MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2
. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Risk Factors
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 management’s current 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements may also include statements in which words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “considers” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” and other comparable words or phrases of a future- or forward-looking nature, are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s 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 Company’s ability to control or predict. 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 California in which we conduct operations;
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Our inability to successfully manage our growth or implement our growth strategy;
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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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Continued volatility in the capital or credit markets;
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The value of deferred tax assets could be significantly reduced if corporate tax rates in the U.S. decline resulting in decreased net income in the period in which the change is enacted and a reduction of regulatory capital;
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Changes in the financial performance and/or condition of our borrowers;
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Our concentration in real estate lending;
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Developments and changes in laws and regulations, including increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the California Department of Business Oversight;
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Changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation and other third parties;
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Changes in consumer spending, borrowing and savings habits;
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The reputation of banks and the financial services industry could deteriorate, which could adversely affect the Company's ability to obtain and maintain customers;
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Changes in the level of our nonperforming assets and charge-offs;
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Deterioration in values of real estate in California and the United States generally, both residential and commercial;
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Possible other-than-temporary impairment 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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Technological changes could expose us to new risks, including potential systems failures or fraud;
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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 (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters;
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The risks presented by continued public stock market volatility, which could adversely affect the market price of the Company's common stock and the ability to raise additional capital;
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Inability 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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Consolidation in the financial services industry in the Company's markets resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape;
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The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Natural disaster or recurring energy shortage, especially in California, such as earthquakes, wildfires, droughts, floods and mudslides;
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Unauthorized computer access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems;
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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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Our inability to manage the risks involved in the foregoing; and
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The effects of any reputational damage to the Company resulting from any of the foregoing.
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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 document and in the information incorporated by reference in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake any obligation to publicly correct, revise, or update any forward-looking statement if we later become aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws.
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 “RISK FACTORS” and in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.
For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
under the heading “Risk factors”.
The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The following sections discuss significant changes and trends in the financial condition, capital resources and liquidity of the Company from December 31, 2016 to June 30, 2017. Also discussed are significant trends and changes in the Company’s results of operations for the six months ended June 30, 2017, compared to the same period in 2016. The consolidated financial statements and related notes appearing elsewhere in this report are unaudited. The following discussion and analysis is intended to provide greater detail of the Company's financial condition and results.
GENERAL
Bank of Commerce Holdings (“Holding Company,” “we,” or “us”) is a corporation organized under the laws of California and a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce). We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II, which was organized in connection with our prior issuance of trust-preferred securities. Our common stock is traded on the NASDAQ Global Market under the symbol “BOCH.”
We commenced banking operations in 1982 and with the completion of the purchase of five Bank of America branches during the first quarter of 2016, we now operate nine full service facilities in northern California. We also operate a full service “cyber office” as identified in our summary of deposits reporting filed with the FDIC. We provide a wide range of financial services and products for business and retail customers which are competitive with those traditionally offered by banks of similar size in California.
Our principal executive office is located at 555 Capitol Mall, Sacramento, California 95814 and the telephone number is (530) 722-3939.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Financial highlights for the second quarter of 2017 compared to the same quarter a year ago:
Performance
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Net income of $2.2 million or $0.15 per share - diluted for the three months ended June 30, 2017 was an increase of $653 thousand (42%) from $1.6 million or $0.11 per share - diluted earned during the same period in the prior year.
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Return on average assets improved to 0.76% for the second quarter of 2017 compared to 0.59% for the same period in the prior year.
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Return on average equity improved to 7.85% for the second quarter of 2017 compared to 6.85% for the same period in the prior year.
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Net interest income increased $958 thousand (10%) to $10.2 million for the second quarter of 2017 compared to $9.2 million for the same period in the prior year.
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Average deposits for the three months ended June 30, 2017 totaled $1.0 billion, an increase of $84.4 million (9%) compared to the average deposits for the same period in the prior year.
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Average loans for the three months ended June 30, 2017 totaled $821.3 million, an increase of $78.6 million (11%) compared to the average loans for the same period in the prior year.
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Average earning assets for the three months ended June 30, 2017 totaled $1.1 billion, an increase of $107.5 million (11%) compared to the average earning assets for the same period in the prior year.
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Tangible book value per common share was $7.61 at June 30, 2017 compared to $6.71 at June 30, 2016.
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Efficiency ratio was 69.13% during the second quarter of 2017 compared to 79.43% during the same period in 2016.
