$ |
(95,166 |
) |
|
$ |
(78,334 |
) |
|
$ |
102,812 |
|
|
$ |
102,812 |
|
As a percentage of earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP Ratio |
|
|
1.22 |
|
|
|
0.59 |
|
|
|
1.08 |
|
|
|
3.95 |
|
|
|
1.14 |
|
Cumulative GAP Ratio |
|
|
1.22 |
|
|
|
0.80 |
|
|
|
0.88 |
|
|
|
1.14 |
|
|
|
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap as % of Earning Assets |
|
|
4.05 |
% |
|
|
-15.51 |
% |
|
|
2.03 |
% |
|
|
21.81 |
% |
|
|
12.38 |
% |
Cumulative Gap as % of Earning Assets |
|
|
4.05 |
% |
|
|
-11.46 |
% |
|
|
-9.43 |
% |
|
|
12.38 |
% |
|
|
12.38 |
% |
The model utilized by management to create the analysis described in the preceding paragraph
uses balance sheet simulation to estimate the impact of changing rates on our projected annual net
interest income Actual results will differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and management
strategies.
71
Management believes that the short duration of its rate-sensitive assets and liabilities
contributes to its ability to re-price a significant amount of its rate-sensitive assets and
liabilities and mitigate the impact of rate changes in excess of 100, 200, 300, or 400 basis
points. The models primary benefit to management is its assistance in evaluating the impact that
future strategies with respect to our mix and level of rate-sensitive assets and liabilities will
have on our net interest income.
Our approach to managing interest rate risk may include the use of derivatives, including interest
rate swaps, caps and floors. This helps to minimize significant, unplanned fluctuations in
earnings, fair values of assets and liabilities and cash flows caused by interest rate volatility.
This approach involves an off-balance sheet instrument with the same characteristics of certain
assets and liabilities so that changes in interest rates do not have a significant adverse effect
on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged
assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect
of this unrealized gain or loss will generally be offset by income or loss on the derivatives
linked to the hedged assets and liabilities. For a cash flow hedge, the change in the fair value of
the derivative to the extent that it is effective is recorded through other comprehensive income.
At inception, the relationship between hedging instruments and hedged items is formally documented
with our risk management objective, strategy and our evaluation of effectiveness of the hedge
transactions. This includes linking all derivatives designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific transactions. Periodically, as
required, we formally assess whether the derivative we designated in the hedging relationship is
expected to be and has been highly effective in offsetting changes in fair values or cash flows of
the hedged item.
72
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
Page |
|
|
|
74 |
|
|
|
|
76 |
|
|
|
|
77 |
|
|
|
|
78 |
|
|
|
|
79 |
|
|
|
|
81 |
|
|
|
|
83 |
|
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Bank of Commerce Holdings
We have audited the accompanying consolidated balance sheets of Bank of Commerce Holdings and
subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of income, shareholders equity, and cash flows for each of the three years in the
period ended December 31, 2010. We also have audited the Companys internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Companys management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Managements Report on
Internal Control over Financial Reporting and Compliance with Applicable Laws and Regulations. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion
on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall consolidated financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Bank of Commerce Holdings and
subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and
their cash flows each of the three years in the period ended December 31, 2010, in conformity with
generally accepted accounting principles in the United States of America.
74
Also in our opinion, Bank of Commerce Holdings maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/ Moss Adams LLP
Stockton, California
March 4, 2011
75
March 4, 2011
To the Shareholders:
Managements Report on Internal Control over Financial Reporting and Compliance with Applicable
Laws and Regulations
Management of the Bank of Commerce Holdings and its subsidiaries (the Company) is responsible for
preparing the Companys annual consolidated financial statements in accordance with generally
accepted accounting principles. Management is also responsible for establishing and maintaining
internal control over financial reporting, including controls over the preparation of regulatory
financial statements, and for complying with the designated safety and soundness laws and
regulations pertaining to insider loans and dividend restrictions. The Companys internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal control can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the effectiveness of internal
control may vary over time.
Management has assessed the Companys internal control over financial reporting encompassing both
consolidated financial statements prepared in accordance with generally accepted accounting
principles and those prepared for regulatory reporting purposes as of December 31, 20010. The
assessment was based on criteria for effective internal control over financial reporting described
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, Management believes that, as of December 31,
2010, the Company maintained effective internal control over financial reporting encompassing both
consolidated financial statements prepared in accordance with generally accepted accounting
principles and those prepared for regulatory reporting purposes in all material respects.
Management also believes that the Company complied with the designated safety and soundness laws
and regulations pertaining to insider loans and dividend restrictions during 2010.
Managements assessment of the effectiveness of the Companys internal control over financial
reporting as of December 31, 2010 has been audited by Moss Adams LLP, an independent registered
public accounting firm, as stated in their report which appears on the previous page.
|
|
|
/s/ Patrick J. Moty
Patrick J. Moty, President and Chief Executive Officer
|
|
|
|
|
|
/s/ Samuel D. Jimenez
Samuel D. Jimenez, SVP and Chief Financial Officer
|
|
|
76
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 and 2009
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
23,786 |
|
|
$ |
36,902 |
|
Interest bearing due from banks |
|
|
39,470 |
|
|
|
31,338 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
63,256 |
|
|
|
68,240 |
|
Securities available-for-sale (including pledged collateral of $101,248 at
December 31, 2010 and $55,672 at December 31, 2009) |
|
|
189,235 |
|
|
|
80,062 |
|
Mortgage loans held for sale |
|
|
42,995 |
|
|
|
27,288 |
|
Loans, net of the allowance for loan and lease losses of $12,841 at
December 31, 2010 and $11,207 at December 31, 2009 |
|
|
587,865 |
|
|
|
590,023 |
|
Premises and equipment, net |
|
|
9,697 |
|
|
|
9,980 |
|
Goodwill |
|
|
3,695 |
|
|
|
3,727 |
|
Other real estate owned |
|
|
2,288 |
|
|
|
2,880 |
|
Other assets |
|
|
40,102 |
|
|
|
31,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
939,133 |
|
|
$ |
813,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand noninterest bearing |
|
$ |
91,025 |
|
|
$ |
69,447 |
|
Demand interest bearing |
|
|
162,258 |
|
|
|
163,814 |
|
Savings accounts |
|
|
83,652 |
|
|
|
65,414 |
|
Certificates of deposit |
|
|
311,767 |
|
|
|
341,789 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
648,702 |
|
|
|
640,464 |
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase |
|
|
13,548 |
|
|
|
9,621 |
|
Federal Home Loan Bank borrowings |
|
|
141,000 |
|
|
|
70,000 |
|
Other liabilities |
|
|
16,691 |
|
|
|
9,049 |
|
Junior subordinated debt payable to unconsolidated subsidiary grantor trust |
|
|
15,465 |
|
|
|
15,465 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
835,406 |
|
|
|
744,599 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 23) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock (liquidation preference of $1,000 per share; issued 2008);
2,000,000 shares authorized; 17,000 shares issued and outstanding in 2010
and 2009 |
|
|
16,731 |
|
|
|
16,641 |
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 50,000,000 shares authorized; 16,991,495
shares issued and outstanding in 2010 and 8,711,495 outstanding in 2009 |
|
|
42,755 |
|
|
|
9,730 |
|
Common stock warrant |
|
|
449 |
|
|
|
449 |
|
Retained earnings |
|
|
41,722 |
|
|
|
39,004 |
|
Accumulated other comprehensive (loss) income, net of tax |
|
|
(509 |
) |
|
|
658 |
|
|
|
|
|
|
|
|
Total Equity Bank of Commerce Holdings |
|
|
101,148 |
|
|
|
66,482 |
|
Non controlling interest in subsidiary |
|
|
2,579 |
|
|
|
2,325 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
103,727 |
|
|
|
68,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
939,133 |
|
|
$ |
813,406 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
77
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
37,000 |
|
|
$ |
35,860 |
|
|
$ |
33,582 |
|
Interest on tax-exempt securities |
|
|
1,692 |
|
|
|
1,164 |
|
|
|
1,197 |
|
Interest on U.S. government securities |
|
|
2,083 |
|
|
|
3,450 |
|
|
|
2,469 |
|
Interest on federal funds sold and securities purchased under agreement to resell |
|
|
2 |
|
|
|
32 |
|
|
|
303 |
|
Interest on other securities |
|
|
1,614 |
|
|
|
823 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
42,391 |
|
|
|
41,329 |
|
|
|
37,689 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
968 |
|
|
|
1,015 |
|
|
|
2,173 |
|
Interest on savings deposits |
|
|
921 |
|
|
|
963 |
|
|
|
1,576 |
|
Interest on certificates of deposit |
|
|
6,151 |
|
|
|
7,628 |
|
|
|
8,552 |
|
Interest on securities sold under repurchase agreements |
|
|
52 |
|
|
|
51 |
|
|
|
173 |
|
Interest on FHLB borrowings |
|
|
626 |
|
|
|
1,833 |
|
|
|
2,812 |
|
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trusts |
|
|
680 |
|
|
|
845 |
|
|
|
1,056 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
9,398 |
|
|
|
12,335 |
|
|
|
16,342 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
32,993 |
|
|
|
28,994 |
|
|
|
21,347 |
|
Provision for loan and lease losses |
|
|
12,850 |
|
|
|
9,475 |
|
|
|
6,520 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan and lease losses |
|
|
20,143 |
|
|
|
19,519 |
|
|
|
14,827 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
260 |
|
|
|
390 |
|
|
|
311 |
|
Payroll and benefit processing fees |
|
|
448 |
|
|
|
452 |
|
|
|
453 |
|
Earnings on cash surrender value Bank owned life insurance |
|
|
438 |
|
|
|
418 |
|
|
|
340 |
|
Net gain on sale of securities available-for-sale |
|
|
1,981 |
|
|
|
2,438 |
|
|
|
628 |
|
Net loss on sale of derivative swap transaction |
|
|
|
|
|
|
|
|
|
|
(225 |
) |
Net gain transfer of financial assets |
|
|
|
|
|
|
341 |
|
|
|
|
|
Gain on settlement of put reserve |
|
|
1,750 |
|
|
|
|
|
|
|
|
|
Mortgage brokerage fee income |
|
|
14,214 |
|
|
|
5,327 |
|
|
|
21 |
|
Other income |
|
|
727 |
|
|
|
697 |
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
19,818 |
|
|
|
10,063 |
|
|
|
2,623 |
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and related benefits |
|
|
15,903 |
|
|
|
10,882 |
|
|
|
7,751 |
|
Occupancy and equipment expense |
|
|
3,660 |
|
|
|
3,405 |
|
|
|
2,501 |
|
Write down of other real estate owned |
|
|
1,571 |
|
|
|
161 |
|
|
|
735 |
|
FDIC insurance premium |
|
|
1,016 |
|
|
|
1,274 |
|
|
|
383 |
|
Data processing fees |
|
|
270 |
|
|
|
282 |
|
|
|
276 |
|
Professional service fees |
|
|
1,726 |
|
|
|
820 |
|
|
|
667 |
|
Deferred compensation expense |
|
|
493 |
|
|
|
478 |
|
|
|
461 |
|
Stationery and supplies |
|
|
258 |
|
|
|
185 |
|
|
|
262 |
|
Postage |
|
|
198 |
|
|
|
147 |
|
|
|
134 |
|
Directors expenses |
|
|
266 |
|
|
|
299 |
|
|
|
294 |
|
Goodwill impairment |
|
|
32 |
|
|
|
|
|
|
|
|
|
Other expenses |
|
|
4,935 |
|
|
|
2,691 |
|
|
|
1,832 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
30,328 |
|
|
|
20,624 |
|
|
|
15,296 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit) for income taxes |
|
|
9,633 |
|
|
|
8,958 |
|
|
|
2,154 |
|
Provision (benefit) for income taxes |
|
|
3,159 |
|
|
|
2,690 |
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6,474 |
|
|
|
6,268 |
|
|
|
2,194 |
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to non-controlling interest |
|
|
254 |
|
|
|
263 |
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
6,220 |
|
|
$ |
6,005 |
|
|
$ |
2,194 |
|
|
|
|
|
|
|
|
|
|
|
Less: preferred dividend and accretion on preferred stock |
|
|
940 |
|
|
|
942 |
|
|
|
|
|
Income available to common shareholders |
|
$ |
5,280 |
|
|
$ |
5,063 |
|
|
$ |
2,194 |
|
Basic earnings per share |
|
$ |
0.35 |
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
Weighted average shares basic |
|
|
14,950,838 |
|
|
|
8,711,495 |
|
|
|
8,712,873 |
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
Weighted average shares diluted |
|
|
14,950,838 |
|
|
|
8,711,495 |
|
|
|
8,774,550 |
|
Cash dividends declared |
|
$ |
0.18 |
|
|
$ |
0.24 |
|
|
$ |
0.29 |
|
See accompanying notes to consolidated financial statements.
78
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AS OF DECEMBER 31, 2010, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Subtotal |
|
|
Non |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Bank of |
|
|
Controlling |
|
|
|
|
|
|
Comprehensive |
|
|
Preferred |
|
|
|
|
|
|
Common |
|
|
Stock |
|
|
Retained |
|
|
Comprehensive |
|
|
Commerce |
|
|
Interest in |
|
|
|
|
(Dollars in Thousands) |
|
Income |
|
|
Amount |
|
|
Warrant |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
(Loss) Income |
|
|
Holdings |
|
|
Subsidiary |
|
|
Total |
|
Balance at
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,757 |
|
|
$ |
9,996 |
|
|
$ |
36,605 |
|
|
$ |
(437 |
) |
|
$ |
46,164 |
|
|
|
|
|
|
$ |
46,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
2,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,194 |
|
|
|
|
|
|
|
2,194 |
|
|
|
|
|
|
|
2,194 |
|
Other
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
on securities
and derivatives
, net of tax |
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
gains included
in net income,
net of tax |
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive
Income BOCH |
|
$ |
2,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356 |
|
|
|
356 |
|
|
|
|
|
|
|
356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock issued |
|
|
|
|
|
|
16,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,551 |
|
|
|
|
|
|
|
16,551 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
449 |
|
Common cash dividends
($0.29 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,790 |
) |
|
|
|
|
|
|
(2,790 |
) |
|
|
|
|
|
|
(2,790 |
) |
|
Compensation expense
associated with stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
|
|
|
|
116 |
|
Share repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
|
(504 |
) |
|
|
|
|
|
|
(504 |
) |
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
Balance at
December 31, 2008 |
|
|
|
|
|
$ |
16,551 |
|
|
$ |
449 |
|
|
|
8,711 |
|
|
$ |
9,650 |
|
|
$ |
36,009 |
|
|
$ |
(81 |
) |
|
$ |
62,578 |
|
|
|
|
|
|
$ |
62,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
6,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,005 |
|
|
|
|
|
|
|
6,005 |
|
|
|
263 |
|
|
|
6,268 |
|
Other
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
on securities
and derivatives,
net of tax |
|
|
2,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
gains included
in net income,
net of tax |
|
|
(1,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
Comprehensive Income |
|
|
7,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other
Comprehensive income
non-controlling
interest |
|
|
(263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive
Income BOCH |
|
$ |
6,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
739 |
|
|
|
739 |
|
|
|
|
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on Preferred
Stock |
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
23 |
|
Common cash dividends
($0.24 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,091 |
) |
|
|
|
|
|
|
(2,091 |
) |
|
|
|
|
|
|
(2,091 |
) |
Preferred stock
dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(852 |
) |
|
|
|
|
|
|
(852 |
) |
|
|
|
|
|
|
(852 |
) |
Compensation expense
associated with stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
80 |
|
Fair value of
non-controlling
interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,062 |
|
|
|
2,062 |
|
Balance at
December 31, 2009 |
|
|
|
|
|
$ |
16,641 |
|
|
$ |
449 |
|
|
|
8,711 |
|
|
$ |
9,730 |
|
|
$ |
39,004 |
|
|
$ |
658 |
|
|
$ |
66,482 |
|
|
$ |
2,325 |
|
|
$ |
68,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (continued)
AS OF DECEMBER 31, 2010, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Subtotal |
|
|
Non |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Bank of |
|
|
Controlling |
|
|
|
|
|
|
Comprehensive |
|
|
Preferred |
|
|
|
|
|
|
Common |
|
|
Stock |
|
|
Retained |
|
|
Comprehensive |
|
|
Commerce |
|
|
Interest in |
|
|
|
|
(Dollars in Thousands) |
|
Income |
|
|
Amount |
|
|
Warrant |
|
|
Shares |
|
|
Amount |
|
|
Earnings |
|
|
(Loss) Income |
|
|
Holdings |
|
|
Subsidiary |
|
|
Total |
|
Balance at
December 31, 2009 |
|
|
|
|
|
$ |
16,641 |
|
|
$ |
449 |
|
|
|
8,711 |
|
|
$ |
9,730 |
|
|
$ |
39,004 |
|
|
$ |
658 |
|
|
$ |
66,482 |
|
|
$ |
2,325 |
|
|
$ |
68,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
6,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,220 |
|
|
|
|
|
|
|
6,220 |
|
|
|
254 |
|
|
|
6,474 |
|
Other
Comprehensive
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss
on securities
and
derivatives,
net of tax |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
gains included
in net income,
net of tax |
|
|
(1,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
Comprehensive income |
|
|
5,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Other
Comprehensive income
non-controlling
interest |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive
Income-BOCH |
|
$ |
5,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167 |
) |
|
|
(1,167 |
) |
|
|
|
|
|
|
(1,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion on preferred
stock |
|
|
|
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common cash dividends
($0.18 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,562 |
) |
|
|
|
|
|
|
(2,562 |
) |
|
|
|
|
|
|
(2,562 |
) |
Preferred stock
dividend |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850 |
) |
|
|
|
|
|
|
(850 |
) |
|
|
|
|
|
|
(850 |
) |
Compensation expense
associated with stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
54 |
|
Issuance of new
shares, net of
issuance costs ($4.25
per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,280 |
|
|
|
32,971 |
|
|
|
|
|
|
|
|
|
|
|
32,971 |
|
|
|
|
|
|
|
32,971 |
|
Balance at
December 31, 2010 |
|
|
|
|
|
$ |
16,731 |
|
|
$ |
449 |
|
|
|
16,991 |
|
|
$ |
42,755 |
|
|
$ |
41,722 |
|
|
|
($509 |
) |
|
$ |
101,148 |
|
|
$ |
2,579 |
|
|
$ |
103,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
80
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,474 |
|
|
$ |
6,268 |
|
|
$ |
2,194 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan and lease losses |
|
|
12,850 |
|
|
|
9,475 |
|
|
|
6,520 |
|
Provision for depreciation and amortization |
|
|
959 |
|
|
|
1,222 |
|
|
|
1,145 |
|
Goodwill impairment |
|
|
32 |
|
|
|
|
|
|
|
|
|
Compensation expense associated with stock options |
|
|
54 |
|
|
|
80 |
|
|
|
116 |
|
Gain on sale of securities available-for-sale |
|
|
(1,981 |
) |
|
|
(2,438 |
) |
|
|
(628 |
) |
Amortization (accretion) of investment premiums and discounts, net |
|
|
492 |
|
|
|
(227 |
) |
|
|
98 |
|
Gain on transfer of financial assets |
|
|
|
|
|
|
(341 |
) |
|
|
|
|
Gross proceeds from sales of loans held for sale |
|
|
764,752 |
|
|
|
449,280 |
|
|
|
|
|
Gross originations of loans held for sale |
|
|
(780,459 |
) |
|
|
(445,269 |
) |
|
|
|
|
Gain on settlement of put reserve |
|
|
(1,750 |
) |
|
|
|
|
|
|
|
|
(Gain) loss on sale of fixed assets |
|
|
(1 |
) |
|
|
1 |
|
|
|
3 |
|
Loss (gain) loss on sale of other real estate owned |
|
|
126 |
|
|
|
(20 |
) |
|
|
|
|
Write down of other real estate owned |
|
|
1,571 |
|
|
|
161 |
|
|
|
735 |
|
Loss on sale of derivative |
|
|
|
|
|
|
|
|
|
|
225 |
|
(Increase) decrease in deferred income taxes |
|
|
(1,538 |
) |
|
|
(1,159 |
) |
|
|
29 |
|
Increase in cash surrender value of bank owned life policies |
|
|
(372 |
) |
|
|
(1,564 |
) |
|
|
(286 |
) |
Increase in other assets |
|
|
(4,263 |
) |
|
|
(4,250 |
) |
|
|
(9,607 |
) |
Increase in deferred compensation, net |
|
|
433 |
|
|
|
449 |
|
|
|
392 |
|
(Decrease) increase in deferred loan fees |
|
|
(119 |
) |
|
|
122 |
|
|
|
(128 |
) |
Increase (decrease) in other liabilities |
|
|
9,406 |
|
|
|
(485 |
) |
|
|
(1,064 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by operating activities |
|
|
6,666 |
|
|
|
11,305 |
|
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and payments of available-for-sale securities |
|
|
58,978 |
|
|
|
32,699 |
|
|
|
9,126 |
|
Proceeds from sale of available-for-sale securities |
|
|
79,680 |
|
|
|
78,773 |
|
|
|
44,828 |
|
Purchases of available-for-sale securities |
|
|
(250,665 |
) |
|
|
(55,928 |
) |
|
|
(105,861 |
) |
Purchases of ITIN loan portfolio |
|
|
|
|
|
|
(66,694 |
) |
|
|
|
|
Purchases of home equity loan portfolio |
|
|
(14,801 |
) |
|
|
|
|
|
|
|
|
Loan originations, net of principal repayments |
|
|
(332 |
) |
|
|
(33,334 |
) |
|
|
(39,056 |
) |
Maturities of held-to-maturity securities |
|
|
|
|
|
|
|
|
|
|
98 |
|
Purchase of premises and equipment |
|
|
(676 |
) |
|
|
(374 |
) |
|
|
(865 |
) |
Proceeds on sale of fixed assets |
|
|
1 |
|
|
|
0 |
|
|
|
5 |
|
Proceeds from the sale of other real estate owned |
|
|
3,454 |
|
|
|
315 |
|
|
|
1,200 |
|
Cash acquired in acquisition, net of cash consideration paid |
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(124,361 |
) |
|
|
(44,278 |
) |
|
|
(90,525 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in demand deposits and savings accounts |
|
|
38,260 |
|
|
|
7,680 |
|
|
|
31,080 |
|
Net (decrease) increase in certificates of deposit |
|
|
(30,022 |
) |
|
|
77,502 |
|
|
|
50,570 |
|
Net increase (decrease) in securities sold under agreements to repurchase |
|
|
3,927 |
|
|
|
(4,233 |
) |
|
|
(1,660 |
) |
Federal Home Loan Bank advances |
|
|
752,000 |
|
|
|
475,140 |
|
|
|
215,000 |
|
Federal Home Loan Bank advance repayments |
|
|
(681,000 |
) |
|
|
(525,140 |
) |
|
|
(155,000 |
) |
Net change in other short term borrowings |
|
|
|
|
|
|
(11,810 |
) |
|
|
|
|
Cash dividends paid on common stock |
|
|
(2,575 |
) |
|
|
(2,265 |
) |
|
|
(2,790 |
) |
Cash dividends paid on preferred stock |
|
|
(850 |
) |
|
|
(852 |
) |
|
|
|
|
Proceeds from stock options exercised |
|
|
|
|
|
|
|
|
|
|
42 |
|
Common stock repurchased |
|
|
|
|
|
|
|
|
|
|
(504 |
) |
Proceeds from issuance of preferred stock and warrants |
|
|
|
|
|
|
|
|
|
|
17,000 |
|
Net proceeds from the issuance of common stock |
|
|
32,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
112,711 |
|
|
|
16,022 |
|
|
|
153,738 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(4,984 |
) |
|
|
(16,951 |
) |
|
|
62,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
68,240 |
|
|
|
85,191 |
|
|
|
22,234 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
63,256 |
|
|
$ |
68,240 |
|
|
$ |
85,191 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements
81
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2008 |
Supplemental disclosures of non cash investment activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
3,711 |
|
|
$ |
3,496 |
|
|
$ |
316 |
|
Interest |
|
$ |
9,505 |
|
|
$ |
12,415 |
|
|
$ |
16,510 |
|
Transfer of loans to OREO |
|
$ |
4,559 |
|
|
$ |
402 |
|
|
$ |
4,869 |
|
Changes in unrealized (loss) gain on investment securities available for sale |
|
$ |
4,323 |
|
|
$ |
(1,255 |
) |
|
$ |
(582 |
) |
Changes in deferred tax asset related to the changes in unrealized (loss) gain on investment securities |
|
$ |
(1,777 |
) |
|
$ |
516 |
|
|
$ |
226 |
|
Changes in accumulated other comprehensive income due to changes in unrealized (loss) gain on
investment securities |
|
$ |
(2,546 |
) |
|
$ |
739 |
|
|
$ |
356 |
|
Reclassification of held-to-maturity securities to available for sale |
|
|
|
|
|
|
|
|
|
$ |
8,805 |
|
Acquisition at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets Acquired |
|
|
|
|
|
$ |
14,857 |
|
|
|
|
|
Liabilities Assumed |
|
|
|
|
|
$ |
14,057 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
82
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE BUSINESS OF THE COMPANY
Bank of Commerce Holdings (the Holding Company), is a bank holding company (BHC) with its
principal offices in Redding, California. The Holding Companys wholly-owned subsidiaries are
Redding Bank of Commercetm, and Roseville Bank of
Commercetm, a division of Redding Bank of Commerce. The Holding Companys
majority owned subsidiary is Bank of Commerce Mortgage (the Mortgage Company) (collectively the
Company). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust and
Bank of Commerce Holdings Trust II. The Bank is principally supervised and regulated by the
California Department of Financial Institutions (DFI) and the Federal Deposit Insurance
Corporation (FDIC). Substantially all of the Companys activities are carried out through the
Bank and the Mortgage Company. The Bank was incorporated as a California banking corporation on
November 25, 1981. The Bank operates four full service branches in Redding, and Roseville,
California.
The Bank conducts a general commercial banking business in the counties of El Dorado, Placer,
Shasta, Sacramento, and Tehama, California. The Company considers Northern California to be the
major market area of the Bank. The services offered by the Bank include those traditionally offered
by commercial banks of similar size and character in California, including checking,
interest-bearing NOW, savings and money market deposit accounts; commercial, real estate, and
construction loans; travelers checks, safe deposit boxes, collection services and electronic
banking activities. The primary focus of the Bank is to provide services to the business and
professional community of its major market area, including Small Business Administration loans,
payroll and accounting packages, benefit administration and billing programs. The Bank does not
offer trust services or international banking services and does not plan to do so in the near
future. Most of the customers of the Bank are small to medium sized businesses and individuals with
medium to high net worth.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America. Additionally, where applicable, the policies conform to
the accounting and reporting guidelines prescribed by bank regulatory authorities. In preparing
the consolidated financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Material estimates that are particularly
susceptible to significant change including the determination of the allowance for loan and lease
losses, the valuation of goodwill and other real estate owned, other than temporary impairment of
investment securities, share based payments, accounting for income taxes, and fair value
measurements are discussed in the notes to consolidated financial statements. Actual results could
differ from those estimates. Certain amounts for prior periods have been reclassified to conform to
the current financial statement presentation. The results of reclassifications are not considered
material and have no effect on previously reported net income and earnings per share.
83
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation The consolidated financial statements include the accounts of the
Holding Company, the Bank and Bank of Commerce Mortgage. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents
include amounts due from correspondent banks, including interest bearing deposits in correspondent
banks, and the Federal Reserve Bank, federal funds sold and securities purchased under agreements
to resell. Generally, federal funds sold are 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.
Securities
Purchased under Agreements to Resell The Company enters into purchases of securities
under agreements to resell substantially identical securities. Securities purchased under
agreements to resell consist primarily of U.S. Treasury, Agency and Municipal Securities. The
amounts advanced under these agreements are reflected as assets in the consolidated balance sheet.
It is the Companys policy to take possession of securities purchased under agreements to resell.
Agreements with third parties specify the Companys rights to request additional collateral, based
on its monitoring of the fair value of the underlying securities on a daily basis. The securities
are delivered by appropriate entry into the Companys account maintained at the Federal Reserve
Bank or into a third-party custodians account designated by the Company under a written custodial
agreement that explicitly recognizes the Companys interest in the securities.
Securities At the time of purchase, the Company designates the security as held-to-maturity or
available-for-sale, based on its investment objectives, operational needs and intent to hold. The
Company does not engage in trading activity. Securities designated as held-to-maturity are carried
at cost adjusted for the accretion of discounts and amortization of premiums. The Company has the
ability and intent to hold these securities to maturity. Securities designated as
available-for-sale may be sold to implement the Companys asset/liability management strategies and
in response to changes in interest rates, prepayment rates and similar factors. Securities
designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of
income taxes, are reported as part of accumulated other comprehensive income (loss), a separate
component of shareholders equity. Gains or losses on sale of securities are based on the specific
identification method. The market value and underlying rating of the security is monitored for
quality. Securities may be adjusted to reflect changes in valuation as a result of
other-than-temporary declines in value. Investments with fair values that are less than amortized
cost are considered impaired. Impairment may result from either a decline in the financial
condition of the issuing entity or, in the case of fixed rate investments, from changes in interest
rates. At each financial statement date, management assesses each investment to determine if
impaired investments are temporarily impaired or if the impairment is other than temporary based
upon the positive and negative evidence available. Evidence evaluated includes, but is not limited
to, industry analyst reports, credit market conditions, and interest rate trends.
When an investment is other than temporarily impaired, the Company assesses whether it intends to
sell the security, or it is more likely than not that we will be required to sell the security
before recovery of its amortized cost basis less any current-period credit losses. If the Company
intends to sell the security or if it more likely than not that the Company will be required to
sell security before recovery of the amortized cost basis, the entire amount of
other-than-temporary impairment is recognized in earnings.
84
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For debt securities that are considered other than temporarily impaired and that we do not intend
to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate
the
amount of the impairment into the amount that is credit related (credit loss component) and the
amount due to all other factors. The credit loss component is recognized in earnings and is
calculated as the difference between the investments amortized cost basis and the present value of
its expected future cash flows.
The remaining differences between the investments fair value and the present value of future
expected cash flows is deemed to be due to factors that are not credit related and is recognized in
other comprehensive income. Significant judgment is required in the determination of whether an
other-than-temporary impairment has occurred for an investment. The Company follows a consistent
and systematic process for determining and recording an other-than-temporary impairment loss. The
Company has designated the ALCO Committee responsible for the other-than-temporary evaluation
process.
The ALCO Committees assessment of whether an other-than-temporary impairment loss should be
recognized incorporates both quantitative and qualitative information including, but not limited
to: (a) the length of time and the extent of 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.
Loans
Loans are stated at the principal amounts outstanding less deferred loan fees and costs
and the allowance for loan losses. Interest on commercial, installment and real estate loans is
accrued daily based on the principal outstanding. Loan origination and commitment fees and certain
origination costs are deferred and the net amount is amortized over the contractual life of the
loans as an adjustment of their yield. A loan is impaired when, based on current information and
events, management believes it is probable that the Company will not be able to collect all amounts
due according to the contractual terms of the loan agreement.
Impairment is measured based upon the present value of future cash flows discounted at the loans
effective rate, the loans observable market price, or the fair value of collateral if the loan is
collateral dependent. Interest on impaired loans is recognized on a cash basis, and only when the
principal is not considered impaired.
The Companys practice is to place an asset on nonaccrual status when one of the following events
occurs: (1) any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well-secured and in the process of collection), (2) management
determines the ultimate collection of principal or interest to be unlikely or, (3) the terms of the
loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, 90 days past due and still accruing, or have been
restructured. Accruals are resumed on loans only when they are brought fully current with respect
to interest and principal and when the loan is estimated to be fully collectible. Restructured
loans are those loans on which concessions in terms have been granted because of the borrowers
financial or legal difficulties. Interest is generally accrued on such loans in accordance with
the new terms, after a period of sustained performance by the borrower. One exception to the 90
days past due policy for non-accruals is the banks pool of home equity loans and lines purchased
from a private equity firm.
85
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase of this pool of loans included a put option allowing the bank to sell a portion of the
loan pool back to the private equity firm in the event of default by the borrower. At 90 days
past due a loan in this pool will be sold back to the private equity firm for the outstanding
principal balance, unless a workout plan has been put in place with the borrower. Once this put
reserve is exhausted, the bank will charge off any loans that go more than 90 days past due. In
accordance to this policy, management does not expect to classify any of the loans from this pool
as nonaccrual. Management believes that charging the loan off at the time it becomes impaired would
be more conservative than placing it in nonaccrual status.
Allowance for Loan and Lease Losses The allowance for loan and lease losses are established
through a provision charged to expense. Loans are charged off against the allowance for loan and
lease losses when management believes that the collectability of the principal is unlikely. The
allowance for loan and lease losses is an amount that management believes will be adequate to
absorb losses inherent in existing loans and overdrafts based on evaluations of collectability and
prior loss experience. The evaluations take into consideration such factors as changes in the
nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific
problem loans, and current economic conditions that may affect the borrowers ability to pay.
Material estimates relating to the determination of the allowance for loan and lease losses are
particularly susceptible to significant change in the near term. While management uses available
information to recognize losses on loans, future additions to the allowance may be necessary based
on changes in economic conditions. In addition, the FDIC and DFI, as an integral part of their
examination process, periodically review the Banks allowance for loan losses. The FDIC or DFI may
require the Bank to recognize additions to the allowance based on their judgment about information
available to them at the time of their examination.
Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful lives of the related
assets. Expenditures for major renewals and improvements are capitalized and those for maintenance
and repairs are charged to expense as incurred.
Securities Sold under Agreements to Repurchase At December 31, 2010, and 2009, securities sold
under agreements to repurchase consist of commercial repurchase agreements, where the Company has
an agreement with the depositor to sell and repurchase, on a daily basis, a proportionate interest
in U.S. Treasury and agency issued securities. These securities are held as collateral for non-FDIC
insured deposits.
Federal Home Loan Bank Borrowings As part of its asset/liability management strategy the Company
has obtained advances from the Federal Home Loan Bank (FHLB) of San Francisco. The Company has
pledged collateral of commercial real estate loans, one to four family residential loans, and
specific securities to support the borrowings. As a member of the FHLB system, the Company is
required to maintain an investment in the capital stock of the FHLB. The investment is carried at
cost. The balance of FHLB stock was $7,943,000 and $6,110,000 at December 31, 2010 and 2009,
respectively. The FHLB stock is included as a component of other assets on the consolidated balance
sheets.
Goodwill and Other Intangibles Goodwill is recorded in business combinations under the
acquisition method of accounting when the purchase prices are higher than the fair value of net
assets acquired, including identifiable intangible assets.
86
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company will evaluate goodwill for impairment annually, and more frequently in certain
circumstances. Impairment exists when the carrying amount of the goodwill exceeds its fair value.
The Company will recognize impairment losses as a charge to noninterest expense and an adjustment
to the carrying value of the goodwill assets. Goodwill is formally tested for impairment annually
in April.
Earnings Per Share The proceeding table illustrates basic earnings per share excluding dilution,
and is computed by dividing net income available to common shareholders 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, converted into common stock, or resulted in the
issuance of common stock that subsequently shared in the earnings of the entity. Diluted EPS are
calculated using the weighted average diluted shares. The number of potential common shares
included in annual diluted EPS is a year-to-date weighted average of the number of potential common
shares included in each quarterly diluted EPS computation under the treasury stock method.
The following table reconciles the numerator and denominator used in computing both basic earnings
per share and diluted earnings per share for the years ended December 31.
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Basic EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
6,220 |
|
|
$ |
6,005 |
|
|
$ |
2,194 |
|
Less: dividend on preferred stock |
|
|
850 |
|
|
|
852 |
|
|
|
|
|
Less: accretion on preferred stock |
|
|
90 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: earnings available to common shareholders |
|
$ |
5,280 |
|
|
$ |
5,063 |
|
|
$ |
2,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (average common shares outstanding) |
|
|
14,950,838 |
|
|
|
8,711,495 |
|
|
|
8,712,873 |
|
Basic earnings per share |
|
$ |
0.35 |
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,220 |
|
|
$ |
6,005 |
|
|
$ |
2,194 |
|
Less: dividend on preferred stock |
|
|
850 |
|
|
|
852 |
|
|
|
|
|
Less: accretion on preferred stock |
|
|
90 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: earnings available to common shareholders |
|
$ |
5,280 |
|
|
$ |
5,063 |
|
|
$ |
2,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
14,950,838 |
|
|
|
8,711,495 |
|
|
|
8,712,873 |
|
Plus incremental shares from assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
11,677 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,950,838 |
|
|
|
8,711,495 |
|
|
|
8,724,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
Anti-dilutive options not included in EPS calculation |
|
|
300,080 |
|
|
|
282,080 |
|
|
|
185,666 |
|
Anti-dilutive warrants not included in EPS calculation |
|
|
405,405 |
|
|
|
405,405 |
|
|
|
405,405 |
|
87
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other
Real Estate Owned Real estate acquired by foreclosure is carried at the lower of the
recorded investment in the property or its fair value less estimated selling costs. Prior to
foreclosure, the value of the underlying loan is written down to the fair value of the real estate
to be acquired, less costs to sell, by a charge to the allowance for loan losses, if necessary.
Fair value of other real estate is generally determined based on an appraisal of the property. Any
subsequent write-downs are charged against noninterest expenses. Operating expenses of such
properties, net of related income, and gains and losses on their disposition are included in other
expenses.
Gain recognition on the disposition of real estate is dependent upon the transaction meeting
certain criteria relating to the nature of the property sold and the terms of the sale. This
includes the buyers initial and continuing investment, the degree of continuing involvement by the
Company with the property after the sale, and other matters. Under certain circumstances, revenue
recognition may be deferred until these criteria are met.
Segment Reporting Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose operating results are
regularly reviewed by the organizations management and whose revenue is 10 percent or more of total
revenue.
Under this definition the Company reports on two operating segments, Commercial Banking and
Mortgage Brokerage Services. In the year 2008, the Company accounted for its operations as one
operating segment.
Income
Taxes The Company accounts for income taxes under the liability method. Under the
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.
Stock Option Plan The Company recognizes in the income statement the grant-date fair value of
stock options and other equity-based forms of compensation issued to employees over their requisite
service period (generally the vesting period). The fair value of options granted is determined on
the date of the grant using a Black Sholes option-pricing model.
Description of Stock-Based Compensation Plan The 2008 Stock Option Plan (the Plan) was
approved by the Companys shareholders on May 15, 2007. A total of 620,000 shares of the Companys
common stock are reserved for grant under the Plan. At December 31, 2010, 586,500 shares were
available for future grants under the Plan.
88
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan provides for awards in the form of options, which may constitute incentive stock options
(Incentive Options) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the
Code), or non-statutory stock options (NSOs) to key personnel of the Company, including
directors. The Plan provides that Incentive Options under the Plan may not be granted at less than
100% of fair market value of the Companys common stock on the date of the grant. The strike price
of NSOs may not be granted at less than 85% of the fair market value of the common stock on the
date of the grant.
The Companys stock option plans provide for awards of incentive and nonqualified stock options.
Incentive options must have an exercise price at or above fair market value of the stock at the
date of the grant and a term of no more than 10 years. Options generally become exercisable over
five years from the date of the grant. Nonqualified stock options must have an exercise price of no
less than 85% of the fair market value of the stock at the date of the grant and for a term of no
more than 10 years. Nonqualified stock options generally become exercisable over five years from
the date of the grant.
The total intrinsic value, which is the amount by which the stock price exceeded the exercise
price, of options exercised during the year ended December 31, 2010, 2009, and 2008 was $0, $0, and
$40,863, respectively.
Comprehensive Income (Loss) Comprehensive income (loss) represents net earnings and any
revenues, expenses, gains and losses that, under accounting principles generally accepted in the
United States of America, are excluded from net earnings and recognized directly as a component of
shareholders equity. The Companys sources of other comprehensive income (loss) include unrealized
gains and losses on securities available-for-sale and unrealized gains and losses on derivative
activities. Reclassification adjustments result from gains or losses on securities that were
realized and included in net income of the current period that also had been included in other
comprehensive income (loss) as unrealized holding gains or losses in the period in which they
arose.
Transfer
of Financial Assets Transfers of financial assets are accounted for as sales when
control over the assets has been surrendered. Control over transferred assets is deemed surrendered
when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free
of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets (or beneficial interests), and (3) the Company does not maintain effective
control over the transferred assets or third party beneficial interests through an agreement to
repurchase them before their maturity.
On April 17, 2009, the Company transferred certain nonperforming loans, without recourse, and cash
in exchange for the acquisition of a pool of Individual Tax Identification Number (ITIN)
residential mortgage loans. The acquired ITIN loan portfolio was initially recorded at an estimated
fair value of $80.7 million. The initial fair value of the ITIN loan portfolio was measured using a
Level 3 valuation approach due to the illiquid market for this type of loan portfolio. As a result
of the transfer of financial assets and the acquisition of the ITIN loan portfolio, the Company
recorded a gain of $340 thousand, which is included as a component of noninterest income on the
consolidated statement of income.
89
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 12, 2010, the Company transferred certain nonperforming loans, without recourse, and $14.8
million in exchange for the acquisition of a pool of performing residential mortgage home equity
loans.
The
acquired residential mortgage home equity loan portfolio was initially recorded at an estimated
fair value of $21.8 million. The initial fair value of the
residential home equity loan portfolio
was measured based on the fair value of the assets transferred and
derecognized. No gain on loss
was recorded resulting from this transaction.
At the settlement date the mortgage home equity loan pool consisted of 562 loans with an average
principle balance of approximately $39,200, a weighted average credit score of 744, a weighted
average loan to value of 86.44%, and a weighted average yield of 7.76%. Fifty one percent of the
mortgage home equity loan pool is located in the state of Michigan; the remaining balance is
geographically disbursed throughout the United States.
The Company services for others, SBA loans that are sold with a principal balance of $556 thousand,
and $622 thousand as of December 31, 2010 and December 31, 2009 respectively. In addition, the
Company services for others, a pool of home equity loans with a principal balance of $475 thousand
at December 31, 2010. The servicing agreements have not resulted in a net servicing asset or net
servicing liability because the servicing fees approximate the servicing costs.
Preferred Stock The Company is authorized to issue up to 2,000,000 shares of preferred stock
with no par value. Preferred shares outstanding rank senior to common shares both as to dividends
and liquidation preference, but have no voting rights. The Emergency Economic Stabilization Act
(EESA) authorizes the United States Department of the Treasury (Treasury) to use appropriated
funds to restore liquidity and stability to the U.S. financial system.
As part of this authority, and pursuant to a Letter Agreement dated November 14, 2008, and the
Securities Purchase Agreement Standard Terms, the Company issued to the Treasury 17,000 shares
of Bank of Commerce Holdings Series A Fixed Rate Perpetual Preferred Stock, with no par value
(Series A Preferred Stock), having a liquidation amount per share equal to $1,000 for a total
price of $17 million.
Warrants As part of its purchase of the Series A Preferred Stock, the Treasury received a
warrant (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 the Companys 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 the Companys common stock, and upon certain issuances of the Companys common stock
at or below a specified price relative to the initial exercise price. The Warrant expires ten
years from the issuance date.
Mortgages Loans Held for Sale The Company, through its majority owned subsidiary, Bank of
Commerce Mortgage, originates residential mortgage loans within Bank of Commerces footprint and on
a nationwide basis. Mortgage loans represent loans collateralized by one-to four family residential
real estate and are made to borrowers in good credit standing. These loans are typically sold to
primary mortgage market aggregators (Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae
(GNMA)) and to third party investors including the servicing rights.
90
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgages held for sale are carried at the lower of cost or fair value. Cost generally approximates
market value, given the short duration of these assets.
Gains and losses on loan sales are recorded in noninterest income, and direct loan origination
costs and fees are deferred at origination of the loan and are recognized in interest income upon
sale of a loan. The Company generally sells all servicing rights associated with the mortgage
loans. Accordingly, there are no separately recognized servicing assets or liabilities resulting
from the sale of mortgage loans.
Advertising Costs For the years ending December 31, 2010, 2009, and 2008, advertising costs were
$322 thousand, $265 thousand, and $326 thousand respectively. Advertising costs were expensed as
incurred.
Derivative Financial Instruments and Hedging Activities
|
|
|
Derivative Loan Commitments The Company, through its majority owned subsidiary, Bank
of Commerce Mortgage, enters into forward delivery contracts to sell residential mortgage
loans at specific prices and dates in order to hedge the interest rate risk in its
portfolio of mortgage loans held for sale and its residential mortgage loan commitments.
Generally, the Company enters into a best efforts interest rate lock commitment (IRLC)
with borrowers and forward delivery contracts with investors associated with mortgage
loans receivable held for sale. |
|
|
|
|
These derivative instruments consist primarily of IRLCs executed with borrowers and
mandatory forward purchase commitments with investor lenders. These derivative instruments
are accounted for as fair value hedges, with the changes in fair value reflected in
earnings as a component of mortgage brokerage fee income. |
|
|
|
|
At December 31, 2010, the Company did not maintain any open positions or any other
outstanding derivative loan commitments. |
|
|
|
|
Interest Rate Swap Agreements As part of the Companys risk management strategy, the
Company enters into interest rate swap agreements or other derivatives to mitigate the
interest rate risk inherent in certain assets and liabilities. These derivative
instruments are accounted for as cash flow hedges, with the changes in fair value
reflected in other comprehensive income and subsequently reclassified to earnings when
gains or losses are realized on the hedged item. |
91
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
FASB
ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this
Update temporarily delay the effective date of the disclosures about troubled debt restructurings
in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses for public entities. The delay is intended to allow
the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The
effective date of the new disclosures about troubled debt restructurings for public entities and
the guidance for determining what constitutes a troubled debt restructuring will then be
coordinated. Currently, the guidance is anticipated to be effective for interim and annual periods
ending after June 15, 2011. The amendments in this Update apply to all public-entity creditors
that modify financing receivables within the scope of the disclosure requirements about troubled
debt restructurings in Update 2010-20. The amendments in this Update do not affect nonpublic
entities. The Company has adopted this Update during 2010. As this ASU is disclosure-related
only, our adoption of this ASU did not impact our consolidated financial condition or results of
operations.