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Credit Quality
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Nonperforming assets at June 30, 2017 totaled $10.7 million or 0.88% of total assets, a decrease of $1.0 million (9%) from $11.7 million or 1.09% of total assets at June 30, 2016.
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Net loan charge-offs were $253 thousand
in the second quarter of 2017 compared with net recoveries of $369 thousand for the same period in 2016.
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Financial highlights for the first six months of 2017 compared to the same period a year ago:
Performance
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Net income of $4.5 million or $0.31 per share – diluted for the six months ended June 30, 2017 was an increase of $3.9 million (648%) from $596 thousand or $0.04 per share – diluted earned during the same period in the prior year. Net income for 2016 was negatively impacted by $3.0 million of branch acquisition and balance sheet restructuring costs, a $546 thousand other-than-temporary-impairment of an investment security and the write-off of a $363 thousand deferred tax asset.
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Return on average assets improved to 0.78% for the six months ended June 30, 2017 compared to 0.11% for the same period in the prior year.
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Return on average equity improved to 8.66% for the six months ended June 30, 2017 compared to 1.31% for the same period in the prior year.
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Net interest income increased $2.4 million (14%) to $19.9 million for the six months ended June 30, 2017 compared to $17.5 million for the same period in the prior year.
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Average deposits for the six months ended June 30, 2017 totaled $1.0 billion, an increase of $136.2 million (16%) compared to average deposits for the same period in the prior year.
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Average loans for the six months ended June 30, 2017 totaled $814.1 million, an increase of $82.4 million (11%) compared to average loans for the same period in the prior year.
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Average earning assets for the six months ended June 30, 2017 totaled $1.1 billion, an increase of $106.6 million (11%) compared to average earning assets for the same period in the prior year.
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Tangible book value per common share was $7.61 at June 30, 2017 compared to $6.97 at March 31, 2017.
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Efficiency ratio was 70.32% for the first six months of 2017 compared to 93.45% during the same period in the prior year.
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Credit Quality
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Nonperforming assets at June 30, 2017 totaled $10.7 million or 0.88% of total assets, a decrease of $1.5 million (24% annualized) compared to December 31, 2016.
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Net loan charge-offs were $356 thousand
for the first six months of 2017 compared with net recoveries of $684 thousand
during the same period in the prior year.
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 of the
Notes to the Consolidated Financial Statements
included in the Form 10-K for the year ended December 31, 2016 filed with the SEC on March 15, 2017. Some of these significant accounting policies are considered critical and require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC’s definition.
Valuation of Investments and Impairment of Securities
At the time of purchase, we designate a security as held-to-maturity or available-for-sale, based on our investment objectives, operational needs and intent to hold. We do not engage in trading activity. Securities designated as held-to-maturity are carried at amortized cost. We have the ability and intent to hold these securities to maturity. Securities designated as 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 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, 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. If we intend to sell the security or if it is more likely than not that we will be required to sell security before recovery of the amortized cost basis, the entire amount of other-than-temporary impairment is recognized in earnings.
For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the investment’s amortized cost basis and the present value of its expected future cash flows.
The remaining differences between the investment’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. Significant judgment is required in the determination of whether other-than-temporary impairment has occurred for an investment. We follow a consistent and systematic process for determining other-than-temporary impairment loss. We have designated the ALCO responsible for the other-than-temporary evaluation process.
The ALCO’s assessment of whether other-than-temporary impairment loss should be recognized incorporates both quantitative and qualitative information including, but not limited to: (1) the length of time and the extent of which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, (4) whether the debtor is current on interest and principal payments, and (5) general market conditions and industry or sector specific outlook. See Note 4
Securities
in the
Notes to Consolidated Financial Statements
in this document for further detail on other-than-temporary impairment and the securities portfolio.
Allowance for Loan and Lease Losses
The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In periodic evaluations of the adequacy of the allowance balance, management considers our past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors.
Management reviews the ALLL on a monthly basis and conducts a formal assessment of the adequacy of the ALLL on a quarterly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for unimpaired loan categories are based on analysis of historical losses adjusted for changing environmental factors applicable to each loan category. Allowances for changing environmental factors are management's best estimate of the probable impact these changes would have on the loan portfolio as a whole. See Note 5
Loans
in the
Notes to Consolidated Financial Statements
in this document for further detail on the ALLL and the loan portfolio.
Income Taxes
Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach. We recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences that have been recognized in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets, management considers all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations.
In projecting future taxable income, management develops assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. We file consolidated federal and combined state income tax returns.