FASB ASU No. 2010-29, Business Combinations (Topic 805)Disclosure of Supplementary Pro
Forma Information for Business Combinations. ASU 2010-29 provides clarification regarding the
acquisition date that should be used for reporting the pro forma financial information disclosures
required by Topic 805 when comparative financial statements are presented. ASU 2010-29 also
requires entities to provide a description of the nature and amount of material, nonrecurring pro
forma adjustments that are directly attributable to the business combination. ASU 2010-29 is
effective for the Company prospectively for business combinations occurring after December 31,
2010.
FASB ASU No. 2010-28, IntangiblesGoodwill and Other (Topic 350)When to Perform Step 2
of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU
2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative
carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an impairment may exist
such as if an event occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. The adoption of this Update is not expected to
have a significant effect on the Companys consolidated financial statements.
FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses (Topic 310), was issued July 2010. The guidance will significantly
expand the disclosures that the Company must make about the credit quality of financing receivables
and the allowance for credit losses. The objectives of the enhanced disclosures are to provide
financial statement users with additional information about the nature of credit risks inherent in
the Companys financing receivables, how credit risk is analyzed and assessed when determining the
allowance for credit losses, and the reasons for the change in the allowance for credit losses.
92
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The disclosures as of the end of the reporting period are effective for the Companys interim and
annual periods ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period are effective for the Companys interim and annual periods beginning on
or after December 15, 2010.
The adoption of this Update required enhanced disclosures and did not have a significant effect on
the Companys consolidated financial statements.
FASB ASU 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool that is
Accounted for as a Single Asset (Topic 310), was issued April 2010 and is effective for
modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first
interim or annual period ending after July 15, 2010. As a result of the amendments in this Update,
modification of loans within the pool does not result in the removal of those loans from the pool
even if the modification of those loans would otherwise be considered a trouble debt restructuring.
An entity will continue to be required to consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change. However, loans within the scope of
Subtopic 310-30 that are accounted for individually will continue to be subject to the troubled
debt restructuring accounting provisions.
The provisions of this Update will be applied prospectively with early application permitted. Upon
initial adoption of the guidance in this Update, an entity may make a one-time election to
terminate accounting for loans as a pool under Subtopic 310-30. The election may be applied on a
pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent
acquisitions of loans with credit deterioration.
The Company does not have any pools of loans accounted for in accordance with Subtopic 310-30, and
therefore, the adoption of this Update will not have an effect on the Companys consolidated
financial statements.
FASB
ASU 2010-13 Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the
consensus reached in EITF No. 09-J. The amendments to the codification clarify that an employee
share-based payment award with an exercise price in the currency of a market in which a substantial
portion of the entitys equity shares trades should not be considered to contain a condition that
is not market, performance or service condition. Therefore, equity would not classify such an award
as a liability if it otherwise classifies as equity. As our current share-based payment awards are
equity awards (exercise price is denominated in dollars in the U.S. where our stock is traded),
this ASU does not have an impact on our consolidated financial condition or results of operations.
FASB ASU 2010-09 Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements was issued on February 24, 2010. The amendments in the ASU remove the
requirement for a Securities and Exchange Commission (SEC) filer to disclose a date through which
subsequent events have been evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result of either correction of an
error or retrospective application of U.S. generally accepted accounting principles (U.S. GAAP).
93
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The FASB also clarified that if the financial statements have been revised, then an entity that is
not an SEC filer should disclose both the date that the financial statements were issued or
available to be issued and the date the revised financial statements were issued or available to be
issued. The FASB believes these amendments remove potential conflicts with the SECs literature.
All of the amendments in the ASU were effective upon issuance, except for the use of the issued
date for conduit debt obligors, which will be effective for interim or annual periods ending after
June 15, 2010. Our adoption of this update did not have a significant impact on our consolidated
financial conditions or results of operations.
FASB ASU 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements was issued in January 2010. This ASU requires: (1) disclosure of the
significant amount transferred in and out of Level 1 and Level 2 fair value measurements and the
reasons for the transfers; and (2) separate presentation of purchases, sales, issuances and
settlements in the reconciliation for fair value measurements using significant unobservable inputs
(Level 3). In addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures set forth in FASB Accounting Standards Codification (The Codification or ASC)
Subtopic 820-10: (1) For purposes of reporting fair value measurement for each class of assets and
liabilities, a reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities; and (2) A reporting entity should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and nonrecurring fair value
measurements.
FASB ASU 2010-06 is effective for interim and annual reporting periods beginning January 1, 2010,
except for the disclosures about purchases, sales, issuances, and settlements in the roll forward
of activity in Level 3 fair value measurements, which are effective for fiscal years beginning
January 1, 2011, and for interim periods within those fiscal years. Our adoption of this ASU in the
first quarter of 2010 did not have an impact on our consolidated financial condition or results of
operations.
FASB ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash was also issued in January 2010 and was issued to clarify the stock
portion of a distribution to shareholders that allows them to elect to receive cash or stock with a
potential limitation on the total amount of cash that all shareholders can elect to receive in the
aggregate and is considered a share issuance that is reflected in earnings per share prospectively
and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods beginning
January 1, 2010. We currently do not make distributions to shareholders with a stock component.
94
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS
A business combination occurs when an entity acquires net assets that constitute a business, or
acquires equity interests in one or more other entities that are businesses and obtains control
over those entities. Business combinations may be effected through the transfer of consideration
such as cash, other financial or non-financial assets, debt, or common or preferred shares. The
assets and liabilities of an acquired entity or business are recorded at their respective fair
values as of the closing date of the transaction.
The results of operations of an acquired entity are included in our consolidated results from the
closing date of the transaction, and prior periods are not restated. All business combinations are
accounted for using the acquisition method.
The Company will regularly explore opportunities to acquire financial services companies and
businesses. Public announcements about an acquisition opportunity are not made until a definitive
agreement has been signed. In the second quarter 2009, the Company entered into a stock purchase
agreement with Simonich Corporation, d.b.a. BWC Mortgage Services, to acquire 51% of the capital
stock of Simonich Corporation. Simonich Corporation, d.b.a. BWC Mortgage Services, is a successful
state of the art mortgage broker of residential real estate loans with fourteen offices in two
different states and licenses in California, Oregon, Washington, Idaho and Colorado. The business
was formed in 1993 and the corporate offices are located in San Ramon, California.
The agreement was dated May 15, 2009. The total consideration paid by the Company was $2.5 million,
with $1.5 million paid at closing and the additional $1.0 million to be earned-out over a period of
three years. The earn-out is based upon the mortgage companys profits and will be paid in annual
installments over the three year period. The measurement date for the earn out payments is December
31. The Company has accounted for the business combination using the acquisition method. The
Companys acquisition of 51% majority ownership interest was measured at fair value based on the
total consideration transferred. As a result of the acquisition, goodwill of approximately $3.7
million was recorded. The Company tested goodwill for impairment during 2010 and recorded an
impairment charge of approximately $32 thousand. Goodwill is not deductible for tax purposes. No
other intangible assets, other than goodwill, were recorded as a result of the business
combination.
The market and income approaches were used to value the business. The total estimated fair value of
the non controlling interest was estimated to be $2.06 million and was based on the following
multiples: 13.27 times trailing twelve months earnings, 29.21% price to trailing twelve months
gross revenues and 436.70% of total shareholders equity.
The agreement allows the Company to penetrate into the Mortgage Brokerage Services market through
our retail outlets and to share in the income on transactions produced from other locations.
Effective July 1, 2009, the Company changed its name to Bank of Commerce Mortgage.
95
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Price and Goodwill
The following table summarizes the purchase and resulting goodwill:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Cash paid at fair value |
|
$ |
1,500 |
|
Earn out payable at fair value |
|
|
965 |
|
|
|
|
|
Total consideration at fair value |
|
|
2,465 |
|
Fair value of non-controlling interest |
|
|
2,062 |
|
|
|
|
|
|
|
$ |
4,527 |
|
|
|
|
|
|
Net acquisition date fair value of assets acquired |
|
$ |
(800 |
) |
|
|
|
|
|
|
Goodwill at date of acquisition |
|
$ |
3,727 |
|
|
Total consideration paid in the acquisition consisted of $1.5 million in cash and $965
thousand in contingent consideration measured at fair value. Goodwill totaling $3.7 million is not
being amortized for book purposes under current accounting guidelines. Goodwill is not deductible
for tax purposes. No other intangible assets, other than goodwill, were recorded as a result of the
business combination.
The following balance sheet summarizes the amount assigned for each major asset category of
Simonich Corporation, d.b.a. BWC Mortgage Services, at the date of acquisition, May 15, 2009. The
carrying amount of the acquired assets and liabilities approximated fair value. Accordingly, no
fair value adjustments to the acquired assets and liabilities were recorded.
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,765 |
|
Accounts receivable |
|
|
10 |
|
Other receivables |
|
|
437 |
|
Loans held for sale |
|
|
12,006 |
|
Prepaid expenses |
|
|
57 |
|
Notes receivable |
|
|
414 |
|
|
|
|
|
Total Current Assets: |
|
|
14,689 |
|
Fixed assets |
|
|
155 |
|
Other assets |
|
|
13 |
|
|
|
|
|
TOTAL ASSETS |
|
$ |
14,857 |
|
|
|
|
|
Accounts payable |
|
$ |
99 |
|
Accrued expenses |
|
|
232 |
|
Branch payables |
|
|
191 |
|
|
|
|
|
Total Payables: |
|
|
522 |
|
Current portion capital lease |
|
|
39 |
|
Impounds payable |
|
|
67 |
|
Mortgage warehouse lines of credit |
|
|
11,810 |
|
|
|
|
|
Total Other Current Liabilities: |
|
|
11,916 |
|
Total Current Liabilities: |
|
|
12,438 |
|
Long term capital lease payable |
|
|
15 |
|
Due to shareholder |
|
|
224 |
|
Notes payable |
|
|
1,380 |
|
|
|
|
|
Total Long Term Liabilities: |
|
|
1,619 |
|
TOTAL LIABILITIES |
|
$ |
14,057 |
|
|
|
|
|
Net assets |
|
$ |
800 |
|
|
|
|
|
96
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revenue and net earnings of Bank of Commerce Mortgage from the acquisition date through
December 31, 2009, included in the consolidated statements of income, totaled $5.3 million and $0.5
million, respectively.
The following unaudited pro forma consolidated results of operations for the years ended December
31, 2009 and 2008 have been prepared as if the acquisition had occurred at January 1, 2009 and
2008, respectively, for each year (unaudited):
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
Net interest income |
|
$ |
28,965 |
|
|
$ |
21,283 |
|
Provision for loan and lease losses |
|
|
9,475 |
|
|
|
6,520 |
|
Noninterest income |
|
|
12,776 |
|
|
|
7,523 |
|
Noninterest expense |
|
|
22,863 |
|
|
|
20,030 |
|
|
|
|
|
|
|
|
Income before income tax |
|
|
9,403 |
|
|
|
2,256 |
|
Provision (benefit) for income tax |
|
|
2,691 |
|
|
|
60 |
|
|
|
|
|
|
|
|
Net Income |
|
|
6,712 |
|
|
|
2,196 |
|
Less: income attributable to non-controlling interest |
|
|
481 |
|
|
|
(58 |
) |
|
|
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
6,231 |
|
|
$ |
2,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.60 |
|
|
$ |
0.26 |
|
Net income per common share diluted |
|
$ |
0.60 |
|
|
$ |
0.25 |
|
|
NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank maintains compensating balances with its primary correspondent, which totaled $250,000, at
December 31, 2010, and $0 at December 31, 2009. The Company did not maintain any unguaranteed
balances at correspondent banks as of December 31, 2010 and 2009.
NOTE 5. SECURITIES
The amortized cost and estimated fair value of securities available for sale are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
U.S. Treasury and agencies |
|
$ |
26,814 |
|
|
$ |
6 |
|
|
$ |
(489 |
) |
|
$ |
26,331 |
|
Obligations of state and
political subdivisions |
|
|
67,004 |
|
|
|
82 |
|
|
|
(2,935 |
) |
|
|
64,151 |
|
Residential mortgage backed
securities and
collateralized mortgage
obligations |
|
|
65,052 |
|
|
|
446 |
|
|
|
(251 |
) |
|
|
65,247 |
|
Corporate securities |
|
|
29,019 |
|
|
|
28 |
|
|
|
(90 |
) |
|
|
28,957 |
|
Other asset backed securities |
|
|
4,569 |
|
|
|
|
|
|
|
(20 |
) |
|
|
4,549 |
|
|
Total |
|
$ |
192,458 |
|
|
$ |
562 |
|
|
$ |
(3,785 |
) |
|
$ |
189,235 |
|
|
97
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
Available for sale securities |
|
Amortized Costs |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
U.S.- Treasury and agencies |
|
$ |
18,500 |
|
|
$ |
101 |
|
|
$ |
|
|
|
$ |
18,601 |
|
Obligations of state and
political subdivisions |
|
|
32,184 |
|
|
|
547 |
|
|
|
(85 |
) |
|
|
32,646 |
|
Residential mortgage backed
securities and
collateralized mortgage
obligations |
|
|
28,278 |
|
|
|
869 |
|
|
|
(332 |
) |
|
|
28,815 |
|
|
Total |
|
$ |
78,962 |
|
|
$ |
1,517 |
|
|
$ |
(417 |
) |
|
$ |
80,062 |
|
|
The table below presents the maturities of investment securities at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Available for Sale |
(Dollars in thousands) |
|
Amortized Cost |
|
|
Fair Value |
|
|
AMOUNTS MATURING IN: |
|
|
|
|
|
|
|
|
One year or less |
|
$ |
7,963 |
|
|
$ |
8,092 |
|
One year through five years |
|
|
57,813 |
|
|
|
57,708 |
|
Five years through ten years |
|
|
51,473 |
|
|
|
51,006 |
|
After ten years |
|
|
75,209 |
|
|
|
72,429 |
|
|
|
|
$ |
192,458 |
|
|
$ |
189,235 |
|
|
The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed
securities are presented by their expected average life, rather than contractual maturity, in the
preceding table. Expected maturities may differ from contractual.
As of December 31, 2010, the Company held $101.2 million in securities with safekeeping
institutions for pledging purposes. Of this amount, $31.5 million are currently pledged for
treasury, tax and loan accounts; public funds collateral; collateralized repurchase agreements;
Federal Home Loan Bank borrowings and interest rate swap contracts.
As of December 31, 2009, the Company held $55.7 million in securities with safekeeping institutions
for pledging purposes. Of this amount, $35.5 million were pledged for treasury, tax and loan
accounts; public funds collateral; collateralized repurchase agreements; Federal Home Loan Bank
borrowings and interest rate swap contracts.
Gross realized gains and gross realized losses, respectively, on available-for-sale securities were
approximately $2.0 million and $12 thousand in 2010, $2.7 million and $260 thousand in 2009, and
$633 thousand and $5 thousand 2008.
Other-Than-Temporarily Impaired Debt Securities
For each security in an unrealized loss position, we assess whether we intend to sell the security,
or it is more likely than not that we will be required to sell the security before recovery of its
amortized cost basis less any current-period credit losses.
98
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For debt securities that are considered other-than-temporarily impaired and that we do not
intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we
separate the amount of the impairment into the amount that is credit related (credit loss
component) and the amount due to all other factors. The credit loss component is recognized in
earnings and the amount due to factors not credit related is recognized in other comprehensive
income.
We do not have the intent to sell the securities that are temporarily impaired, and it is more
likely than not that we will not have to sell those securities before recovery of the cost basis.
Additionally, we have evaluated the credit ratings of our investment securities and their issuers
and/or insurers, if applicable. Based on our evaluation, Management has determined that no
investment security in our investment portfolio is other-than-temporarily impaired.
The following tables present the current fair value and associated unrealized losses on investments
with unrealized losses at December 31, 2010 and December 31, 2009. The tables also illustrate
whether these securities have had unrealized losses for less than 12 months or for 12 months or
longer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(Dollars in thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
U.S. government and
agencies |
|
$ |
18,829 |
|
|
$ |
(489 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
18,829 |
|
|
$ |
(489 |
) |
Obligations of state and
political subdivisions |
|
|
52,414 |
|
|
|
(2,935 |
) |
|
|
|
|
|
|
|
|
|
|
52,414 |
|
|
|
(2,935 |
) |
Residential mortgage
backed securities and
collateralized mortgage
obligations |
|
|
26,477 |
|
|
|
(251 |
) |
|
|
|
|
|
|
|
|
|
|
26,477 |
|
|
|
(251 |
) |
Corporate securities |
|
|
14,494 |
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
14,494 |
|
|
|
(90 |
) |
Other asset backed
securities |
|
|
4,549 |
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
4,549 |
|
|
|
(20 |
) |
|
Total temporarily
impaired securities |
|
$ |
116,763 |
|
|
$ |
(3,785 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
116,763 |
|
|
$ |
(3,785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(Dollars in thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
U.S. government and
agencies |
|
$ |
3,994 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,994 |
|
|
$ |
(1 |
) |
Obligations of state and
political subdivisions |
|
|
8,517 |
|
|
|
(84 |
) |
|
|
500 |
|
|
|
(1 |
) |
|
|
9,017 |
|
|
|
(85 |
) |
Residential mortgage
backed securities and
collateralized mortgage
obligations |
|
|
7,516 |
|
|
|
(331 |
) |
|
|
|
|
|
|
|
|
|
|
7,516 |
|
|
|
(331 |
) |
Corporate securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other asset backed
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
impaired securities |
|
$ |
20,027 |
|
|
$ |
(416 |
) |
|
$ |
500 |
|
|
$ |
(1 |
) |
|
$ |
20,527 |
|
|
$ |
(417 |
) |
|
At December 31, 2010 and 2009, 159 and 19 securities, respectively were in an unrealized loss
position.
99
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unrealized losses associated with debt securities of U.S. government agencies are
primarily driven by changes in interest rates and not due to the credit quality of the securities.
Further, securities backed by GNMA, FNMA, or FHLMC have the explicit guarantee of the full faith
and credit of the U.S. Federal Government. Obligations of U.S. states and political subdivisions in
our portfolio are all investment grade without delinquency history. These securities will continue
to be monitored as part of our ongoing impairment analysis, but are expected to perform. As a
result, we concluded that these securities were not other-than-temporarily impaired at December 31,
2010.
The unrealized losses associated with corporate securities, asset backed securities and CMOs are
primarily related to securities backed by residential mortgages. All of these securities were above
investment grade at December 31, 2010 and 2009, as rated by at least one major rating agency. We
estimate loss projections for each security by assessing loans collateralizing the security and
determining expected default rates and loss severities. Based upon our assessment of expected
credit losses of each security given the performance of the underlying collateral and credit
enhancements where applicable, we concluded that these securities were not other-than-temporarily
impaired at December 31, 2010.
NOTE 6. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Outstanding loan balances consist of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
2010 |
|
|
2009 |
|
Commercial and industrial loans |
|
$ |
133,199 |
|
|
$ |
133,080 |
|
Real estate construction loans |
|
|
41,327 |
|
|
|
59,524 |
|
Real estate commercial (investor) |
|
|
194,285 |
|
|
|
197,023 |
|
Real estate commercial (owner occupied) |
|
|
68,055 |
|
|
|
63,001 |
|
Real estate ITIN loans |
|
|
70,585 |
|
|
|
78,250 |
|
Real estate mortgage |
|
|
19,299 |
|
|
|
20,525 |
|
Real estate equity lines |
|
|
69,590 |
|
|
|
45,601 |
|
Installment loans |
|
|
2,303 |
|
|
|
2,223 |
|
Other |
|
|
2,153 |
|
|
|
2,212 |
|
|
|
|
|
|
|
|
|
|
$ |
600,796 |
|
|
|
601,439 |
|
Less: |
|
|
|
|
|
|
|
|
Deferred loan fees, net |
|
|
90 |
|
|
|
209 |
|
Allowance for loan and lease losses |
|
|
12,841 |
|
|
|
11,207 |
|
|
|
|
$ |
587,865 |
|
|
$ |
590,023 |
|
|
100
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Age analysis of past due loans, segregated by class of loans, as of December 31, 2010 and 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded |
|
|
|
|
|
|
60-89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
30-59 |
|
Days |
|
Greater |
|
|
|
|
|
|
|
|
|
|
|
|
|
> 90 Days |
|
|
Days |
|
Past |
|
Than 90 |
|
Total |
|
|
|
|
|
|
|
|
|
and |
|
|
Past Due |
|
Due |
|
Days |
|
Past Due |
|
Current |
|
Total |
|
Accruing |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
1,625 |
|
|
$ |
|
|
|
$ |
677 |
|
|
$ |
2,302 |
|
|
$ |
130,897 |
|
|
$ |
133,199 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
342 |
|
|
|
40,985 |
|
|
|
41,327 |
|
|
|
|
|
Other |
|
|
5,168 |
|
|
|
|
|
|
|
2,520 |
|
|
|
7,688 |
|
|
|
254,652 |
|
|
|
262,340 |
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
7,857 |
|
|
|
2,404 |
|
|
|
6,720 |
|
|
|
16,981 |
|
|
|
72,903 |
|
|
|
89,884 |
|
|
|
|
|
Home equities |
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
450 |
|
|
|
69,140 |
|
|
|
69,590 |
|
|
|
|
|
Consumer |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
4,437 |
|
|
|
4,456 |
|
|
|
|
|
|
Total |
|
$ |
15,461 |
|
|
$ |
2,404 |
|
|
$ |
9,917 |
|
|
$ |
27,782 |
|
|
$ |
573,014 |
|
|
$ |
600,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
237 |
|
|
$ |
|
|
|
$ |
5 |
|
|
$ |
242 |
|
|
$ |
132,836 |
|
|
$ |
133,080 |
|
|
$ |
5 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
719 |
|
|
|
|
|
|
|
130 |
|
|
|
849 |
|
|
|
58,675 |
|
|
|
59,524 |
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
5,759 |
|
|
|
5,759 |
|
|
|
254,265 |
|
|
|
260,024 |
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
4,236 |
|
|
|
2,221 |
|
|
|
5,047 |
|
|
|
11,504 |
|
|
|
87,272 |
|
|
|
98,775 |
|
|
|
5,047 |
|
Home equities |
|
|
102 |
|
|
|
104 |
|
|
|
97 |
|
|
|
303 |
|
|
|
45,298 |
|
|
|
45,601 |
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,436 |
|
|
|
4,435 |
|
|
|
|
|
|
Total |
|
$ |
5,294 |
|
|
$ |
2,325 |
|
|
$ |
11,038 |
|
|
$ |
18,657 |
|
|
$ |
582,782 |
|
|
$ |
601,439 |
|
|
$ |
5,052 |
|
|
The Companys practice is to place an asset on nonaccrual status when one of the following
events occur: (1) any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well-secured and in the process of collection), (2) management
determines the ultimate collection of principal or interest to be unlikely or, (3) the terms of the
loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, 90 days past due and still accruing, or have been
restructured. Accruals are resumed on loans only when they are brought fully current with respect
to interest and principal and when the loan is estimated to be fully collectible. Restructured
loans are those loans on which concessions in terms have been granted because of the borrowers
financial or legal difficulties. Interest is generally accrued on such loans in accordance with
the new terms, after a period of sustained performance by the borrower.
One exception to the 90 days past due policy for nonaccruals is the Companys pool of home equity
loans and lines purchased from a private equity firm. The purchase of this pool of loans included
a put option allowing the bank to sell a portion of the loan pool back to the private equity firm
in the event of default by the borrower. At 90 days past due a loan in this pool will be sold
back to the private equity firm for the outstanding principal balance, unless a workout plan has
been put in place with the borrower. Once this put reserve is exhausted, the bank will charge off
any loans that go more than 90 days past due.
101
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes that charging the loan off at the time it becomes impaired would be more
conservative than placing it in nonaccrual status.
As of December 31, 2010 the bank had a put reserve balance of $1.2 million remaining on the
portfolio of home equity loans and lines purchased from the private equity firm totaling $18.1
million.
It is the Companys policy to apply all payments received on all loans on nonaccrual status to
principal until such time the loan is reclassified to accrual status. It is our policy to resume
the accrual of interest on any loan on nonaccrual status when, at a minimum, six consecutive
payments of the original or modified contractual terms has occurred, and it is more likely than not
that contractual or modified payment amounts will continue into the foreseeable future. Had
nonaccrual loans performed in accordance with their contractual terms, the Company would have
recognized additional interest income, net of tax, of approximately $501 thousand in 2010, $319
thousand in 2009, and $147 thousand in 2008.
Year-end nonaccrual loans, segregated by class of loans, were as follows: |
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Commercial |
|
$ |
2,302 |
|
|
$ |
237 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
342 |
|
|
|
849 |
|
Other |
|
|
7,066 |
|
|
|
5,759 |
|
Residential: |
|
|
|
|
|
|
|
|
1-4 family |
|
|
10,704 |
|
|
|
623 |
|
Home equities |
|
|
97 |
|
|
|
199 |
|
Consumer |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,511 |
|
|
$ |
7,667 |
|
|
The Company considers and defines a loan as impaired when, based on current information and
events, it is probable that the Company will be unable to collect all interest and principal
payments due according to the contractual terms of the loan agreement. Management assesses all
loans, either individually or in aggregate (homogenous retail credits), that meet the Companys
definition of impairment. Management classifies all troubled debt restructures as impaired.
The Company generally applies all cash payments received on impaired loans towards the reduction of
outstanding principal. It is the Companys policy to recognize interest income on only those
impaired loans that are also classified as troubled debt restructurings (TDRs); the following
criteria is also applied on a loan-by-loan basis:
|
|
|
An impairment assessment has been completed on the TDR loan, as prescribed by ASC 310,
and no impairment has been identified, |
|
|
|
|
the borrower has not been delinquent 90 or more days prior to the loan modification
date, and |
|
|
|
|
it is more likely than not that the modified payment amounts will continue into the
foreseeable future. |
102
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the circumstances when a TDR loan is delinquent 90 or more days at the date of the
modification, it is the Companys policy to maintain the loan on nonaccrual status and apply all
cash payments received to principal until such time the TDR borrower has made a minimum six
consecutive payments in conformance with the modified contractual terms, and it is more likely than
not that the borrowers modified payment amounts will continue into the foreseeable future.
Year-end impaired loans are set forth in the following table. No interest income was recognized on
impaired loans subsequent to their classification as impaired, other than performing TDRs as noted
in the previous paragraph.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2010 |
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
Recorded |
|
|
Principal |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
120 |
|
|
$ |
120 |
|
|
$ |
|
|
|
$ |
445 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
718 |
|
|
|
947 |
|
|
|
|
|
|
|
2,002 |
|
|
|
2 |
|
Other |
|
|
9,527 |
|
|
|
12,421 |
|
|
|
|
|
|
|
9,942 |
|
|
|
10 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
8,067 |
|
|
|
9,745 |
|
|
|
|
|
|
|
8,393 |
|
|
|
78 |
|
Home equities |
|
|
97 |
|
|
|
105 |
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
$ |
18,529 |
|
|
$ |
23,338 |
|
|
$ |
|
|
|
$ |
21,018 |
|
|
$ |
90 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,182 |
|
|
$ |
9,372 |
|
|
$ |
449 |
|
|
$ |
2,532 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,428 |
|
|
|
3,347 |
|
|
|
139 |
|
|
|
2,374 |
|
|
|
74 |
|
Other |
|
|
1,160 |
|
|
|
3,022 |
|
|
|
111 |
|
|
|
923 |
|
|
|
27 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
8,716 |
|
|
|
9,298 |
|
|
|
599 |
|
|
|
4,562 |
|
|
|
30 |
|
Home equities |
|
|
901 |
|
|
|
901 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
$ |
15,387 |
|
|
$ |
25,940 |
|
|
$ |
1,388 |
|
|
$ |
10,391 |
|
|
$ |
131 |
|
Subtotal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,302 |
|
|
$ |
9,492 |
|
|
$ |
449 |
|
|
$ |
2,977 |
|
|
$ |
|
|
Commercial real estate |
|
$ |
13,833 |
|
|
$ |
19,737 |
|
|
$ |
250 |
|
|
$ |
15,241 |
|
|
$ |
113 |
|
Residential |
|
$ |
17,781 |
|
|
$ |
20,049 |
|
|
$ |
689 |
|
|
$ |
13,191 |
|
|
$ |
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,916 |
|
|
$ |
49,278 |
|
|
$ |
1,388 |
|
|
$ |
31,409 |
|
|
$ |
221 |
|
|
103
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
Recorded |
|
|
Principal |
|
|
Related |
|
|
Recorded |
|
|
Income |
|
|
|
Investment |
|
|
Balance |
|
|
Allowance |
|
|
Investment |
|
|
Recognized |
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
111 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
672 |
|
|
|
4,576 |
|
|
|
|
|
|
|
5,483 |
|
|
|
|
|
Other |
|
|
8,740 |
|
|
|
9,172 |
|
|
|
|
|
|
|
5,273 |
|
|
|
2 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
623 |
|
|
|
1,087 |
|
|
|
|
|
|
|
1,143 |
|
|
|
|
|
Home equities |
|
|
199 |
|
|
|
206 |
|
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
$ |
10,234 |
|
|
$ |
15,041 |
|
|
$ |
|
|
|
$ |
12,160 |
|
|
$ |
2 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
237 |
|
|
$ |
243 |
|
|
$ |
130 |
|
|
$ |
269 |
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
2,396 |
|
|
|
2,399 |
|
|
|
45 |
|
|
|
1,154 |
|
|
|
|
|
Other |
|
|
530 |
|
|
|
530 |
|
|
|
70 |
|
|
|
132 |
|
|
|
2 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
$ |
3,163 |
|
|
$ |
3,172 |
|
|
$ |
245 |
|
|
$ |
1,555 |
|
|
$ |
2 |
|
Subtotal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
237 |
|
|
$ |
243 |
|
|
$ |
130 |
|
|
$ |
380 |
|
|
$ |
|
|
Commercial real estate |
|
$ |
12,338 |
|
|
$ |
16,677 |
|
|
$ |
115 |
|
|
$ |
12,042 |
|
|
$ |
4 |
|
Residential |
|
$ |
822 |
|
|
$ |
1,293 |
|
|
$ |
|
|
|
$ |
1,293 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,397 |
|
|
$ |
18,213 |
|
|
$ |
245 |
|
|
$ |
13,715 |
|
|
$ |
4 |
|
|
The tables below provide information regarding the number of loans where the contractual terms
have been restructured in a manner which grants a concession to a borrower experiencing financial
difficulties during 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
|
|
|
|
Pre-Modification |
|
Post-Modification |
|
|
|
|
|
|
Outstanding Recorded |
|
Outstanding Recorded |
Troubled Debt Restructurings |
|
Number of Contracts |
|
Investment |
|
Investment |
|
Commercial |
|
|
2 |
|
|
$ |
3,562 |
|
|
$ |
3,562 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
5 |
|
|
|
931 |
|
|
|
931 |
|
Other |
|
|
9 |
|
|
|
5,994 |
|
|
|
5,994 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
69 |
|
|
|
9,379 |
|
|
|
9,379 |
|
Home equities |
|
|
4 |
|
|
|
215 |
|
|
|
215 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
89 |
|
|
$ |
20,081 |
|
|
$ |
20,081 |
|
|
104
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
|
|
|
|
Pre-Modification |
|
Post-Modification |
|
|
|
|
|
|
Outstanding Recorded |
|
Outstanding Recorded |
Troubled Debt Restructurings |
|
Number of Contracts |
|
Investment |
|
Investment |
|
Commercial |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
4 |
|
|
|
12,159 |
|
|
|
12,159 |
|
Other |
|
|
4 |
|
|
|
8,319 |
|
|
|
8,319 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
|
|
|
|
|
|
|
|
|
|
Home equities |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8 |
|
|
$ |
20,478 |
|
|
$ |
20,478 |
|
|
The following summarizes, as of December 31, 2010, the key modification features and
concessions granted related to troubled debt restructuring:
|
|
|
Residential Mortgages (1-4 Family) With the exception of two loans, the concession
granted was an interest rate reduction for a period of up to 5 years. The two exception
loans also included an extended maturity of 10 years in conjunction with an interest rate
reduction. |
|
|
|
|
Commercial RE The concessions granted on the twenty loans was an interest rate
reduction in combination with an interest-only period of up to 3 years. |
|
|
|
|
Commercial and Industrial Loans The concessions granted on the twenty loans was an
interest rate reduction in combination with an interest-only period of up to 3 years. |
It is the Companys accounting policy to require a period of sustained performance (minimum of six
monthly payments) on the restructured terms before returning any modified loan back to accrual
status.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
Troubled Debt Restructurings |
|
|
|
|
That Subsequently Defaulted |
|
Number of Contracts |
|
Recorded Investment |
|
Commercial |
|
|
|
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
1-4 family |
|
|
10 |
|
|
|
811 |
|
Home equities |
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
Total |
|
|
10 |
|
|
$ |
811 |
|
|
105
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
Troubled Debt Restructurings |
|
|
|
|
That Subsequently Defaulted |
|
Number of Contracts |
|
Recorded Investment |
|
Commercial |
|
|
|
|
|
$ |
|
|
Commercial real estate: |
|
|
|
|
|
|
|
|
Construction |
|
|
3 |
|
|
|
4,346 |
|
Other |
|
|
3 |
|
|
|
7,790 |
|
Residential: |
|
|
|
|
|
|
|
|
1-4 family |
|
|
|
|
|
|
|
|
Home equities |
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
Total |
|
|
6 |
|
|
$ |
12,136 |
|
|
The foundation or primary factor in determining the appropriate credit quality indicators is
the degree of a debtors willingness and ability to perform as agreed. The Company defines a
performing loan as a loan where any installment of principal or interest is not 90 days or more
past due, and management believes the ultimate collection of principal and interest to be likely.
The Company defines a nonperforming loan as an impaired loan which may be on nonaccrual, is 90 days
past due and still accruing, or has been restructured and is not in compliance with its modified
terms.
Year-end performing and nonperforming loans, segregated by class of loans, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
Performing |
|
Nonperforming |
|
Total |
|
Commercial |
|
$ |
130,897 |
|
|
$ |
2,302 |
|
|
$ |
133,199 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
40,985 |
|
|
|
342 |
|
|
|
41,327 |
|
Other |
|
|
255,274 |
|
|
|
7,066 |
|
|
|
262,340 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
79,180 |
|
|
|
10,704 |
|
|
|
89,884 |
|
Home equities |
|
|
69,493 |
|
|
|
97 |
|
|
|
69,590 |
|
Consumer |
|
|
4,456 |
|
|
|
|
|
|
|
4,456 |
|
|
Total |
|
$ |
580,285 |
|
|
$ |
20,511 |
|
|
$ |
600,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
Performing |
|
Nonperforming |
|
Total |
|
Commercial |
|
$ |
132,838 |
|
|
$ |
242 |
|
|
$ |
133,080 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
58,675 |
|
|
|
849 |
|
|
|
59,524 |
|
Other |
|
|
254,265 |
|
|
|
5,759 |
|
|
|
260,024 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
93,105 |
|
|
|
5,670 |
|
|
|
98,775 |
|
Home equities |
|
|
45,402 |
|
|
|
199 |
|
|
|
45,601 |
|
Consumer |
|
|
4,435 |
|
|
|
|
|
|
|
4,435 |
|
|
Total |
|
$ |
588,720 |
|
|
$ |
12,719 |
|
|
$ |
601,439 |
|
|
106
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with evaluating the performing versus nonperforming nature of the Companys
loan portfolio, management evaluates the following credit risk and other relevant factors in
determining the appropriate credit quality indicator (grade) for each loan class:
Pass Grade Borrowers classified as Pass Grades specifically demonstrate:
|
|
|
Strong cashflows borrowers cashflows must meet or exceed the Companys minimum
Debt Service Coverage Ratio. |
|
|
|
Collateral margin generally, the borrower must have pledged an acceptable collateral
class with an adequate collateral margin. |
Those borrowers who qualify for unsecured loans must fully demonstrate above average cashflows and
strong secondary sources of repayment to mitigate the lack of unpledged collateral.
|
|
|
Qualitative Factors in addition to meeting the Companys minimum cashflow and
collateral requirements, a number of other quantitative and qualitative factors are also
factored into assigning a pass grade including the borrowers level of leverage (Debt to
Equity), prospects, history and experience in their industry, credit history, and any
other relevant factors including a borrowers character. |
Watch Grade Generally, borrowers classified as Watch exhibit some level of deterioration in one
or more of the following:
|
|
|
Adequate Cashflows borrowers in this category demonstrate adequate cashflows and
Debt Service Coverage Ratios, but also exhibit one or more less than positive conditions
such as declining trends in the level of cashflows, increasing or sole reliance on
secondary sources of cashflows, and/or do not meet the Companys minimum Debt Service
Coverage Ratio. However, cashflow remains at acceptable levels to meet debt service
requirements. |
|
|
|
Adequate Collateral Margin the collateral securing the debt remains adequate but
also exhibits a declining trend in value or expected volatility due to macro or industry
specific conditions. The current collateral value, less selling costs, remains adequate to
cover the outstanding debt under a liquidation scenario. |
|
|
|
Qualitative Factors while the borrowers cashflow and collateral margin generally
remain adequate, one or more quantitative and qualitative factors may also factor into
assigning a Watch Grade including the borrowers level of leverage (Debt to Equity),
deterioration in prospects, limited experience in their industry, newly formed company,
overall deterioration in the industry, negative trends or recent events in a borrowers
credit history, deviation from core business, and any other relevant factors. |
Special Mention Grade Generally, borrowers classified as Special Mention exhibit a greater level
of deterioration than Watch graded loans and warrant managements close attention. If left
uncorrected, the potential weaknesses could threaten repayment prospects in the future. Special
Mention loans are not adversely classified and do not expose the Company to sufficient risk to
warrant an adverse risk grade.
107
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following represents potential characteristics of a Special Mention Grade but do not
necessarily generate automatic reclassification into this loan grade:
|
|
|
Adequate Cashflows borrowers in this category demonstrate adequate cashflows and
Debt Service Coverage Ratios, but also reflect adverse trends in operations or continuing
financial deterioration that, if does not stabilize and reverse in a reasonable timeframe,
retirement of the debt may be jeopardized. |
|
|
|
Adequate Collateral Margin the collateral securing the debt remains adequate but
also exhibits a continuing declining trend in value or volatility due to macro or industry
specific conditions. The current collateral value, less selling costs, remains adequate,
but should the negative collateral trend continue, the full recovery of the outstanding
debt under a liquidation scenario could be jeopardized. |
|
|
|
Qualitative Factors while the borrowers cashflow and/or collateral margin continue
to deteriorate but generally remain adequate, one or more quantitative and qualitative
factors may also be factoring into assigning a Special Mention Grade including inadequate
or incomplete loan documentation, perfection of collateral, inadequate credit structure,
borrower unable or unwilling to produce current and adequate financial information, and
any other relevant factors. |
Substandard Grade A Substandard credit is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have
a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the
debt. Substandard credits are characterized by the distinct possibility that the Company will
sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to
be recognizable in an individual credit for it to be considered a substandard credit. As such,
substandard credits may or may not be classified as impaired.
The following represents, but is not limited to, the potential characteristics of a Substandard
Grade and do not necessarily generate automatic reclassification into this loan grade:
|
|
|
Sustained or substantial deteriorating financial trends |
|
|
|
Unresolved management problems |
|
|
|
Collateral is insufficient to repay debt; collateral is not sufficiently supported by
independent sources, such as asset-based financial audits, appraisals, or equipment
evaluations |
|
|
|
Improper perfection of lien position, which is not readily correctable |
|
|
|
Unanticipated and severe decline in market values |
|
|
|
High reliance on secondary source of repayment |
108
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Legal proceedings, such as bankruptcy or a divorce, which has substantially
decreased the borrowers capacity to repay the debt |
|
|
|
Fraud committed by the borrower |
|
|
|
IRS liens that take precedence |
|
|
|
Forfeiture statutes for assets involved in criminal activities |
|
|
|
Protracted repayment terms outside of policy that are for longer than the same type of
credit in the Company portfolio |
|
|
|
Any other relevant quantitative or qualitative factor that negatively affects the
current net worth and paying capacity of the borrower or of the collateral pledged, if
any. |
Doubtful Grade A credit risk rated as Doubtful has all the weaknesses inherent in a credit
classified Substandard with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. As such, all doubtful loans are considered impaired. The possibility
of loss is extremely high, but because of certain pending factors that may work to the advantage
and strengthening of the credit, its classification as an estimated loss is deferred until its more
exact status may be determined. Pending factors may include, but are not limited to:
|
|
|
Acquisition or liquidation procedures |
|
|
|
Perfecting liens on additional collateral |
Generally, a Doubtful grade does not remain outstanding for a period greater than six months. After
six months, the pending events should have either occurred or not occurred. The credit grade should
have improved or the principal balance charged against the allowance for loan and lease losses.
109
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit grade definitions, including qualitative factors, for all credit grades are reviewed
and approved annually by the Companys Loan Committee.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Special |
|
|
|
|
|
|
|
|
Pass |
|
Watch |
|
Mention |
|
Substandard |
|
Doubtful |
|
Total |
|
Commercial |
|
$ |
99,953 |
|
|
$ |
22,458 |
|
|
$ |
2,454 |
|
|
$ |
12,153 |
|
|
$ |
2,181 |
|
|
$ |
133,199 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
26,960 |
|
|
|
8,228 |
|
|
|
44 |
|
|
|
5,995 |
|
|
|
100 |
|
|
|
41,327 |
|
Other |
|
|
221,033 |
|
|
|
29,061 |
|
|
|
1,125 |
|
|
|
8,401 |
|
|
|
2,720 |
|
|
|
262,340 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
58,869 |
|
|
|
|
|
|
|
11,534 |
|
|
|
18,580 |
|
|
|
901 |
|
|
|
89,884 |
|
Home equities |
|
|
59,018 |
|
|
|
4,428 |
|
|
|
1,231 |
|
|
|
4,913 |
|
|
|
|
|
|
|
69,590 |
|
Consumer |
|
|
3,923 |
|
|
|
362 |
|
|
|
73 |
|
|
|
98 |
|
|
|
|
|
|
|
4,456 |
|
|
Total |
|
$ |
463,756 |
|
|
$ |
64,537 |
|
|
$ |
16,461 |
|
|
$ |
50,140 |
|
|
$ |
5,902 |
|
|
$ |
600,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Special |
|
|
|
|
|
|
|
|
Pass |
|
Watch |
|
Mention |
|
Substandard |
|
Doubtful |
|
Total |
|
Commercial |
|
$ |
95,254 |
|
|
$ |
20,296 |
|
|
$ |
1,902 |
|
|
$ |
15,628 |
|
|
$ |
|
|
|
$ |
133,080 |
|
Commercial real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
43,554 |
|
|
|
8,457 |
|
|
|
2,949 |
|
|
|
4,564 |
|
|
|
|
|
|
|
59,524 |
|
Other |
|
|
217,197 |
|
|
|
30,708 |
|
|
|
35 |
|
|
|
12,084 |
|
|
|
|
|
|
|
260,024 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family |
|
|
96,415 |
|
|
|
2,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,775 |
|
Home equities |
|
|
39,294 |
|
|
|
2,051 |
|
|
|
2,886 |
|
|
|
1,370 |
|
|
|
|
|
|
|
45,601 |
|
Consumer |
|
|
4,074 |
|
|
|
250 |
|
|
|
65 |
|
|
|
46 |
|
|
|
|
|
|
|
4,435 |
|
|
Total |
|
$ |
495,788 |
|
|
$ |
64,122 |
|
|
$ |
7,837 |
|
|
$ |
33,692 |
|
|
$ |
|
|
|
$ |
601,439 |
|
|
Allowance for Credit Losses and Recorded Investment in Financing Receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31,2010 |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Residential |
|
Unallocated |
|
Total |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
5,306 |
|
|
$ |
3,535 |
|
|
$ |
35 |
|
|
$ |
2,059 |
|
|
$ |
272 |
|
|
$ |
11,207 |
|
Charge-offs |
|
|
(4,192 |
) |
|
|
(3,391 |
) |
|
|
|
|
|
|
(4,506 |
) |
|
|
|
|
|
|
(12,089 |
) |
Recoveries |
|
|
393 |
|
|
|
154 |
|
|
|
8 |
|
|
|
318 |
|
|
|
|
|
|
|
873 |
|
Provision |
|
|
2,886 |
|
|
|
3,394 |
|
|
|
3 |
|
|
|
6,690 |
|
|
|
(123 |
) |
|
|
12,850 |
|
|
|
|
Ending balance |
|
$ |
4,393 |
|
|
$ |
3,692 |
|
|
$ |
46 |
|
|
$ |
4,561 |
|
|
$ |
149 |
|
|
$ |
12,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually evaluated for
impairment |
|
$ |
449 |
|
|
$ |
250 |
|
|
$ |
|
|
|
$ |
689 |
|
|
$ |
|
|
|
$ |
1,388 |
|
Ending
balance: collectively evaluated for
impairment |
|
$ |
3,944 |
|
|
$ |
3,442 |
|
|
$ |
46 |
|
|
$ |
3,872 |
|
|
$ |
149 |
|
|
$ |
11,453 |
|
Financing receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
133,199 |
|
|
$ |
303,667 |
|
|
$ |
4,456 |
|
|
$ |
159,474 |
|
|
$ |
|
|
|
$ |
600,796 |
|
Ending balance individually
evaluated for impairment |
|
$ |
2,302 |
|
|
$ |
13,833 |
|
|
$ |
|
|
|
$ |
17,781 |
|
|
$ |
|
|
|
$ |
33,916 |
|
Ending balance collectively
evaluated for impairment |
|
$ |
130,897 |
|
|
$ |
289,834 |
|
|
$ |
4,456 |
|
|
$ |
141,693 |
|
|
$ |
|
|
|
$ |
566,880 |
|
110
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
As of December 31, 2009 |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Residential |
|
Unallocated |
|
Total |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
3,249 |
|
|
$ |
4,138 |
|
|
$ |
42 |
|
|
$ |
692 |
|
|
$ |
308 |
|
|
$ |
8,429 |
|
Charge-offs |
|
|
(2,517 |
) |
|
|
(4,268 |
) |
|
|
(3 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
(6,871 |
) |
Recoveries |
|
|
170 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
174 |
|
Provision |
|
|
4,404 |
|
|
|
3,665 |
|
|
|
(8 |
) |
|
|
1,450 |
|
|
|
(36 |
) |
|
|
9,475 |
|
|
|
|
Ending balance |
|
$ |
5,306 |
|
|
$ |
3,535 |
|
|
$ |
35 |
|
|
$ |
2,059 |
|
|
$ |
272 |
|
|
$ |
11,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
evaluated for impairment |
|
$ |
130 |
|
|
$ |
115 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
245 |
|
Ending balance: collectively
evaluated for impairment |
|
$ |
5,176 |
|
|
$ |
3,420 |
|
|
$ |
35 |
|
|
$ |
2,059 |
|
|
$ |
272 |
|
|
$ |
10,962 |
|
Financing receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
133,080 |
|
|
$ |
319,548 |
|
|
$ |
4,435 |
|
|
$ |
144,376 |
|
|
$ |
|
|
|
$ |
601,439 |
|
Ending balance individually
evaluated for impairment |
|
$ |
237 |
|
|
$ |
12,338 |
|
|
$ |
|
|
|
$ |
822 |
|
|
$ |
|
|
|
$ |
13,397 |
|
Ending balance collectively
evaluated for impairment |
|
$ |
132,843 |
|
|
$ |
307,210 |
|
|
$ |
4,435 |
|
|
$ |
143,554 |
|
|
$ |
|
|
|
$ |
588,042 |
|
The allowance for loan and lease losses (ALLL) totaled $12.8 million or 2.14% of total loans
at December 31, 2010, compared to $11.2 million 1.76% at December 31, 2009. The related allowance
allocation for the ITIN portfolio was $2.9 million and $1.2 million at December 31, 2010 and 2009,
respectively.