ASC 740-10-55
Income Taxes
requires a two-step process that separates recognition from measurement of tax positions. We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. The measurement process is applied only after satisfying the recognition requirement and determines what amount of a tax position will be sustainable upon a potential examination or settlement. If upon measuring, the tax position produces a range of potential tax benefits, we may claim the highest tax benefit from that range as long as it is over 50% likely to be realized using a probability analysis.
We believe that all of the tax positions we have taken, meet the more likely than not recognition threshold. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.
Derivative Financial Instruments and Hedging Activities
During March of 2016, we terminated all of our interest rate swaps (active and forward starting the “hedging instrument”) and simultaneously paid off the $75.0 million Federal Home Loan Bank of San Francisco borrowing (the “hedged instrument”). At the time of termination, the interest rate swaps were carried at a $2.3 million loss in our
Consolidated Balance Sheets
. Accordingly, we immediately reclassified $1.4 million in unrealized losses from other comprehensive income into earnings resulting in a pre-tax loss of $2.3 million recorded in noninterest expense.
We used derivatives to hedge the risk of changes in market interest rates to limit the impact on earnings and cash flows relating to specific groups of assets and liabilities. During 2015 and the first quarter of 2016, we utilized interest rate swaps (the “hedging instrument”) with other major financial institutions (counterparties) to hedge interest expenses associated with certain Federal Home Loan Bank of San Francisco borrowings (the “hedged instrument”). We do not use derivative instruments for trading or speculative purposes.
For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in cash flows of the instruments is recognized immediately into earnings.
ASC 815-10,
Derivatives and Hedging
(“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the
Consolidated Balance Sheets
. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument in cash flow hedges were recorded in accumulated other comprehensive income until earnings were impacted by the hedged instrument. No components of our hedging instruments were excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Classification of the gain or loss in the
Consolidated Statements of Income
upon release from accumulated other comprehensive income is the same as that of the underlying exposure. We discontinue the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were in accumulated other comprehensive income are recognized immediately in earnings.
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 and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a nonrecurring basis, such as certain impaired loans held for investment, (“OREO”) and goodwill. These nonrecurring fair value adjustments typically involve write-downs of individual assets due to application of lower of cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, we use our best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s 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 consolidated financial statements. Additional information on our use of fair value measurements and our related valuation methodologies is provided in Note 12
Fair Values
in the
Notes to Consolidated Financial Statements
incorporated in this document.
SOURCES OF INCOME
We derive our income primarily from 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. Sources of noninterest income include fees earned on deposit related services, ATM and point of sale fees, payroll processing, gain on sale of available-for-sale securities, earnings on bank-owned life insurance and dividends on Federal Home Loan Bank of San Francisco stock.
Net interest income is impacted by many factors that are beyond our control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. In recent years, we originated higher volumes of longer term fixed rate loans. These loans, combined with the structure of our investment portfolio, the use of floors in the pricing of our variable rate loans and funding mix caused the Company to become slightly liability sensitive, which could negatively impact earnings in a rising interest rate environment.
Net interest income reflects both the amount of earning assets we hold and our net interest margin, which is the difference between the yield we on our earning assets and the interest rate we pay to fund those assets. As a result, changes in either our net interest margin or the amount of earning assets we hold will affect our net interest income and earnings.
Increases or decreases in interest rates could adversely affect our net interest margin. Although our asset yields and 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 our ability to reprice a large portion of our liabilities, causing our net interest margin to contract.
Changes in the slope of the yield curve, 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 simulated scenarios that differ based on assumptions including 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 earnings in material amounts, especially if actual conditions turn out to be materially different than simulated scenarios. 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.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Second Quarter of 2017 Compared With Second Quarter of 2016
Net income for the second quarter of 2017 increased $653 thousand compared to the second quarter of 2016. In the current quarter, net interest income was $958 thousand higher and noninterest income was $546 thousand higher. These positive changes were offset by an increase in the provision for loan and lease losses of $300 thousand, noninterest expense that was $46 thousand higher and a provision for income taxes that was $505 thousand higher.
First Six Months
of 2017 Compared With
First
Six Months
of 201
6
Net income for the first six months of 2017 increased $3.9 million compared to the same period a year ago. Net income for the current year included life insurance death benefit proceeds of $502 thousand that were not subject to income tax. Net income for 2016 was negatively impacted by $3.0 million of branch acquisition and balance sheet restructuring costs, a $546 thousand other-than-temporary-impairment of an investment security and the write-off of a $363 thousand deferred tax asset. In the current year, net interest income was $2.4 million higher, noninterest income was $1.1 million higher and noninterest expenses were $1.9 million lower. These positive changes were offset by an increase in the provision for loan and lease losses of $500 thousand, and a provision for income taxes that was $1.1 million higher.