The Company has lending policies and procedures in place with the objective of optimizing loan
income within an accepted risk tolerance level. Management reviews and approves these policies and
procedures annually. Monitoring and reporting systems supplement the review process with regular
frequency as related to loan production, loan quality, concentrations of credit, potential problem
loans, loan delinquencies, and nonperforming loans.
The following is a brief summary, by loan type, of managements evaluation of the general risk
characteristics and underwriting standards:
Commercial and Industrial (C&I) Loans - C&I loans are underwritten after evaluating the borrowers
financial ability to maintain profitability including future expansion objectives. In addition, the
borrowers qualitative qualities are evaluated, such as management skills and experience, ethical
traits, and overall business acumen. C&I loans are primarily extended based on the cash flows of
the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers
cash flow may deviate from initial projections, and the value of collateral securing these loans
may vary. Most C&I loans are generally secured by the assets being financed and other business
assets such as accounts receivable or inventory. Management may also incorporate a personal
guarantee; however, some short-term loans may be extended on an unsecured basis. Repayment of C&I
loans secured by accounts receivable may be substantially dependent on the ability of the borrower
to collect amounts due from its customers.
111
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Real Estate (CRE) Loans CRE loans are subject to similar underwriting standards
and processes as C&I loans. CRE loans are viewed predominantly as cash flow loans and secondarily,
as loans collateralized by real estate.
Generally, CRE lending involves larger principal amounts with repayment largely dependent on the
successful operation of the property securing the loan or the business conducted on the
collateralized property. CRE loans tend to be more adversely affected by conditions in the real
estate markets or by general economic conditions. The properties securing the Companys CRE
portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce
the Companys exposure to adverse economic events that affect any single industry. Management
monitors and evaluates CRE loans based on occupancy status (investor versus owner-occupied),
collateral, geography, and risk grade criteria.
Generally, CRE loans to developers and builders that are secured by non-owner occupied properties
require the borrower to have had an existing relationship with the Company and a proven record of
success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of
absorption and lease rates, and financial analysis of the developers and property owners.
Construction loans are generally based upon estimates of cost and value associated with the
complete project (as-is value). These estimates may be inaccurate. Construction loans often involve
the disbursement of substantial funds with repayment largely dependent on the success of the
ultimate project. Sources of repayment for these types of loans may be pre-committed permanent
loans from approved long-term lenders, sales of developed property, or an interim loan commitment
from the Company until permanent financing is secured. These loans are closely monitored by on-site
inspections, and are considered to have higher inherent risks than other CRE loans due to their
ultimate repayment being sensitive to interest rate changes, governmental regulation of real
property, general economic conditions, and the availability of long-term financing.
Consumer Loans The Companys consumer loan portfolio is generally limited to home equity loans
with nominal originations in unsecured personal loans and credit cards. The Company is highly
dependent on third-party credit scoring analysis to supplement the internal underwriting process.
To monitor and manage consumer loan risk, policies and procedures are developed and modified, as
needed, jointly by management and staff personnel. This activity, coupled with relatively small
loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend
and outlook reports are reviewed by management on a regular basis. Underwriting standards for home
equity loans are heavily influenced by statutory requirements, which include, but are not limited
to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a
borrower can have at one time, and documentation requirements.
The Company maintains an independent loan review program that reviews and validates the credit risk
program on a periodic basis. Results of these reviews are presented to the Board of Directors Audit
Committee. The loan review process complements and reinforces the risk identification and
assessment decisions made by lenders and credit personnel, as well as the Companys policies and
procedures.
112
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Companys Allowance for Loan and Lease Losses (ALLL) is a reserve established through a
provision for possible loan losses charged to expense. The ALLL represents managements best
estimate of probable losses that have been incurred within the existing portfolio of loans as of
the financial statement date presented.
The Companys ALLL methodology significantly incorporates managements current judgments, and
reflects the reserve amount that is necessary for estimated loan losses and risks inherent in the
loan portfolio in accordance with ASC Topic 450 (Contingencies) and ASC Topic 310 (Receivables).
Managements continuing evaluation of all known relevant quantitative and qualitative internal and
external risk factors provide the foundation for the three major components of the Companys ALLL:
(1) historical valuation allowances established in accordance with ASC 450 for groups of similarly
situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and
based on qualitative credit risk factors; and (3) specific valuation allowances established in
accordance with ASC 310 and based on estimated probable losses on specific impaired loans. All
three components are aggregated and constitute the Companys ALLL; while portions of the allowance
may be allocated to specific credits, the entire allowance is available for any credit that
management deems as loss.
It is the Companys policy to classify a credit as loss with a concurrent charge-off when
management considers the credit uncollectible and of such little value that its continuance as a
bankable asset is not warranted. A loss classification does not mean that the loan has absolutely
no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the
likely credit loss of a valueless asset even though partial recovery may occur in the future.
In accordance with ASC 450, historical valuation allowances are established for loan pools with
similar risk characteristics common to each loan grouping. The Companys loan portfolio is
evaluated by general loan class including commercial, commercial real estate (which includes
construction and other real estate), residential real estate (which includes 1-4 family and home
equity loans), consumer and other loans.
These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all
relevant risk characteristics that are common to these segmented groups of loans. These
characteristics include a significant emphasis on historical losses within each loan group,
inherent risks for each, and specific loan class characteristics such as trends related to
nonaccrual loans, past-due loans, criticized loans, net charge-offs or recoveries, among other
relevant credit risk factors. Management periodically reviews and updates its historical loss
ratios based on net charge-off experience for each loan class. Other credit risk factors are also
reviewed periodically and adjusted as necessary to account for any changes in potential loss
exposure.
General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as
changes in asset quality trends, concentrations of credit or changes in concentrations of credit,
changes in underwriting standards, changes in experience or depth of lending staff or management,
the effectiveness of loan grading and the internal loan review function, and any other relevant
factors. Management evaluates each qualitative component quarterly to determine the associated
risks to the quality of the Companys loan portfolio.
113
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valuation allowances specific to the ITIN and purchased Home Equity Portfolios
ITIN Portfolio During 2010, management increased the general valuation allowance for the
portfolio to 4.05% of the outstanding principal balance, or $2.9 million as of December 31, 2010.
The following factors were considered in determining the reserve:
|
|
|
Increased delinquencies 20% of the portfolio was delinquent 30 days or more as of
12/31/2010. |
|
|
|
Servicer modification efforts were generally extending beyond a typical timeframe |
|
|
|
Mortgage insurance A small number of mortgage insurance claims have been denied and
management has not been able to identify a trend regarding any potential future denials. |
|
|
|
Sale of other real estate owned (OREO) An emerging trend in the lengthening
disposition of ITIN other real estate owned had developed, including the potential for
decreased recoveries and consequently increased net charge-offs. |
|
|
|
Lack of loss guaranty due to settlement. |
In August of 2010, the Company settled and terminated the put reserve provided on the ITIN loan
pool purchase. Subsequent to the settlement of the put reserve, the ITIN portfolio has experienced
approximately $640 thousand in gross charge offs. However, management has estimated that related
recoveries will approximate 90% of amounts charged off. See Note 28 for further discussion
pertaining to the gain on settlement of put reserve.
Home Equity Portfolio On March 12, 2010, the Company completed a loan swap transaction which
included the purchase of a pool of residential mortgage home equity loans with a par value of $22.0
million. As of December 31, 2010, the Companys specific valuation allowance is $758 thousand or
4.25% of the outstanding principal balance. An accompanying $1.5 million put reserve was also
part of the loan swap transaction and represents a credit enhancement. As such, management
considers this put reserve in estimating potential losses in the home equity portfolio.
As of December 31, 2010, the remaining put reserve totaled $1.2 million or 6.57% of the outstanding
principal balance. The put reserve is an irrevocable first loss guarantee from the seller that
provides us the right to put back delinquent home equity loans to the seller that are 90 days or
more delinquent, up to an aggregate amount of $1.5 million. This guarantee is backed by a seller
cash deposit with the Company that is restricted for this sole purpose. The sellers cash deposit
is classified as a deposit liability on the Companys consolidated balance sheet. At the end of
the term of this loss guarantee, the Company is required to return the cash deposit to the seller
to the extent not used to fund losses in the home equity portfolio.
During 2010, home equity loans with an approximate aggregate principal amount of $300 thousand were
returned to the seller under the loss guarantee, reducing the deposit liability to approximately
$1.5 million as of December 31, 2010.
Management employs its best judgment given available and relevant information in determining the
adequacy of the allowance; however, there are a number of factors beyond the Companys control,
including the performance of the loan portfolio, changes in interest rates, economic conditions,
and regulatory views towards loan classifications.
114
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As such, the ultimate adequacy of the allowance may differ significantly from the Companys
estimation.
At December 31, 2010 and 2009, the Company had pledged approximately $267 million and $101 million,
respectively, in loans as available collateral for Federal Home Loan Bank borrowings.
NOTE 7. PREMISES AND EQUIPMENT
The following table presents the major components of premises and equipment at December 31, 2010
and 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
2009 |
|
Land |
|
$ |
1,508 |
|
|
$ |
1,508 |
|
Land improvements |
|
|
189 |
|
|
|
189 |
|
Bank buildings |
|
|
8,383 |
|
|
|
8,318 |
|
Furniture, fixtures and equipment |
|
|
7,061 |
|
|
|
6,767 |
|
Construction in progress |
|
|
2 |
|
|
|
3 |
|
|
|
|
Total premises and equipment |
|
|
17,143 |
|
|
|
16,785 |
|
Less: Accumulated depreciation and amortization |
|
|
(7,446 |
) |
|
|
(6,805 |
) |
|
|
|
Premises and equipment, net |
|
$ |
9,697 |
|
|
$ |
9,980 |
|
|
Depreciation expense, included in net occupancy and equipment expense approximately $959 thousand,
$1.2 million, and $1.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company applies the straight-line method of deprecation to all depreciable assets.
NOTE 8. GOODWILL
As a result of the stock purchase agreement and acquisition of 51% of the capital stock of Simonich
Corporation, d.b.a. BOC Mortgage Services, the Company has recorded goodwill (See Note 2). The
following table summarizes the changes in the Companys goodwill for the years ended December 31,
2010, and 2009. All recorded goodwill is related to the Mortgage Services segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Services |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
(Dollars in thousands) |
|
Gross |
|
|
Impairment |
|
Total |
|
|
Balance, December 31, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net additions |
|
|
3,727 |
|
|
|
|
|
|
|
3,727 |
|
|
|
|
Balance, December 31, 2009 |
|
|
3,727 |
|
|
|
|
|
|
|
3,727 |
|
Impairment |
|
|
|
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
Balance, December 31, 2010 |
|
$ |
3,727 |
|
|
$ |
(32 |
) |
|
$ |
3,695 |
|
|
The Company performs a goodwill impairment analysis on an annual basis as of April 30th.
Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events
or circumstances indicate impairment potentially exists.
115
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A significant amount of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include, among others, a significant decline in our expected cash
flows; a sustained and significant decline in our stock price and market capitalization; a
significant adverse change in legal factors or in the business climate; adverse action or
assessment by regulator; and unanticipated competition.
The goodwill impairment test involves a two-step process. The first step compares the fair value of
a reporting unit to its carrying value. If the reporting units fair value is less than its
carrying value, the Company would be required to proceed to the second step.
In the second step the Company calculates the implied fair value of the reporting units goodwill.
The implied fair value of goodwill is determined in the same manner as goodwill recognized in a
business combination. The estimated fair value of the Company is allocated to all of the Companys
assets and liabilities, based on their relative fair values, including any unrecognized
identifiable intangible assets, as if the Company had been acquired in a business combination and
the estimated fair value of the reporting unit is the price paid to acquire it.
Any excess of the estimated fair value of the Company over the fair value of the reporting units
net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is
greater than the implied fair value of that goodwill, an impairment loss would be recognized as a
charge to earnings in an amount equal to that excess.
The Company performed its annual goodwill impairment analysis of the Mortgage Brokerage Services
operating segment as of April 30, 2010. The Company engaged an independent valuation consultant to
assist in determining whether and to what extent the goodwill asset was impaired.
The results of the Companys and valuation specialists step one impairment test indicated that the
reporting units fair value was less than its carrying value, and therefore the Company performed
step two of the analysis.
In the second step of the goodwill impairment analysis, we calculated the implied fair value of the
reporting units assets and liabilities. There were no unrecognized identifiable intangible assets
associated with the reporting unit. We determined the implied fair value of goodwill pertaining to
the reporting unit was less than the carrying amount of goodwill recorded. In accordance to ASC
350, the carrying amount of goodwill was written down to its implied fair value. Accordingly, the
Company recognized an impairment loss of $32 thousand. There were no further indicators for
impairment as of December 31, 2010.
NOTE 9. OTHER REAL ESTATE OWNED
Other real estate owned represents real estate which the Bank has taken control of in partial or
full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the
fair value less costs to sell, which becomes the propertys new basis. Any write-downs based on the
assets fair value at the date of acquisition are charged to the allowance for loan and lease
losses.
116
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After foreclosure, management periodically performs valuations such that the real estate is
carried at the lower of its new cost basis or fair value, net of estimated costs to sell.
Subsequent valuation adjustments are recognized within net loss on other real estate owned.
Revenue and expenses from operations and subsequent adjustments to the carrying amount of the
property are included in non-interest expense in the Consolidated Statements of Income.
The following table presents the changes in other real estate owned (OREO), net of valuation
allowance, for the years ended December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Balance at beginning of year |
|
$ |
2,880 |
|
|
$ |
2,934 |
|
|
$ |
|
|
Additions to OREO |
|
|
4,559 |
|
|
|
402 |
|
|
|
4,869 |
|
Dispositions of OREO |
|
|
(3,580 |
) |
|
|
(295 |
) |
|
|
(1,200 |
) |
Valuation adjustments in the period |
|
|
(1,571 |
) |
|
|
(161 |
) |
|
|
(735 |
) |
|
|
|
$ |
2,288 |
|
|
$ |
2,880 |
|
|
$ |
2,934 |
|
|
For the year ended December 31, 2010 the Company transferred property from twenty one loans in
the amount of $4,559,002 to OREO, sold nine properties with balances of $3,580,325 for a net loss
of $126,284, recorded $1,570,670 in write downs of OREO in other noninterest expense, and adjusted
the balances through charges to the allowance for loan and lease losses in the amount of $246,181.
The December 31, 2010 OREO balance of $2,287,963 consists of fifteen properties of which thirteen
are secured with 1-4 family residential real estate in the amount of $705,583. The remaining two
properties consist of vacant commercial land in the amount of $1,582,380.
NOTE 10. DERIVATIVES
As part of the Companys risk management strategy, the Company enters into interest rate swap
agreements or other derivatives to mitigate the interest rate risk inherent in certain assets and
liabilities. Presently, the Company does not use derivatives for trading or speculative purposes.
The primary underlying risk exposure of the derivative instruments are the timing and level of
changes in interest rates counter to managements expectations. Furthermore, interest rate swap
agreements involve the risk of dealing with institutional counterparties and their ability to
adhere to contractual terms. The agreements are entered into with counterparties that meet
established credit standards and contain master netting and collateral provisions protecting the
at-risk party. Oversight of the Derivatives and Hedging Program is the responsibility of the
Asset-Liability Committee of the Companys Board of Directors.
Based on adherence to the Companys credit standards and the presence of the netting and collateral
provisions, the Company believes that the credit risk inherent in these contracts was not
significant at December 31, 2010.
117
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash flow hedges
The effective portion of unrealized changes in the fair value of derivatives accounted for as cash
flow hedges are reported in other comprehensive income and subsequently reclassified to earnings
when gains or losses are realized on the hedged item.
Each quarter, the Company assesses the effectiveness of each hedging relationship by comparing the
changes in cash flows of the derivative hedging instrument with the changes in cash flows of the
designated hedged item or transaction. The ineffective portion of changes in the fair value of the
derivatives is recognized directly in earnings.
As of December 31, 2010, the Company held derivatives with a total notional amount of $75.0
million. The total $75.0 million represents interest rate swaps designated as cash flow hedges.
The following table summarizes the notional amount, effective date and maturity dates of the
forward starting interest rate contracts the Company has outstanding with counterparties as of
December 31,2010.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
Notional Amount |
|
Effective Date |
|
Maturity |
|
Forward starting
interest rate swap |
|
$ |
75,000 |
|
|
March 1, 2012 |
|
September 1, 2012 |
Forward starting
interest rate swap |
|
$ |
75,000 |
|
|
September 4, 2012 |
|
September 1, 2013 |
Forward starting
interest rate swap |
|
$ |
75,000 |
|
|
September 3, 2013 |
|
September 1, 2014 |
Forward starting
interest rate swap |
|
$ |
75,000 |
|
|
September 2, 2014 |
|
September 1, 2015 |
Forward starting
interest rate swap |
|
$ |
75,000 |
|
|
September 1, 2015 |
|
March 1, 2017 |
|
The hedge strategy converts the LIBOR based floating rate of interest on certain FHLB advances
to fixed interest rates, thereby protecting the Company from floating interest rate variability.
Pursuant to the interest rate swap agreements, the Company pledged collateral to counterparties in
the form of securities totaling $4.0 million with an amortized cost of $4.0 million and a fair
value of $3.9 million as of December 31, 2010. No collateral was posted from counterparties to the
Company as of December 31, 2010. There is the possibility that the Company may need to post
additional collateral in the future in proportion to potential increases in unrealized loss
positions.
As of December 31, 2010, there were no cash flows exchanged with the counterparties of the interest
rate swap contracts. As such, there was no ineffectiveness. As of December 31, 2010 derivatives
carried a fair value of $2.3 million, of which $1.4 million was recognized as gain in other
comprehensive income. There were no reclassifications into earnings for the period ending December
31, 2010.
118
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the type of derivative and their location on the consolidated
balance sheet and the fair values of such derivatives as of December 31, 2010. The Company did not
carry any derivatives as of December 31, 2009 or December 31, 2008.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
|
|
|
Balance Sheet |
|
December 31, |
|
|
Risk Exposure |
|
Description |
|
Location |
|
2010 |
|
Maturity |
|
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
(22 |
) |
|
September 1, 2012 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
198 |
|
|
September 1, 2013 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
443 |
|
|
September 1, 2014 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
611 |
|
|
September 1, 2015 |
Interest rate contract |
|
Forward starting interest rate swaps |
|
Other assets |
|
$ |
1,111 |
|
|
March 1, 2017 |
|
|
|
|
|
|
|
Total |
|
$ |
2,341 |
|
|
|
|
|
|
Fair values of the derivatives are obtained from a third-party pricing service; see Note 25
for further disclosures pertaining to fair value calculations of derivatives.
On
February 4, 2011, the Boards Asset Liability Committee terminated the Companys forward
starting swap positions and realized $3.0 million in cash from the counterparty, equal to the
carrying amount of the derivative at the date of termination. Concurrent with the termination of
the hedge contract, management removed the cash flow hedge designation.
The Boards Asset Liability Committee terminated the forward starting swaps due to continuing
uncertainty regarding future economic conditions including the corresponding uncertainty on the
timing and extent of future changes in three month Libor rate index.
The $3.0 million in cash received from the counterparty related to the cash flow hedge reflects
gains to be reclassified into earnings. Although the hedge designation was removed, management
believes the forecasted transaction to be probable. Accordingly, the gains will be reclassified
from other comprehensive income to earnings as a credit to interest expense in the same periods
during which the hedged forecasted transaction will affect earnings, as illustrated in the
preceding table.