We continued our quarterly cash dividends of $0.03 per share during the six months ended June 30, 2017. In determining the amount of dividend to be paid, management considers capital preservation objectives, expected asset growth, projected earnings, the overall dividend pay-out ratio, and the dividend yield.
Return on Average Assets, Average Total Equity and Common Shareholders' Equity
The following table presents the returns on average assets and average total equity for the six months ended June 30, 2017 and 2016. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the
Consolidated
Statements of Income
incorporated in this document.
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For the Six Months Ended
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June 30, 2017
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June 30, 2016
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Return on average assets
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0.78
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%
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0.11
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%
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Return on average total equity
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8.66
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%
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1.31
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%
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NET INTEREST INCOME AND NET INTEREST MARGIN
For the three months ended June 30, 2017 compared to the same period a year ago:
Net interest income increased $958 thousand compared to the same period a year ago.
Interest income for the three months ended June 30, 2017 increased $1.1 million or 10% to $11.3 million. Interest and fees on loans increased $962 thousand primarily due to increased average loan balances. Interest on securities increased $10 thousand and interest on interest-bearing deposits due from banks increased $91 thousand.
Interest expense for the second quarter of 2017 increased $105 thousand or 10% to $1.1 million. The increase was primarily caused by an increase in the average rate paid on interest-bearing deposits.
For the six months ended June 30, 2017 compared to the same period a year ago:
Net interest income increased $2.4 million compared to the same period a year ago.
Interest income for the six months ended June 30, 2017 increased $2.0 million or 10% to $22.1 million. Interest and fees on loans increased $1.9 million due to increased average loan balances. Interest on securities decreased $49 thousand due to decreased yields partially offset by increased average balances. Interest on interest bearing deposits due from banks increased $130 thousand due to increased average balances and increases in the rate we receive on interest bearing deposits.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense for the first six months of 2017 decreased $412 thousand or 16% to $2.2 million. The net decrease was primarily caused by a $482 thousand decrease in interest on FHLB term debt. Late in the first quarter of 2016 all FHLB term debt was repaid and an interest rate hedge associated with $75.0 million of that debt was terminated.
Average Balances, Interest Income/Expense and Yields/Rates Paid
The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and six months ended June 30, 2017 and 2016.
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Three Months Ended June 30, 2017
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Three Months Ended June 30, 2016
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Average
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|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
(2)
|
|
$
|
821,321
|
|
|
$
|
9,758
|
|
|
|
4.77
|
%
|
|
$
|
742,684
|
|
|
$
|
8,796
|
|
|
|
4.76
|
%
|
Taxable securities
|
|
|
143,705
|
|
|
|
872
|
|
|
|
2.43
|
%
|
|
|
124,183
|
|
|
|
808
|
|
|
|
2.62
|
%
|
Tax-exempt securities
|
|
|
73,927
|
|
|
|
534
|
|
|
|
2.90
|
%
|
|
|
77,168
|
|
|
|
588
|
|
|
|
3.06
|
%
|