119
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. OTHER ASSETS
Other assets consist of the following at December 31, 2010, and 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2010 |
|
|
2009 |
|
|
Cash surrender value of bank owned life insurance policies |
|
$ |
9,351 |
|
|
$ |
8,979 |
|
Deferred tax asset, net |
|
|
7,928 |
|
|
|
5,574 |
|
Interest receivable on loans |
|
|
2,319 |
|
|
|
2,428 |
|
Interest receivable on investment securities |
|
|
1,526 |
|
|
|
624 |
|
California affordable housing credits |
|
|
2,108 |
|
|
|
2,289 |
|
Prepaid FDIC deposit insurance assessments |
|
|
2,408 |
|
|
|
3,331 |
|
Interest rate swap fair value |
|
|
2,341 |
|
|
|
|
|
Taxes receivable Bank |
|
|
555 |
|
|
|
490 |
|
Federal Home Loan Bank stock |
|
|
7,943 |
|
|
|
6,110 |
|
Investment in junior subordinated debt payable to subsidiary grantor trust |
|
|
465 |
|
|
|
465 |
|
Prepaid expenses |
|
|
701 |
|
|
|
419 |
|
Other |
|
|
2,457 |
|
|
|
497 |
|
|
|
|
$ |
40,102 |
|
|
$ |
31,206 |
|
|
NOTE 12. DEPOSITS
The following table presents time certificate of deposits equal to or greater than $100,000 and
their associated interest expense as of December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Balance |
|
|
Interest Expense |
|
|
2010 |
|
$ |
233,690 |
|
|
$ |
4,464 |
|
2009 |
|
$ |
250,779 |
|
|
$ |
5,166 |
|
2008 |
|
$ |
168,810 |
|
|
$ |
5,785 |
|
|
The following table presents the scheduled maturities of all time certificates of deposits as of
December 31, 2010:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
Amounts due in: |
|
|
|
|
One year or less |
|
$ |
204,551 |
|
One to three years |
|
|
98,408 |
|
Three to five years |
|
|
8,808 |
|
Over five years |
|
|
|
|
|
Total time deposits |
|
$ |
311,767 |
|
|
120
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. OTHER LIABILITIES
Other liabilities consist of the following at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2010 |
|
|
2009 |
|
|
Deferred compensation retired officers |
|
$ |
692 |
|
|
$ |
818 |
|
Deferred compensation directors fees |
|
|
2,935 |
|
|
|
2,803 |
|
Deferred compensation salary continuation |
|
|
2,023 |
|
|
|
1,596 |
|
Accrued 401(k) match payable |
|
|
62 |
|
|
|
73 |
|
Interest payable |
|
|
388 |
|
|
|
458 |
|
Reserve for off-balance sheet commitments |
|
|
422 |
|
|
|
422 |
|
Interest payable Junior Subordinated Debentures |
|
|
70 |
|
|
|
103 |
|
Dividend payable |
|
|
510 |
|
|
|
523 |
|
Note payable /earn out agreement fair value |
|
|
986 |
|
|
|
965 |
|
Warehouse line of credit |
|
|
4,983 |
|
|
|
|
|
Taxes payable Mortgage Services |
|
|
785 |
|
|
|
89 |
|
Other |
|
|
2,835 |
|
|
|
1,199 |
|
|
|
|
$ |
16,691 |
|
|
$ |
9,049 |
|
|
NOTE 14. WHOLESALE ADVANCES
FHLB Advances The Company had advances from the Federal Home Loan Bank of San Francisco (FHLB)
totaling $141.0 million and $70.0 million as of December 31, 2010, and December 31, 2009
respectively. The Company had two fixed rate advances of $6.0 million and $120.0 million, with
interest payable at maturity and monthly, respectively. In addition, the Company had one floating
rate advance for $15.0 million. The floating rate adjusts quarterly to 3 month LIBOR plus 1 basis
point, with interest payable quarterly.
The following table illustrates the FHLB advances outstanding as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
Advance Amount |
|
|
Interest Rate |
|
|
Maturity |
|
|
|
|
$ |
120,000 |
|
|
|
0.29 |
% |
|
June 6, 2011 |
|
|
|
|
6,000 |
|
|
|
0.26 |
% |
|
June 6, 2011 |
|
|
|
|
15,000 |
|
|
|
0.31 |
% |
|
March 5, 2013 |
|
|
The borrowings are secured by an investment in FHLB stock, commercial real estate loans, and
certain real estate mortgage loans which have been specifically pledged to the FHLB pursuant to
their collateral requirements. In addition, certain securities held in the Banks available for
sale securities portfolio are pledged.
Based upon the level of FHLB advances, the Company was required to hold a $7.9 million investment
in FHLB stock. As of December 31, 2010, the Company has pledged $267.3 million of its commercial
and real estate mortgage loans, and has borrowed $135.0 million against the pledged loans.
121
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010, the Company held $46.7 million in securities with the FHLB for
pledging purposes, and has borrowed $6.0 million against the pledged securities.
At December 31, 2010, the Company had available borrowing lines at the FHLB of $46.6 million and a
federal fund borrowing line at a correspondent bank totaling $10.0 million.
FRB Advances The Company may periodically obtain secured borrowings from the Federal Reserve
Bank of San Francisco (FRB). The Company did not have any FRB borrowings outstanding as of
December 31, 2010, and 2009. The FRBs discount window credit facility is limited to overnight
borrowings. At December 31, 2010 the Company has pledged $72.9 million in commercial and industrial
loans as collateral, and had available borrowing lines at the FRB of $44.5 million.
NOTE 15. PREFERRED STOCK AND WARRANTS
Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement
Standard Terms the Company issued to the United States Department of the Treasury (Treasury
Department) 17,000 shares of Bank of Commerce Holdings Series A Fixed Rate Perpetual Preferred
Stock, without par value (the Series A Preferred Stock), having a liquidation amount per share
equal to $1,000 for a total price of $17 million.
The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five
years and thereafter at a rate of 9% per year. The Company may not redeem the Series A Preferred
Stock during the first three years except with the proceeds from a qualified equity offering.
After three years, the Company may, at our option, redeem the Series A Preferred Stock at par value
plus accrued and unpaid dividends. The Series A Preferred Stock is generally non-voting. Prior to
November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the Treasury
Department has transferred the Series A Preferred Stock to a third party, the consent of the
Treasury Department will be required for the Company to increase our common stock dividend or
repurchase our common stock or other equity or capital securities, other than in connection with
benefit plans consistent with past practice and certain other circumstances specified in the
Securities Purchase Agreement. A consequence of the Series A Preferred Stock purchase includes
certain restrictions on executive compensation that could limit the tax deductibility of
compensation we pay to executive management.
As part of its purchase of the Series A Preferred Stock, the Treasury Department received a
warrant (the Warrant) to purchase 405,405 shares of the Companys common stock at an initial per
share exercise price of $6.29. The Warrant provides for the adjustment of the exercise price and
the number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other assets to holders of
our common stock, and upon certain issuances of our common stock at or below a specified price
relative to the initial exercise price. The Warrant expires ten years from the issuance date.
Pursuant to the Securities Purchase Agreement, the Treasury Department has agreed not to exercise
voting power with respect to any shares of common stock issued upon exercise of the Warrant.
The preferred stock proceeds from the Treasury Department were allocated based upon the relative
fair value of the warrant as compared with the fair value of the preferred stock.
122
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the warrant was determined using a Black-Sholes pricing model incorporating
assumptions including our common stock price, dividend yield, stock price volatility and risk-free
interest rate.
We determined the fair value of the preferred stock based on assumptions regarding the discount
rate (market rate) on the preferred stock which was estimated to be approximately 9.0% at the date
of issuance. The discount on the preferred stock is being accreted to par value over a five-year
term which is the expected life of the preferred stock. The proceeds of $17.0 million were
allocated between the preferred stock and warrant with $16.6 million allocated to preferred stock
and $449,000 allocated to the warrant based on their relative fair value at the time of issuance.
Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1
capital. The Series A Preferred Stock and the Warrant were issued in a private placement exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Upon the request of the Treasury Department at any time, we have agreed to promptly enter into a
deposit arrangement pursuant to which the Series A Preferred Stock may be deposited and depositary
shares (Depositary Shares) may be issued. Neither the Series A Preferred Stock nor the Warrant
will be subject to any contractual restrictions on transfer.
In the Securities Purchase Agreement, the Company agreed that, until such time as the Treasury
Department ceases to own any securities acquired from us pursuant to the Securities Purchase
Agreement, the Company will take all necessary action to ensure that our benefit plans with respect
to our senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization
Act of 2008 (EESA) as implemented by any guidance or regulation under Section 111(b) of EESA that
has been issued and is in effect as of the date of issuance of the Series A Preferred Stock and the
Warrant and not adopt any benefit plans with respect to, or which cover, our senior executive
officers that do not comply with EESA. The applicable executives have consented to the foregoing.
Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the
Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of
the Treasury Department will be required for us to (1) declare or pay any dividend or make any
distribution on our common stock (other than regular quarterly cash dividends of not more than
$0.08 per share of common stock) or (2) redeem, purchase or acquire any shares of the Companys
common stock or other equity or capital securities, other than in connection with benefit plans
consistent with past practice and certain other circumstances specified in the Securities Purchase
Agreement. The Company may opt out by repaying the capital without raising additional capital
subject to consultation with the appropriate Federal regulator.
NOTE 16. JUNIOR SUBORDINATED DEBTENURES
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.
123
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three month London Interbank
Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2010 was 3.60%. The rate increase is
capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the trust notes is
March 18, 2033, and the debt allows for prepayment after five years on the quarterly payment date.
On July 29, 2005, Bank of Commerce Holdings (the Company) participated in a private placement to
an institutional investor of $10 million of fixed rate trust preferred securities (the Trust
Preferred Securities); through a newly formed Delaware trust affiliate, Bank of Commerce Holdings
Trust II (the Trust). The Trust simultaneously issued $310,000 common securities to the Company.
The fixed rate terms expired in September 2010, and have transitioned to floating rate for the
remainder of the term.
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. The
Trust Preferred Securities require quarterly distributions by the Trust to the holder of the Trust
Preferred Securities at a rate that resets quarterly to equal three month LIBOR plus 1.58%. The
interest rate at December 31, 2010 was 1.88%.
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.
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 were used by the Company for general corporate purposes, including funding the
growth of the Companys various financial services. During September 2008, an additional
$1,200,000 in proceeds from the issuance of the trust notes was transferred from the Holding
Company to the Bank as surplus capital.
The Notes were issued pursuant to a Junior Subordinated Indenture (the Indenture), dated July
29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association, as trustee.
Like the Trust Preferred Securities, the Notes bear interest at a floating rate which resets on a
quarterly basis to three 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.
124
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and may be redeemed at the Companys option at any. The
Company may redeem the Notes for their aggregate principal amount, plus accrued interest, if any.
NOTE 17. SEGMENT REPORTING
The Company has two reportable segments: Commercial Banking and Mortgage Brokerage Services. The
Company conducts a general commercial banking business in the counties of El Dorado, Placer,
Shasta, Tehama and Sacramento, California. The principal commercial banking activities include a
full array of deposit accounts and related services and commercial lending for businesses,
professionals and their interests.
Mortgage brokerage services are performed by Bank of Commerce Mortgage subsidiary. Mortgage
brokerage services offers residential real estate loans with fourteen offices in two different
states. Furthermore, the subsidiary is licensed in California, Oregon, Washington, Idaho and
Colorado. Mortgages that are originated are sold, servicing included, in the secondary market or
directly to correspondent financial institutions.
The following tables represent a reconciliation of the Companys reportable segments income and
expenses to the Companys consolidated net income as of December 31, 2010, and 2009. The Company
did not have multiple operating segments in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Year ended December 31, 2010 |
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Net interest income (expense) |
|
$ |
33,886 |
|
|
$ |
(1 |
) |
|
$ |
(440 |
) |
|
$ |
(452 |
) |
|
$ |
32,993 |
|
Provision for loan and lease losses |
|
|
12,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,850 |
|
Total noninterest income |
|
|
5,621 |
|
|
|
13,745 |
|
|
|
|
|
|
|
452 |
|
|
|
19,818 |
|
Total noninterest expense |
|
|
18,117 |
|
|
|
11,640 |
|
|
|
571 |
|
|
|
|
|
|
|
30,328 |
|
|
|
|
Income before provision for income taxes |
|
|
8,540 |
|
|
|
2,104 |
|
|
|
(1,011 |
) |
|
|
|
|
|
|
9,633 |
|
Provision for income taxes |
|
|
2,042 |
|
|
|
1,116 |
|
|
|
1 |
|
|
|
|
|
|
|
3,159 |
|
|
|
|
Net income |
|
|
6,498 |
|
|
|
988 |
|
|
|
(1,012 |
) |
|
|
|
|
|
|
6,474 |
|
Less: net income attributable to non-controlling interest |
|
|
|
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
|
254 |
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
6,498 |
|
|
$ |
734 |
|
|
$ |
(1,012 |
) |
|
$ |
|
|
|
$ |
6,220 |
|
|
125
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Year ended December 31, 2009 |
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Net interest income (expense) |
|
$ |
29,552 |
|
|
$ |
(13 |
) |
|
$ |
(545 |
) |
|
$ |
|
|
|
$ |
28,994 |
|
Provision for loan and lease losses |
|
|
9,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,475 |
|
Total noninterest income |
|
|
4,770 |
|
|
|
5,293 |
|
|
|
|
|
|
|
|
|
|
|
10,063 |
|
Total noninterest expense |
|
|
15,908 |
|
|
|
4,415 |
|
|
|
301 |
|
|
|
|
|
|
|
20,624 |
|
|
|
|
Income before provision for income taxes |
|
|
8,939 |
|
|
|
865 |
|
|
|
(846 |
) |
|
|
|
|
|
|
8,958 |
|
Provision for income taxes |
|
|
2,363 |
|
|
|
326 |
|
|
|
1 |
|
|
|
|
|
|
|
2,690 |
|
|
|
|
Net income |
|
|
6,576 |
|
|
|
539 |
|
|
|
(847 |
) |
|
|
|
|
|
|
6,268 |
|
Less: net income attributable to non-controlling interest |
|
|
|
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
263 |
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
6,576 |
|
|
$ |
276 |
|
|
$ |
(847 |
) |
|
$ |
|
|
|
$ |
6,005 |
|
|
The following table represents financial information about the Companys reportable segments
at December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Year Ended December 31, 2010 |
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Total assets |
|
$ |
923,832 |
|
|
$ |
23,912 |
|
|
$ |
118,173 |
|
|
$ |
(126,784 |
) |
|
$ |
939,133 |
|
Total portfolio loans, gross |
|
$ |
606,646 |
|
|
$ |
|
|
|
$ |
2,289 |
|
|
$ |
(8,139 |
) |
|
$ |
600,796 |
|
Total deposits |
|
$ |
655,802 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(7,100 |
) |
|
$ |
648,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Year Ended December 31, 2009 |
|
|
Bank |
|
|
Mortgage |
|
|
Parent |
|
|
Elimination |
|
|
Consolidated |
|
|
Total assets |
|
$ |
807,216 |
|
|
$ |
15,001 |
|
|
$ |
83,532 |
|
|
$ |
(92,343 |
) |
|
$ |
813,406 |
|
Total portfolio loans, gross |
|
$ |
606,682 |
|
|
$ |
|
|
|
$ |
2,469 |
|
|
$ |
(7,712 |
) |
|
$ |
601,439 |
|
Total deposits |
|
$ |
643,581 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,117 |
) |
|
$ |
640,464 |
|
|
NOTE 18. INCOME TAXES
Provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Years Ended December 31, |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,948 |
|
|
$ |
3,070 |
|
|
$ |
158 |
|
State |
|
|
749 |
|
|
|
779 |
|
|
|
(227 |
) |
|
|
|
|
|
|
|
|
|
|
Total current provision (benefit) |
|
$ |
4,697 |
|
|
$ |
3,849 |
|
|
$ |
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,421 |
) |
|
|
(784 |
) |
|
|
103 |
|
State |
|
|
(117 |
) |
|
|
(375 |
) |
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision |
|
|
(1,538 |
) |
|
|
(1,159 |
) |
|
|
29 |
|
|
Total provision (benefit) for income taxes |
|
$ |
3,159 |
|
|
$ |
2,690 |
|
|
$ |
(40 |
) |
|
126
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2006, the Company invested in the California Affordable Housing Fund -2006 I, LLC.
The investment provides funding for low income housing projects in our local markets in return for
federal and state tax credits. As of December 31, 2010 the original commitment of $2.5 million has
been fully funded. The tax benefit summary provided by the California Affordable Housing Fund
2006 I, LLC was $158 thousand, for federal and $110 thousand for state as of December 31, 2010.
Income tax expense attributable to income before income taxes differed from the amounts computed by
applying the U.S. federal income tax rate of 34 percent to income before income taxes.
The following table presents a reconciliation of income taxes computed at the Federal statutory
rate to the actual effective rate for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Income tax at the Federal statutory rate |
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
State franchise tax, net of Federal tax benefit |
|
|
3.58 |
% |
|
|
2.98 |
% |
|
|
-12.16 |
% |
Tax-exempt interest |
|
|
-5.58 |
% |
|
|
-4.07 |
% |
|
|
-15.79 |
% |
Officer life insurance |
|
|
-1.29 |
% |
|
|
-1.53 |
% |
|
|
-4.51 |
% |
Affordable housing credits |
|
|
-0.99 |
% |
|
|
-1.95 |
% |
|
|
-7.39 |
% |
Other |
|
|
3.07 |
% |
|
|
0.59 |
% |
|
|
4.02 |
% |
|
Effective Tax Rate |
|
|
32.79 |
% |
|
|
30.02 |
% |
|
|
-1.83 |
% |
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
State franchise taxes |
|
$ |
143 |
|
|
$ |
127 |
|
Deferred compensation |
|
|
2,533 |
|
|
|
2,3339 |
|
Loan loss reserves |
|
|
5,851 |
|
|
|
5,130 |
|
Unrealized (gains) losses other comprehensive income |
|
|
356 |
|
|
|
(460 |
) |
Other |
|
|
328 |
|
|
|
223 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
9,211 |
|
|
$ |
7,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(106 |
) |
|
|
(591 |
) |
Deferred loan origination costs |
|
|
(351 |
) |
|
|
(466 |
) |
Deferred state taxes |
|
|
(672 |
) |
|
|
(572 |
) |
Other California Affordable Housing |
|
|
(154 |
) |
|
|
(156 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
$ |
(1,283 |
) |
|
$ |
(1,785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
7,928 |
|
|
$ |
5,574 |
|
|
Additionally, the Company has no unrecognized tax benefits at December 31, 2010 and 2009. The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax
expense.
127
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not anticipate providing a reserve for uncertain tax positions in the next
twelve months. During the years ended December 31, 2010, 2009, and 2008 the Company recognized no
interest and penalties associated with uncertain tax positions.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and the State of California. With few exceptions, the Company is no longer subject to U.S. Federal
or State and local income tax examinations by tax authorities for the years before 2007.
NOTE 19. STOCK OPTION PLAN
On May 1, 2008 the 1998 Stock Option Plan which was approved by the Companys shareholders on April
21, 1998 expired and was replaced by the 2008 Stock Option Plan (the Plan) which was approved by
the Companys shareholders on May 15, 2007. The Plan provides for awards in the form of options,
which may constitute incentive stock options (Incentive Options) under Section 422(a) of the
Internal Revenue Code of 1986, as amended (the Code), or non-statutory stock options (NSOs) to
key personnel of the Company, including directors. The Plan provides that Incentive Options under
the Plan may not be granted at less than 100% of fair market value of the Companys common stock on
the date of the grant. NSOs may not be granted at less than 85% of the fair market value of the
common stock on the date of the grant.
Generally, all options under the plan will vest at 20% per year from the date of the grant.
Vesting may be accelerated in case of an optionees death, disability, and retirement or in case of
a change of control.
For the years ended December 31, 2010, 2009 and 2008 stock option compensation expense was $54
thousand ($32 thousand, net of tax), $81 thousand ($47 thousand, net of tax), and $116 thousand
($69 thousand, net of tax), respectively. At December 31, 2010, 2009 and 2008 there were $60
thousand, $91 thousand, and $272 thousand respectively, of total unrecognized compensation costs
related to non-vested share based payments. The unrecognized compensation costs are expected to be
recognized over a weighted average period of two years.
Activity in stock-based compensation plan
The following table presents the changes in outstanding stock options for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Contractual |
|
|
|
Number of Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
|
Term |
|
|
Options outstanding December 31, 2008 |
|
|
298,080 |
|
|
$ |
8.64 |
|
|
$ |
|
|
|
|
5.77 |
|
Granted |
|
|
4,000 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(20,000 |
) |
|
$ |
10.40 |
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2009 |
|
|
282,080 |
|
|
$ |
8.46 |
|
|
|
|
|
|
|
4.70 |
|
Granted |
|
|
18,000 |
|
|
$ |
3.62 |
|
|
$ |
11,340 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2010 |
|
|
300,080 |
|
|
$ |
8.17 |
|
|
|
|
|
|
|
4.07 |
|
|
Exercisable at December 31, 2010 |
|
|
245,620 |
|
|
$ |
8.44 |
|
|
$ |
11,340 |
|
|
|
|
|
|
At December 31, 2010, 586,500 shares were available for future grants under the Plan.
128
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2010, 2009, and 2008, 245,620 shares, 221,960 shares, and 209,485 shares,
respectively, were available to be exercised.
The fair value of the options granted is estimated on the date of grant using a Black Sholes
option-pricing model and includes the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Volatility |
|
|
58.53 |
% |
|
|
67.60 |
% |
|
|
32.10 |
% |
Risk free interest rate |
|
|
1.18 |
% |
|
|
1.82 |
% |
|
|
2.97 |
% |
Expected dividends |
|
$ |
0.21 |
|
|
$ |
0.30 |
|
|
$ |
0.32 |
|
Annual dividend rate |
|
|
5.80 |
% |
|
|
4.53 |
% |
|
|
4.56 |
% |
Assumed forfeiture rate |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Expected Life |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
Volatility represents the historical volatility in the Companys common stock price, for a
period consistent with the expected life of the option. The risk free rate was derived from the
U.S. Treasury rate at the time of the grant, which coincides with the expected life of the option.
The annual dividend rate is the ratio of the expected annual dividends to the Companys common
stock price on the grant date. The expected option life is estimated based on the history of the
Companys stock option holders and expectations regarding future forfeitures.
The grant date fair value per share of the 2010, 2009 and 2008 awards was $1.20, $1.91 and $1.38,
respectively.
NOTE 20. CAPITAL STOCK
The Company paid a quarterly cash dividend of $0.06, $0.06, $0.06 and $0.03 on January 14, 2010,
March 24, 2010, July 7, 2010 and October 7, 2010, respectively, to shareholders of record as of
December 31, 2009, March 31, 2010, June 30, 2010 and September 30, 2010, respectively.
On April 20,1999, the Board of Directors authorized 2,000,000 shares of preferred stock. As of
December 31, 2008, 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 Company paid preferred cash
dividends of $850 thousand during fiscal year 2010.
On March 23, 2010, the Company filed a Form S-1/A Registration Statement (the Registration
Statement) with the SEC to offer 7,200,000 shares of our common stock in an underwritten public
offering (Offering). In the Registration Statement, we set out our intent to use the net proceeds
of the Offering for general corporate purposes, including contributing additional capital to the
Bank, supporting our ongoing and future anticipated growth, which may include opportunistic
acquisitions of all or parts of other financial institutions, including FDIC-assisted transactions,
and positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury
129
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 29, 2010 the Company announced the successful closing of the Offering. The Company
received net proceeds from the offering of approximately $28.8 million, after underwriting
discounts and commissions and estimated expenses.
On April 14, 2010 the Company announced that the underwriters of the public offering of common
shares fully exercised their over-allotment option, which resulted in the issuance of an additional
1,080,000 shares of common stock, and approximately $4.4 million in additional net proceeds. The
option was granted in connection with the Companys public offering of 7,200,000 shares of common
stock at a public offering price of $4.25 per share. Pursuant to the Offering the Company incurred
$460 thousand of capitalized Offering costs that were directly related to the issuance of the
common stock.
With the additional proceeds from the exercise of the over-allotment option, the Company realized
total net proceeds from the offering of approximately $33.0 million, after deducting the
underwriting discount and offering expenses. The exercise of the over-allotment option brings the
total number of shares of common stock sold by the Company in the offering to 8,280,000
NOTE 21. RETIREMENT BENEFITS
Profit sharing plan In 1985, the Company adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the earnings of the Company. The employees contributions are
limited to the maximum amount allowable under IRS Section 402(G). The Companys contributions
include a matching contribution of 100% of the first 3% of salary deferred and 50% of the next 2%
of salary deferred. Discretionary contributions are also permitted. The Company made matching
contributions aggregating $249 thousand, $240 thousand, and $234 thousand for the years ended
December 31, 2010, 2009 and 2008, respectively. No discretionary contributions were made over the
three year reporting period.
Salary continuation plan In April 2001, the Board of Directors approved the
implementation of the Supplemental Executive Retirement Plan (SERP), which is a non-qualified
executive benefit plan in which the Bank agrees to pay certain executives covered by the SERP plan
additional benefits in the future in return for continued satisfactory performance by the
executives.
Benefits under the salary continuation plan include a benefit generally payable commencing upon a
designated retirement date for a fixed period of ten to twenty years; disability or termination of
employment, and a death benefit for the participants designated beneficiaries. Key-man life
insurance policies were purchased as an investment to provide for the Banks contractual obligation
to pay pre-retirement death benefits and to recover the Banks cost of providing benefits. The
executive is the insured under the policy, while the Bank is the owner and beneficiary.
The assets of the SERP, under Internal Revenue Service Regulations, are the property of the Company
and are available to the Companys general creditors. The insured executive has no claim on the
insurance policy, its cash value or the proceeds thereof.
130
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The retirement benefit is derived from accruals to a benefit account during the participants
employment. Compensation expense under the salary continuation plan totaled $343 thousand, $324
thousand, and $179 thousand for 2010, 2009 and 2008, respectively. As of December 31, 2010, 2009
and 2008, the vested benefit payable was $2.0 million, $1.6 million, and $1.2 million respectively.
Retired employees deferred compensation Effective April 1, 1990, the Board of Directors approved
an Employee Deferred Compensation plan for two executives, which is a non-qualified plan in which
the selected employees may elect to defer all or any part of their compensation to be payable to
the employee upon retirement over a period not to exceed fifteen years. Interest on retired
employees deferred compensation is fixed at ten percent (10%) per the plan. Participants in this
plan have since retired and funds are being disbursed. As of December 31, 2010, 2009 and 2008, the
vested benefit payable was $691 thousand, $818 thousand and $932 thousand, respectively.
Directors deferred fee compensation Effective January 1, 1993, the Board of Directors approved
the implementation of the Directors Deferred Fee Compensation Plan, which is a non-qualified plan
in which a Director may elect to defer the payment of all or any part of the fee compensation in
which such director would otherwise be entitled to as directors fees or committee fees to be
payable upon retirement of the director in a lump sum distribution or over a period not to exceed
fifteen years. Directors are granted the option of having their deferred payments accrue interest
at a rate of prime plus 3.25% or a fixed rate of 10%.
Deferred compensation expense totaled $493 thousand, $478 thousand, and $462 thousand at December
31, 2010, 2009, and 2008 respectively. As of December 31, 2010, 2009 and 2008, the vested benefit
payable was $2.9 million, $2.8 million, and $2.6 million respectively.
NOTE 22. RELATED PARTY TRANSACTIONS
Some of the directors, officers and principal shareholders of the Company and their associates were
customers of and had banking transactions with the Bank in the ordinary course of the Banks
business during 2010, and the Bank expects to have such transactions in the future. All deposits,
loans and commitments to loans included in such transactions were made in compliance with the
applicable laws on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons of similar creditworthiness
The following table presents a summary of aggregate activity involving related party borrowers for
the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Balance at beginning of year |
|
$ |
9,469 |
|
|
$ |
7,911 |
|
New loan additions |
|
|
1,248 |
|
|
|
1,418 |
|
Advances on existing lines of credit |
|
|
15,704 |
|
|
|
11,497 |
|
Principal repayments |
|
|
(17,017 |
) |
|
|
(11,642 |
) |
Reclassifications (1) |
|
|
(176 |
) |
|
|
285 |
|
|
Balance at end of year |
|
$ |
9,228 |
|
|
$ |
9,469 |
|
|
|
|
|
|
(1) |
|
Represents existing loans that were added or subtracted from the balances
because their related party classification was changed. |
131
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2010 and 2009, deposits of related parties amounted to $18.4 million and $16.2
million, respectively. As of December 31, 2010 and 2009 there were no related party loans, which
were past due or classified. At December 31, 2010 and 2009 there was $4.6 million, and $3.2 million
respectively, in outstanding loan commitments to related parties. In the opinion of the Company,
these transactions did not involve more than a normal risk of collectability or present other
unfavorable terms.
NOTE 23. COMMITMENTS AND CONTINGENCIES
Lease Commitments The Company leases certain facilities where it conducts its operations. Future
minimum lease commitments under all non-cancelable operating leases as of December 31, 2010 are
below:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Amounts due in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
$ |
775 |
|
|
|
|
|
2012 |
|
|
606 |
|
|
|
|
|
2013 |
|
|
488 |
|
|
|
|
|
2014 |
|
|
499 |
|
|
|
|
|
2015 |
|
|
164 |
|
|
|
|
|
Thereafter |
|
|
270 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,802 |
|
|
|
|
|
|
|
|
|
|
Rental expense, net of rental income for the years ended December 31, 2010, 2009 and 2008 was $1.2
million, $530 thousand and $540 thousand respectively.
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.
The off-balance sheet credit risk exposure of the Company is the contractual amount of commitments
to extend credit and stand-by letters of credit. The Company applies the same credit standards to
these contracts as it uses for loans recorded on the balance sheet.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
Off-balance sheet commitments: |
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
146,915 |
|
|
$ |
122,872 |
|
Standby letters of credit |
|
|
3,509 |
|
|
|
4,844 |
|
Guaranteed commitments outstanding |
|
|
1,299 |
|
|
|
1,325 |
|
|
|
|
$ |
151,723 |
|
|
$ |
129,041 |
|
|
132
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company has mortgage loan purchase agreements with various mortgage bankers. The Company is
obligated to perform certain procedures in accordance with these agreements. The agreements provide
for conditions whereby the Company may be required to repurchase mortgage loans for various reasons
among which are either (1) a mortgage loan is originated in violation of the mortgage bankers
requirement, (2) the Company breaches any term of the agreement and (3) an early payment default
occurs from a mortgage originated by the Company. The mortgage loan repurchase agreements are
consistent with the standard representations and warranties of the loan sales agreements and the
impact is considered immaterial to the consolidated financial statements.
The Company entered into a mandatory forward loan volume commitment agreement with a purchaser of
mortgage loans. Under the agreement, the Company is committed to deliver $264 million in loan
volume over the period from March 1, 2010 through February 28, 2011. Upon failure to deliver
minimum loan volume quarterly, the Company is responsible to pay a non-delivery fee to the
purchaser. As of December 31, 2010, the Company met the volume commitments. The Company has not
negotiated any new forward loan volume commitments beyond February 28, 2011.
Litigation
The Company is subject to various pending and threatened legal actions arising in the
ordinary course of business. The Company maintains reserves for losses from legal actions that are
both probable and estimable. In the opinion of management the disposition of claims currently
pending will not have a material effect on the Companys consolidated financial position or results
of operations.
NOTE 24. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the
federal and state banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that if undertaken,
could have a direct material effect on the Companys and Consolidated Financial Statements.
133
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve quantitative measures
of their assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices.
The capital amounts and the Banks prompt corrective action classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
Prompt corrective action provisions are not applicable to Bank Holding Companies. Quantitative
measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets.
Management believes as of December 31, 2010 that the Company and the Bank met all capital adequacy
requirements to which they are subject.
As of December 31, 2010, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the following table. There are no conditions or events since that
notification that management believes have changed the Banks category.
The principal sources of cash for the Holding Company are dividends from the Bank. 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. As of December 31, 2010,
the maximum amount available for dividend distribution under this restriction was approximately
$11,435,417.
The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions
on the extension of credit to affiliates. In particular, it is prohibited from lending to an
affiliated company unless the loans are secured by specific types of collateral. Such secured loans
and other advances from the subsidiaries are limited to 10 percent of the subsidiarys equity. No
such loans or advances were outstanding during 2010 or 2009.
134
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Companys and the Banks actual capital amounts and ratios as of December 31, 2010 and
2009 are presented in the following table.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Adequacy |
|
To be |
|
|
Actual |
|
Purposes |
|
Well Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
At December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets)
|
|
$ |
115,541 |
|
|
|
12.48 |
% |
|
$ |
37,036 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Tier 1 capital (to risk-weighted assets)
|
|
$ |
115,541 |
|
|
|
13.74 |
% |
|
$ |
33,631 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Total capital (to risk-weighted assets)
|
|
$ |
126,085 |
|
|
|
15.00 |
% |
|
$ |
67,262 |
|
|
|
8.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets)
|
|
$ |
106,747 |
|
|
|
11.60 |
% |
|
$ |
36,820 |
|
|
|
4.00 |
% |
|
$ |
46,025 |
|
|
|
5.00 |
% |
Tier 1 capital (to risk-weighted assets)
|
|
$ |
106,747 |
|
|
|
13.34 |
% |
|
$ |
32,013 |
|
|
|
4.00 |
% |
|
$ |
48,020 |
|
|
|
6.00 |
% |
Total capital (to risk-weighted assets)
|
|
$ |
116,791 |
|
|
|
14.59 |
% |
|
$ |
64,026 |
|
|
|
8.00 |
% |
|
$ |
80,033 |
|
|
|
10.00 |
% |
At December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets)
|
|
$ |
79,422 |
|
|
|
9.89 |
% |
|
$ |
32,168 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Tier 1 capital (to risk-weighted assets)
|
|
$ |
79,422 |
|
|
|
12.06 |
% |
|
$ |
26,347 |
|
|
|
4.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
Total capital (to risk-weighted assets)
|
|
$ |
87,697 |
|
|
|
13.31 |
% |
|
$ |
52,693 |
|
|
|
8.00 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage capital (to average assets)
|
|
$ |
76,262 |
|
|
|
9.37 |
% |
|
$ |
32,603 |
|
|
|
4.00 |
% |
|
$ |
40,754 |
|
|
|
5.00 |
% |
Tier 1 capital (to risk-weighted assets)
|
|
$ |
76,262 |
|
|
|
11.57 |
% |
|
$ |
26,366 |
|
|
|
4.00 |
% |
|
$ |
39,549 |
|
|
|
6.00 |
% |
Total capital (to risk-weighted assets)
|
|
$ |
84,543 |
|
|
|
12.83 |
% |
|
$ |
52,732 |
|
|
|
8.00 |
% |
|
$ |
65,915 |
|
|
|
10.00 |
% |
|
135
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Companys financial instruments as of
December 31, 2010 and December 31, 2009, excluding financial instruments recorded at fair value on
a recurring basis (summarized in a separate table), whether or not recognized or recorded at fair
value in the consolidated balance sheets.
Non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-1A),
such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the
table. In addition, we have not disclosed the fair value of financial instruments specifically
excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC
825-10-50-8), such as Bank-owned life insurance policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
|
|
|
|
Carrying |
|
|
(Dollars in thousands) |
|
Amounts |
|
Fair Value |
|
Amounts |
|
Fair Value |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
63,256 |
|
|
$ |
63,256 |
|
|
$ |
68,240 |
|
|
$ |
68,240 |
|
Portfolio loans, net |
|
|
587,865 |
|
|
|
595,442 |
|
|
|
590,023 |
|
|
|
611,099 |
|
Mortgages held for sale |
|
|
42,995 |
|
|
|
42,995 |
|
|
|
27,288 |
|
|
|
27,288 |
|
Interest receivable |
|
|
3,845 |
|
|
|
3,845 |
|
|
|
3,087 |
|
|
|
3,087 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
648,702 |
|
|
|
650,200 |
|
|
|
640,465 |
|
|
|
642,917 |
|
Securities sold under
agreement to repurchase |
|
|
13,548 |
|
|
|
13,548 |
|
|
|
9,621 |
|
|
|
9,621 |
|
Federal home loan borrowings |
|
|
141,000 |
|
|
|
141,000 |
|
|
|
70,000 |
|
|
|
70,000 |
|
Subordinated debenture |
|
|
15,465 |
|
|
|
6,411 |
|
|
|
15,465 |
|
|
|
6,978 |
|
Interest payable |
|
|
388 |
|
|
|
388 |
|
|
|
495 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
Contract |
Off balance sheet financial instruments: |
|
Amount |
|
Amount |
Commitments to extend credit |
|
$ |
146,915 |
|
|
$ |
122,872 |
|
Standby letters of credit |
|
$ |
3,509 |
|
|
$ |
4,844 |
|
Guaranteed commitments outstanding |
|
$ |
1,299 |
|
|
$ |
1,325 |
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value:
Cash and cash equivalents The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a
reasonable estimate of fair value because of the relatively short term between the origination of
the instrument and its expected realization.
Portfolio loans receivable For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The fair values for
fixed rate loans are estimated using discounted cash flow analysis, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The allowance
for loan and lease losses is considered to be a reasonable estimate of loan discount for credit
quality concerns.
136
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest receivable and payable The carrying amount of interest receivable and payable
approximates its fair value.
Mortgage loans held for sale Mortgage loans held for sale are carried at the lower of cost or
fair value. Cost generally approximates fair value, given the short duration of these assets.
Federal Home Loan Bank borrowings The fair value of borrowed funds is based on carrying amounts
due to the short term nature of the borrowing.
Junior subordinated debt payable to unconsolidated subsidiary grantor trust The fair value of
the subordinated debenture is estimated by discounting the future cash flows (interest payments at
a rate of 7.34% and 7.39% for Bank of Commerce Holdings Trust, and Bank of Commerce Holdings Trust
II, respectively) using current market rates at which similar bonds would be issued with similar
credit ratings as ours and similar remaining maturities. We have used the average spread of the
twenty two and twenty four year BBB rated U.S. Bank Composite to calculate this credit-risk-related
discount of future cash flows.
Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, savings, and money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., carrying amounts). The fair values for fixed-rate
time deposits are estimated using a discounted cash flow calculation applying interest rates
currently offered on certificates to a schedule of aggregated expected monthly maturities on time
deposits. For variable-rate certificates of deposit that reprice frequently, fair values are based
on carrying values.
Securities sold under agreements to repurchase The fair value of securities sold under
agreements to repurchase is estimated by discounting the contractual cash flows under outstanding
borrowings at rates prevailing in the marketplace today for similar borrowings, rates and
collateral.
Earn out payable The fair value of the earn out payable is estimated by discounting the
contractual cash flows expected to be paid out, under the assumption the mortgage subsidiary meets
the targeted results.
Commitments Loan commitments and standby letters of credit generate ongoing fees, which are
recognized over the term of the commitment period. In situations where the borrowers credit
quality has declined, we record a reserve for these off-balance sheet commitments. Given the
uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of
the fair value of these commitments is the carrying value of the related unamortized loan fees plus
the reserve, which is not material. As such, no disclosures are made on the fair value of
commitments.
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. Available-for-sale securities, derivatives,
and the earn out payable are recorded at fair value on a recurring basis. From time to time, the
Company may be required to record at fair value other assets on a non recurring basis, such as
collateral dependent impaired loans and certain other assets including other real estate owned and
goodwill. These non recurring fair value adjustments involve the application of
lower-of-cost-or-market accounting or write-downs of individual assets.
137
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Hierarchy
Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access.
Level 2 valuations utilize inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. Level 2 valuations include quoted prices
for similar assets and liabilities in active markets, and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates and yield curves that are observable
at commonly quoted intervals.
Level 3 valuations are unobservable inputs for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability. Valuation is generated from
model-based techniques that use significant assumptions not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include the use of option pricing models,
discounted cash flow models and similar techniques.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level input that is
significant to the fair value measurement in its entirety.
The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs
when developing fair value measurements.
The Companys assessment of the significance of a particular input to the fair value measurement in
its entirety requires judgment, and considers factors specific to the asset or liability.
The following table presents information about the Companys assets and liabilities measured at
fair value on a recurring basis as of December 31, 2010 and 2009 respectively, and indicate the
fair value hierarchy of the valuation techniques utilized by the Company to determine such fair
value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at December 31, 2010 |
|
Recurring basis |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
64,151 |
|
|
$ |
|
|
|
$ |
64,151 |
|
|
$ |
|
|
Corporate securities |
|
|
28,957 |
|
|
|
|
|
|
|
28,957 |
|
|
|
|
|
Other investment securities (1) |
|
|
96,127 |
|
|
|
|
|
|
|
96,127 |
|
|
|
|
|
Derivatives |
|
|
2,341 |
|
|
|
|
|
|
|
2,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
191,576 |
|
|
$ |
|
|
|
$ |
191,576 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn out payable |
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
986 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
986 |
|
|
|
|
|
|
(1) |
|
Principally represents U.S. Treasury and agencies or residential mortgage-backed securities
issued or guaranteed by governmental agencies. |
138
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at December 31, 2009 |
|
Recurring basis |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Available for sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
subdivisions |
|
$ |
32,646 |
|
|
$ |
|
|
|
$ |
32,646 |
|
|
$ |
|
|
Corporate securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment securities (1) |
|
|
47,416 |
|
|
|
|
|
|
|
47,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
80,062 |
|
|
$ |
|
|
|
$ |
80,062 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earn out payable |
|
|
965 |
|
|
|
|
|
|
|
|
|
|
|
965 |
|
Total liabilities measured at fair value |
|
$ |
965 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
965 |
|
|
|
|
(1) |
|
Principally represents U.S. Treasury and agencies or residential mortgage-backed securities
issued or guaranteed by governmental agencies. |
The following table provides a reconciliation of assets and liabilities measured at fair value
using significant unobservable inputs (Level 3) on a recurring basis during the year ended December
31, 2010 and 2009. The amount included in the Transfer into Level 3 column represents the
beginning balance of an item in the period (interim quarter) for which it was designated as a Level
3 fair value measure.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2010 |
|
2009 |
|
Beginning Balance |
|
$ |
965 |
|
|
$ |
|
|
Transfers into Level 3 |
|
|
|
|
|
|
965 |
|
Transfers out of Level 3 |
|
|
|
|
|
|
|
|
Total losses |
|
|
|
|
|
|
|
|
Included in earnings (or changes in net liabilities) |
|
|
(21 |
) |
|
|
|
|
Included in other comprehensive income |
|
|
|
|
|
|
|
|
Purchases, issuances, sales, and settlements |
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
Issuances |
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
986 |
|
|
$ |
965 |
|
|
|
|
|
|
|
|
|
|
The available for sale securities amount above represent securities that have been adjusted to
their fair value. For these securities, the Company obtains fair value measurements from an
independent pricing service. The fair value measurements consider observable data that may include
dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels,
trade execution data, market consensus prepayment speeds, credit information and the bonds terms
and conditions among other things.
The derivative amount above represent the fair value of the Companys interest rate swaps. The
valuation of the Companys interest rate swaps are obtained from a third-party pricing service. The
fair values are determined by using a discounted cash flow analysis on the expected cash flows of
each derivative. The pricing analysis is based on observable inputs for the contractual terms of
the derivatives, including the period to maturity and interest rate curves. The Company has
determined that the source of the derivative fair values fall with Level 2 of the fair value
hierarchy.
139
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The earn out payable amount above represents the fair value of the Companys earn out
incentive agreement with the Bank of Commerce Mortgage subsidiary. The mortgage subsidiary will
earn certain cash payments from the Company, based on targeted results. The fair value of the earn
out payable is estimated by using a discounted cash flow model whereby discounting the contractual
cash flows expected to be paid out, under the assumption the mortgage subsidiary meets the target
results. The expected contractual cash flows are discounted using the three year treasury rate over
a term of three years. As such, the Company has determined that the fair values fall with Level 3
of the fair value hierarchy.
Assets and Liabilities Recorded at Fair Value on a Non Recurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a non
recurring basis in accordance with U.S. generally accepted accounting principles.
These include assets that are measured at the lower of cost or market that were recognized at fair
value below cost at the end of the period.
Assets measured at fair value on a non recurring basis are included in the table below. No
liabilities were measured at fair value on a non recurring basis at December 31, 2010 or December
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at December 31, 2010 |
|
Total |
Non recurring basis |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
(Losses) |
|
Impaired loans |
|
$ |
12,982 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,982 |
|
|
$ |
(6,726 |
) |
Other real estate owned |
|
|
1,994 |
|
|
|
|
|
|
|
|
|
|
|
1,994 |
|
|
|
(1,571 |
) |
Goodwill |
|
|
3,695 |
|
|
|
|
|
|
|
|
|
|
|
3,695 |
|
|
|
(32 |
) |
|
Total assets measured at fair value |
|
$ |
18,671 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,671 |
|
|
$ |
(8,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Fair Value at December 31, 2009 |
|
Total |
Non recurring basis |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
(Losses) |
|
Impaired loans |
|
$ |
5,278 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,278 |
|
|
$ |
(1,289 |
) |
Other real estate owned |
|
|
2,880 |
|
|
|
|
|
|
|
|
|
|
|
2,880 |
|
|
|
(125 |
) |
|
Total assets measured at fair value |
|
$ |
8,158 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,158 |
|
|
$ |
(1,414 |
) |
|
For the year ending December 31, 2010:
|
|
|
Collateral dependent impaired loans with a carrying amount of $19.7 million were written
down to their fair value of $13.0 million resulting in a $6.7 million adjustment to the
allowance for loan and lease losses. |
|
|
|
|
Other real estate owned with a carrying amount of $3.6 million was written down to fair
value of $2.0 million resulting in a loss of $1.6 million which was included in earnings
for the period. |
|
|
|
|
Goodwill with a carrying amount of $3.7 million was written down to the fair value of
$3.69 million resulting in an impairment charge of $32 thousand which was included in
earnings for the period. |
140
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loans and leases amount above represents impaired, collateral dependent loans that have
been adjusted to fair value. When we identify a collateral dependent loan as impaired, we measure
the impairment using the current fair value of the collateral, less selling costs. Depending on the
characteristics of a loan, the fair value of collateral is generally estimated by obtaining
external appraisals. If we determine that the value of the impaired loan is less than the recorded
investment in the loan, we recognize this impairment and adjust the carrying value of the loan to
fair value through the allowance for loan and lease losses.
The loss represents charge-offs or impairments on collateral dependent loans for fair value
adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is
zero. When the fair value of the collateral is based on a current appraised value, or management
determines the fair value of the collateral is further impaired below the appraised value and there
is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
The other real estate owned amount above represents impaired real estate that has been adjusted to
fair value. Other real estate owned represents real estate which the Bank has taken control of in
partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is
recorded at the fair value less costs to sell, which becomes the propertys new basis. Any
write-downs based on the assets fair value at the date of acquisition are charged to the allowance
for loan and lease losses. After foreclosure, management periodically performs valuations such that
the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs
to sell. Fair value adjustments on other real estate owned are recognized within net loss on real
estate owned. The loss represents impairments on other real estate owned for fair value adjustments
based on the fair value of the real estate. The Company records other real estate owned as a
nonrecurring Level 3.
The Goodwill amount above represents goodwill that has been adjusted to fair value. The fair value
of goodwill is estimated using a market and income approach, and is provided to the Company by a
third party independent valuation consultant. See Note 8 for further disclosure pertaining to the
goodwill impairment analysis. The Company records goodwill as a non-recurring Level 3 when
impairment is recorded.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market
information and other information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the Companys entire
holdings of a particular financial instrument.
Because no market exists for a significant portion of the Companys financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and other factors.
These estimates are subjective in nature, involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on current on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
141
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other significant assets and liabilities that are not considered financial assets or
liabilities include deferred tax assets and liabilities, and property, plant and equipment. In
addition, the tax ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered in any of the
estimates.
NOTE 26. PARENT COMPANY ONLY FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
Condensed Balance Sheets |
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
4,246 |
|
|
$ |
977 |
|
Participation loans, net of allowance for loan and lease losses of $38,850
in 2010 and 2009 |
|
|
2,250 |
|
|
|
2,431 |
|
Investment in subsidiaries |
|
|
110,177 |
|
|
|
80,124 |
|
Other assets |
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
118,173 |
|
|
$ |
83,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Junior subordinated debt payable to unconsolidated subsidiary grantor trust |
|
$ |
15,465 |
|
|
$ |
15,465 |
|
Other liabilities |
|
|
1,560 |
|
|
|
1,585 |
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
101,148 |
|
|
|
66,482 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
118,173 |
|
|
$ |
83,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Condensed Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
239 |
|
|
$ |
300 |
|
|
$ |
1,097 |
|
Dividends from subsidiaries |
|
|
1,033 |
|
|
|
2,503 |
|
|
|
1,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,272 |
|
|
|
2,803 |
|
|
|
2,594 |
|
Expenses: |
|
|
1,250 |
|
|
|
1,146 |
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed net
income of subsidiaries |
|
|
22 |
|
|
|
1,657 |
|
|
|
1,583 |
|
Provision for income taxes |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of subsidiaries |
|
|
21 |
|
|
|
1,656 |
|
|
|
1,582 |
|
Equity in undistributed net income of subsidiaries |
|
|
6,453 |
|
|
|
4,612 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,474 |
|
|
$ |
6,268 |
|
|
$ |
2,194 |
|
Less: Net income attributable to non-controlling interest |
|
|
254 |
|
|
|
263 |
|
|
|
|
|
Net income attributable to Bank of Commerce Holdings |
|
$ |
6,220 |
|
|
$ |
6,005 |
|
|
$ |
2,194 |
|
|
|
|
|
|
|
|
|
|
|
142
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Statements of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,474 |
|
|
$ |
6,268 |
|
|
$ |
2,194 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation associated with stock options |
|
|
34 |
|
|
|
34 |
|
|
|
33 |
|
Effect of changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
(1,500 |
) |
|
|
80 |
|
|
|
79 |
|
Other Liabilities |
|
|
(12 |
) |
|
|
(71 |
) |
|
|
45 |
|
Equity in undistributed net income of subsidiaries |
|
|
(6,453 |
) |
|
|
(4,612 |
) |
|
|
(612 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
|
(1,457 |
) |
|
|
1,699 |
|
|
|
1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries |
|
|
(25,000 |
) |
|
|
|
|
|
|
(14,200 |
) |
Participation loan payments |
|
|
180 |
|
|
|
631 |
|
|
|
2,935 |
|
Participation loan purchased |
|
|
|
|
|
|
1,578 |
|
|
|
(2,400 |
) |
Cash paid in acquisition of mortgage subsidiary |
|
|
|
|
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities |
|
|
(24,820 |
) |
|
|
709 |
|
|
|
(13,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
32,971 |
|
|
|
|
|
|
|
|
|
Equity transactions, net |
|
|
|
|
|
|
22 |
|
|
|
15,183 |
|
Cash dividends paid on common stock |
|
|
(2,575 |
) |
|
|
(2,265 |
) |
|
|
(2,790 |
) |
Cash dividends paid on preferred stock |
|
|
(850 |
) |
|
|
(852 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
29,546 |
|
|
|
(3,095 |
) |
|
|
12,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
3,269 |
|
|
|
(687 |
) |
|
|
467 |
|
Cash and cash equivalents at beginning of year |
|
|
977 |
|
|
|
1,664 |
|
|
|
1,197 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
4,246 |
|
|
$ |
977 |
|
|
$ |
1,664 |
|
|
|
|
|
|
|
|
|
|
|
143
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 27. UNAUDITED QUARTERLY RESULTS
UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
Net interest income |
|
$ |
7,517 |
|
|
$ |
8,172 |
|
|
$ |
8,640 |
|
|
$ |
8,664 |
|
Provision for loan losses |
|
|
2,250 |
|
|
|
1,600 |
|
|
|
4,450 |
|
|
|
4,550 |
|
Noninterest income |
|
|
3,942 |
|
|
|
3,337 |
|
|
|
5,683 |
|
|
|
6,856 |
|
Noninterest expense |
|
|
7,185 |
|
|
|
7,510 |
|
|
|
7,293 |
|
|
|
8,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
2,024 |
|
|
|
2,399 |
|
|
|
2,580 |
|
|
|
2,630 |
|
Provision for income tax |
|
|
744 |
|
|
|
750 |
|
|
|
916 |
|
|
|
749 |
|
(Less) Income non-controlling interest |
|
|
(255 |
) |
|
|
144 |
|
|
|
105 |
|
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,535 |
|
|
|
1,505 |
|
|
|
1,559 |
|
|
|
1,621 |
|
(Less) Preferred dividend and accretion on
preferred stock |
|
|
235 |
|
|
|
236 |
|
|
|
235 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,300 |
|
|
$ |
1,269 |
|
|
$ |
1,324 |
|
|
$ |
1,387 |
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.15 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
Diluted earnings per share |
|
$ |
0.15 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
|
$ |
0.08 |
|
Dividends declared per share |
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Net interest income |
|
$ |
6,400 |
|
|
$ |
7,498 |
|
|
$ |
7,406 |
|
|
$ |
7,690 |
|
Provision for loan losses |
|
|
1,425 |
|
|
|
3,056 |
|
|
|
1,844 |
|
|
|
3,150 |
|
Noninterest income |
|
|
865 |
|
|
|
3,195 |
|
|
|
2,944 |
|
|
|
3,059 |
|
Noninterest expense |
|
|
3,960 |
|
|
|
4,893 |
|
|
|
5,654 |
|
|
|
6,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
1,880 |
|
|
|
2,744 |
|
|
|
2,852 |
|
|
|
1,482 |
|
Provision for income tax |
|
|
610 |
|
|
|
1,027 |
|
|
|
1,010 |
|
|
|
43 |
|
(Less) Income non-controlling interest |
|
|
|
|
|
|
101 |
|
|
|
129 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,270 |
|
|
|
1,616 |
|
|
|
1,713 |
|
|
|
1,406 |
|
(Less)
Preferred dividend and accretion on preferred stock |
|
|
237 |
|
|
|
235 |
|
|
|
235 |
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
$ |
1,033 |
|
|
$ |
1,381 |
|
|
$ |
1,478 |
|
|
$ |
1,171 |
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
Diluted earnings per share |
|
$ |
0.12 |
|
|
$ |
0.16 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
Dividends declared per share |
|
$ |
0.06 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
|
$ |
0.06 |
|
144
BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 28. GAIN ON SETTLEMENT OF PUT RESERVE
In August of 2010, the Company settled and terminated the put reserve provided on the ITIN loan
pool purchase. Prior to the release, the put reserve carried a balance of $2.1 million; and the
Company received $1.8 million in cash and returned $0.3 million in cash to the seller from the
deposit account. Accordingly, the Company recognized a gain upon settlement. As such, no portion of
the remaining outstanding principal balance of the ITIN loan portfolio has an accompanying loss
guarantee. Management has considered the impact of the lack of loss guarantee in estimating the
allowance for loan and lease losses related to the ITIN loan portfolio at December 31, 2010.
The put reserve was part of the April 17, 2009 loan swap transaction in which the Company
purchased a pool of Individual Tax Identification Number (ITIN) residential mortgages in exchange
for a combination of certain nonperforming loans and cash. The put reserve was an irrevocable first
loss guarantee from the seller that provided us the right to put back delinquent ITIN loans to the
seller that were 90 days or more delinquent up to an aggregate amount of $3.5 million. This
guarantee was backed by a seller cash deposit with the Company that was restricted for this sole
purpose. The sellers cash deposit was classified as a deposit liability in the Companys balance
sheet. At the end of the term of this loss guarantee, the Company was required to return the cash
deposit to the seller to the extent not used to fund losses in the ITIN portfolio.
During the period from March 2010 to September 2010, thirteen ITIN loans with an aggregate
principal amount of $1.4 million were returned to the seller under the loss guarantee, reducing the
deposit liability to approximately $2.1 million prior to reaching the settlement with the seller to
eliminate the loss guarantee arrangement.
145
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants or auditors on accounting and
financial disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out under the
supervision and with the participation of the Companys management, including its President and
Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).
Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer
concluded that these disclosure controls and procedures were effective.
Disclosure controls and procedures, no matter how well designed and implemented, can provide only
reasonable assurance of achieving an entitys disclosure objectives. The likelihood of achieving
such objectives is affected by limitations inherent in disclosure controls and procedures. These
include the fact that human judgment in decision-making can be faulty and that breakdowns in
internal controls can occur because of human failures such as simple errors, mistakes or
intentional circumvention of the established processes.
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process designed by, or under the
supervision of, the Companys Chief Executive Officer and the Chief Financial Officer and
implemented by the Companys Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
The Companys internal control over financial reporting includes those policies and procedures
that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
146
On a quarterly basis, we carry out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Principal Financial Officer (whom is
also our Principal Accounting Officer) of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of
1934. As of December 31, 2010, our management, including our Chief Executive Officer, and Principal
Financial Officer, concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us that is required to be included in our
periodic SEC filings.
Although we change and improve our internal controls over financial reporting on an ongoing basis,
we do not believe that any such changes occurred in the fourth quarter 2010 that materially
affected or are reasonably likely to materially affect our internal control over financial
reporting.
This annual report includes an attestation report of the Companys registered public accounting
firm regarding internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
The registrant must disclose under this item any information required to be disclosed in a
report on Form 8-K during the fourth quarter of the year covered by this Form 10-K, but not
reported.
None to report.
147
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this item is incorporated by reference to Bank of Commerce Holdings Proxy
Statement for the 2011 annual meeting of shareholders under the captions Annual Meeting Business,
Information About Directors and Executive Officers, Corporate Governance Overview and Section
16(a) Beneficial Ownership Reporting Compliance.
ITEM 11. EXECUTIVE COMPENSATION.
The response to this item is incorporated by reference to the Proxy Statement, under the
captions Compensation Discussion and Analysis and Executive Compensation Decisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The response to this item is incorporated by reference to the Proxy Statement, under the
caption Security Ownership of Certain Beneficial Owners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The response to this item is incorporated by reference to the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The response to this item is incorporated by reference to the Proxy Statement.
148
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
The following documents are filed as a part of this Form 10-K: |
|
(1) |
|
Financial Statements: |
Reference is made to the Index to Consolidated Financial Statements under Item 8 in
Part II of this Form 10-K.
|
(2) |
|
Financial Statement Schedules: |
All schedules are omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto.
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
3.1
|
|
Articles of Incorporation, as amended, incorporated by reference to EX-3.1 of the Form
10-12G filed 12/4/1998. |
|
|
|
3.2
|
|
Bylaws, as amended, incorporated by reference to EX-3.1 of the Form 8-K filed 05/15/2007. |
|
|
|
4.1
|
|
Specimen Common Stock Certificate, incorporated by reference to EX-4.1 of the Form 10-12G filed
12/4/1998. |
|
|
|
4.2
|
|
Certificate of determination for the Series A Preferred Stock, incorporated by reference to
EX-4.1 of the Form 8-K filed 11/19/2008. |
|
|
|
4.3
|
|
Form of Certificate for the Series A Preferred Stock, incorporated by reference to EX-4.2 of the
Form 8-K filed 11/19/2008. |
|
|
|
4.4
|
|
Warrant for purchase of shares of Common stock, incorporated by reference to EX-4.3 of the Form
8-K filed 11/19/2008. |
|
|
|
10.1
|
|
Letter Agreement, dated November 14, 2008, between Bank of Commerce Holdings and the United
States Department of the Treasury, which includes the Securities Purchase Agreement Standard
terms attached thereto, with respect to the issuance of the Series A Preferred Stock and Warrant,
incorporated by reference to EX-10.1 of the Form 8-K filed 11/19/2008. |
|
|
|
10.2
|
|
Office Building Lease between Gairn Partnership/First Avenue Square and Redding Bank of Commerce
dated July 16, 1998, incorporated by reference to EX-10.2 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.3
|
|
1998 Stock Option Plan, incorporated by reference to EX-10.3 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.4
|
|
Form of Incentive Stock Option Agreement used in connection with 1998 Stock Option Plan,
incorporated by reference to EX-10.4 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.5
|
|
Form of Non-statutory Stock Option Agreement used in connection with 1998 Stock Option Plan,
incorporated by reference to EX-10.5 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.7
|
|
Directors Deferred Compensation Plan, incorporated by reference to EX-10.7 of the Form 10-12G
filed 12/4/1998. |
|
|
|
10.8
|
|
Form of Deferred Compensation Agreement Used In Connection With Directors Deferred Compensation
Plan, incorporated by reference to EX-10.8 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.10
|
|
Employment contracts dated April 2001, incorporated by reference to EX-10.10 of the Form 8-K
filed 9/27/2001. |
|
|
|
10.11
|
|
Affiliated Business Arrangement Agreement, incorporated by reference to EX-10.11 of the Form 8-K
filed 8/20/2004. |
|
|
|
10.12
|
|
Office building lease by and between Waybright #3 Partners and Redding Bank of Commerce dated
9/23/2005 incorporated by reference to EX-99.1 of the Form 8-K filed 9/26/2005. |
|
|
|
10.13
|
|
Amendment to Employment contracts dated April 2001, incorporated by reference to EX-99.1 &99.2 of
the Form 8-K filed 12/21/2005. |
|
|
|
10.14
|
|
Change in Control Agreements, incorporated by reference to EX-99.1-99.4 of the Form 8-K filed
12/21/2005. |
|
|
|
10.15
|
|
Salary Continuation Blais, incorporated by reference to EX-10.15 of the Form 8-K filed 12/19/2006. |
|
|
|
10.16
|
|
Salary Continuation Moty, incorporated by reference to EX-10.16 of the Form 8-K filed 12/19/2006. |
|
|
|
10.17
|
|
Salary Continuation Eslick, incorporated by reference to EX-10.17 of the Form 8-K filed
12/19/2006. |
|
|
|
10.19
|
|
Employment Agreement Miles, incorporated by reference to EX-10.19 of the Form 8-K filed 1/03/2007. |
|
|
|
10.21
|
|
Salary Continuation Miles, incorporated by reference to EX-10.21 of the Form 8-K filed 1/03/2007. |
149
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
10.22
|
|
Employment Agreement Moty, incorporated by reference to EX-10.22 of the Form 8-K filed 9/27/2007. |
|
|
|
10.23
|
|
Salary Continuation Moty, incorporated by reference to EX-10.23 of the Form 8-K filed 9/28/2007. |
|
|
|
10.24
|
|
Employment contracts dated October 14, 2008, incorporated by reference to EX-10.22 of the Form
8-K filed 10/17/2008. |
|
|
|
10.25
|
|
Employment Agreement Matranga, incorporated by reference to EX-10.22 of the Form 8-K filed
11/26/2008. |
|
|
|
14.0
|
|
Bank of Commerce Code of Ethics, incorporated by reference to EX-10.12 of the Form 8-K filed
2/26/2003. |
|
|
|
21.1
|
|
Subsidiaries of the Company, incorporated by reference to EX-21.1 of the Form 10-12G filed
12/4/1998. |
|
|
|
23.1
|
|
Consent of Moss Adams LLP |
|
|
|
24.1
|
|
Power of Attorney-see page 151. |
|
|
|
31.1
|
|
Certification of Patrick J. Moty pursuant to Exchange Act Rule 13a-14(a) or 15d 14(a) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Samuel D. Jimenez pursuant to Exchange Act Rule 13a-14(a) or 15d 14(a) as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification pursuant to Section 1350. |
|
|
|
99.1
|
|
Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic
Stabilization Act of 2008 |
|
|
|
99.2
|
|
Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic
Stabilization Act of 2008 |
150
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 04, 2011.
|
|
|
|
|
|
|
|
|
BANK OF COMMERCE HOLDINGS |
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Patrick J. Moty
Patrick J. Moty
|
|
|
|
|
|
|
President, Chief Executive |
|
|
|
|
|
|
Officer and Director of Redding Bank of |
|
|
|
|
|
|
Commerce |
|
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Patrick J. Moty and Samuel D. Jimenez, and each of them, his true and lawful
attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign
any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying
and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
151
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Company and in the capacities and on the dates
indicated:
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
/s/ Patrick J. Moty
|
|
President, Chief Executive Officer and
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Samuel D. Jimenez
|
|
Senior Vice President and Chief
|
|
March 04, 2011 |
|
|
Financial Officer (Principal Financial |
|
|
|
|
and Accounting Officer) |
|
|
|
|
|
|
|
/s/ Kenneth R. Gifford, Jr.
|
|
Chairman of the Board
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Russell L. Duclos
|
|
Director
|
|
March 04, 2011 |
|
|
|
|
|
/s/ David H. Scott
|
|
Director
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Lyle L. Tullis
|
|
Director
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Jon Halfhide
|
|
Director
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Orin Bennett
|
|
Director
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Gary Burks
|
|
Director
|
|
March 04, 2011 |
|
|
|
|
|
/s/ Joseph Gibson
|
|
Director
|
|
March 04, 2011 |
152
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
3.1
|
|
Articles of Incorporation as amended, incorporated by reference to EX-3.1 of the Form 10-12G filed 12/4/1998. |
|
|
|
3.2
|
|
Bylaws as amended, incorporated by reference to EX-3.1 of the Form 8-K filed 05/15/2007. |
|
|
|
4.1
|
|
Specimen Common Stock Certificate, incorporated by reference to EX-4.1 of the Form 10-12G filed 12/4/1998. |
|
|
|
4.2
|
|
Certificate of determination for the Series A Preferred Stock, incorporated by reference to EX-4.1 of the
Form 8-K filed 11/19/2008. |
|
|
|
4.3
|
|
Form of Certificate for the Series A Preferred Stock, incorporated by reference to EX-4.2 of the Form 8-K
filed 11/19/2008. |
|
|
|
4.4
|
|
Warrant for purchase of shares of Common stock, incorporated by reference to EX-4.3 of the Form 8-K filed
11/19/2008. |
|
|
|
10.1
|
|
Letter Agreement, dated November 14, 2008, between Bank of Commerce Holdings and the United States
Department of the Treasury, which includes the Securities Purchase Agreement Standard terms attached
thereto, with respect to the issuance of the Series A Preferred Stock and Warrant, incorporated by
reference to EX-10.1 of the Form 8-K filed 11/19/2008. |
|
|
|
10.2
|
|
Office Building Lease between Gairn Partnership/First Avenue Square and Redding Bank of Commerce dated July
16, 1998, incorporated by reference to EX-10.2 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.3
|
|
1998 Stock Option Plan, incorporated by reference to EX-10.3 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.4
|
|
Form of Incentive Stock Option Agreement used in connection with 1998 Stock Option Plan, incorporated by
reference to EX-10.4 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.5
|
|
Form of Non-statutory Stock Option Agreement used in connection with 1998 Stock Option Plan,
incorporated by reference to EX-10.5 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.7
|
|
Directors Deferred Compensation Plan, incorporated by reference to EX-10.7 of the Form 10-12G filed
12/4/1998. |
|
|
|
10.8
|
|
Form of Deferred Compensation Agreement Used In Connection With Directors Deferred Compensation Plan,
incorporated by reference to EX-10.8 of the Form 10-12G filed 12/4/1998. |
|
|
|
10.10
|
|
Employment contracts dated April 2001, incorporated by reference to EX-10.10 of the Form 8-K filed
9/27/2001. |
|
|
|
10.11
|
|
Affiliated Business Arrangement Agreement, incorporated by reference to EX-10.11 of the Form 8-K filed
8/20/2004. |
|
|
|
10.12
|
|
Office building lease by and between Waybright #3 Partners and Redding Bank of Commerce dated 9/23/2005
incorporated by reference to EX-99.1 of the Form 8-K filed 9/26/2005. |
|
|
|
10.13
|
|
Amendment to Employment contracts dated April 2001, incorporated by reference to EX-99.1 &99.2 of the Form
8-K filed 12/21/2005. |
|
|
|
10.14
|
|
Change in Control Agreements, incorporated by reference to EX-99.1-99.4 of the Form 8-K filed 12/21/2005. |
|
|
|
10.15
|
|
Salary Continuation Blais, incorporated by reference to EX-10.15 of the Form 8-K filed 12/19/2006. |
|
|
|
10.16
|
|
Salary Continuation Moty, incorporated by reference to EX-10.16 of the Form 8-K filed 12/19/2006. |
|
|
|
10.17
|
|
Salary Continuation Eslick, incorporated by reference to EX-10.17 of the Form 8-K filed 12/19/2006. |
|
|
|
10.19
|
|
Employment Agreement Miles, incorporated by reference to EX-10.19 of the Form 8-K filed 1/03/2007. |
|
|
|
10.21
|
|
Salary Continuation Miles, incorporated by reference to EX-10.21 of the Form 8-K filed 1/03/2007. |
|
|
|
10.22
|
|
Employment Agreement Moty, incorporated by reference to EX-10.22 of the Form 8-K filed 9/27/2007. |
|
|
|
10.23
|
|
Salary Continuation Moty,
incorporated by reference to EX-10.23 of the Form 8-K filed
9/28/07. |
|
|
|
10.24
|
|
Employment contracts dated October 14, 2008, incorporated by reference to EX-10.22 of the Form 8-K filed
10/17/2008. |
|
|
|
10.25
|
|
Employment Agreement Matranga, incorporated by reference to EX-10.22 of the Form 8-K filed 11/26/2008. |
|
|
|
14.0
|
|
Bank of Commerce Code of Ethics, incorporated by reference to EX-10.12 of the Form 8-K filed 2/26/2003. |
|
|
|
21.1
|
|
Subsidiaries of the Company, incorporated by reference to EX-21.1 of the Form 10-12G filed 12/4/1998. |
|
|
|
23.1
|
|
Consent of Moss Adams LLP |
|
|
|
24.1
|
|
Power of Attorney-see page 151. |
|
|
|
31.1
|
|
Certification of Patrick J. Moty pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Samuel D. Jimenez pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification pursuant to Section 1350. |
|
|
|
99.1
|
|
Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic
Stabilization Act of 2008 |
|
|
|
99.2
|
|
Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic
Stabilization Act of 2008 |
153