Interest-bearing deposits in other banks
|
|
|
58,691
|
|
|
|
156
|
|
|
|
1.07
|
%
|
|
|
46,097
|
|
|
|
65
|
|
|
|
0.57
|
%
|
Average interest-earning assets
|
|
|
1,097,644
|
|
|
|
11,320
|
|
|
|
4.14
|
%
|
|
|
990,132
|
|
|
|
10,257
|
|
|
|
4.17
|
%
|
Cash and due from banks
|
|
|
17,364
|
|
|
|
|
|
|
|
|
|
|
|
17,028
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
15,809
|
|
|
|
|
|
|
|
|
|
|
|
15,632
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
39,630
|
|
|
|
|
|
|
|
|
|
|
|
41,394
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
1,170,447
|
|
|
|
|
|
|
|
|
|
|
$
|
1,064,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
421,888
|
|
|
|
184
|
|
|
|
0.17
|
%
|
|
$
|
382,811
|
|
|
|
130
|
|
|
|
0.14
|
%
|
Savings deposits
|
|
|
109,857
|
|
|
|
47
|
|
|
|
0.17
|
%
|
|
|
103,990
|
|
|
|
41
|
|
|
|
0.16
|
%
|
Certificates of deposit
|
|
|
208,703
|
|
|
|
545
|
|
|
|
1.05
|
%
|
|
|
223,958
|
|
|
|
515
|
|
|
|
0.92
|
%
|
Net term debt
|
|
|
19,539
|
|
|
|
298
|
|
|
|
6.12
|
%
|
|
|
19,510
|
|
|
|
295
|
|
|
|
6.08
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
71
|
|
|
|
2.76
|
%
|
|
|
10,310
|
|
|
|
59
|
|
|
|
2.30
|
%
|
Average interest-bearing liabilities
|
|
|
770,297
|
|
|
|
1,145
|
|
|
|
0.60
|
%
|
|
|
740,579
|
|
|
|
1,040
|
|
|
|
0.56
|
%
|
Noninterest-bearing demand
|
|
|
275,039
|
|
|
|
|
|
|
|
|
|
|
|
220,377
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,256
|
|
|
|
|
|
|
|
|
|
|
|
11,913
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
112,855
|
|
|
|
|
|
|
|
|
|
|
|
91,317
|
|
|
|
|
|
|
|
|
|
Average liabilities and shareholders’ equity
|
|
$
|
1,170,447
|
|
|
|
|
|
|
|
|
|
|
$
|
1,064,186
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
(4)
|
|
|
|
|
|
$
|
10,175
|
|
|
|
3.72
|
%
|
|
|
|
|
|
$
|
9,217
|
|
|
|
3.74
|
%
|
Tax equivalent net interest margin
(3)
|
|
|
|
|
|
|
|
|
|
|
3.82
|
%
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
(1)
Interest income on loans is net of deferred fees and costs of approximately $131 thousand and $352 thousand for the three months ended June 30, 2017 and 2016, respectively.
(2)
Net loans includes average nonaccrual loans of $9.8 million and $11.4 million for the three months ended June 30, 2017 and 2016, respectively.
(3)
Tax-exempt income has been adjusted to a tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $275 thousand and $303 thousand for the three months ended June 30, 2017 and 2016, respectively.
(4)
Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
(5)
Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Six Months Ended June 30, 2017
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
(2)
|
|
$
|
814,098
|
|
|
$
|
19,142
|
|
|
|
4.74
|
%
|
|
$
|
731,740
|
|
|
$
|
17,247
|
|
|
|
4.74
|
%
|
Taxable securities
|
|
|
140,660
|
|
|
|
1,661
|
|
|
|
2.38
|
%
|
|
|
122,050
|
|
|
|
1,592
|
|
|
|
2.62
|
%
|
Tax-exempt securities
|
|
|
73,726
|
|
|
|
1,064
|
|
|
|
2.91
|
%
|
|
|
77,510
|
|
|
|
1,182
|
|
|
|
3.07
|
%
|
Interest-bearing deposits in other banks
|
|
|
57,920
|
|
|
|
270
|
|
|
|
0.94
|
%
|
|
|
48,676
|
|
|
|
140
|
|
|
|
0.58
|
%
|
Average interest-earning assets
|
|
|
1,086,404
|
|
|
|
22,137
|
|
|
|
4.11
|
%
|
|
|
979,976
|
|
|
|
20,161
|
|
|
|
4.14
|
%
|
Cash and due from banks
|
|
|
17,120
|
|
|
|
|
|
|
|
|
|
|
|
14,665
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
15,986
|
|
|
|
|
|
|
|
|
|
|
|
14,008
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
39,928
|
|
|
|
|
|
|
|
|
|
|
|
40,543
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
1,159,438
|
|
|
|
|
|
|
|
|
|
|
$
|
1,049,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
421,156
|
|
|
|
332
|
|
|
|
0.16
|
%
|
|
$
|
353,291
|
|
|
|
252
|
|
|
|
0.14
|
%
|
Savings deposits
|
|
|
111,742
|
|
|
|
94
|
|
|
|
0.17
|
%
|
|
|
100,008
|
|
|
|
86
|
|
|
|
0.17
|
%
|
Certificates of deposit
|
|
|
211,934
|
|
|
|
1,074
|
|
|
|
1.02
|
%
|
|
|
222,897
|
|
|
|
1,112
|
|
|
|
1.00
|
%
|
Net term debt
|
|
|
19,071
|
|
|
|
591
|
|
|
|
6.25
|
%
|
|
|
55,478
|
|
|
|
1,077
|
|
|
|
3.90
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
137
|
|
|
|
2.68
|
%
|
|
|
10,310
|
|
|
|
113
|
|
|
|
2.20
|
%
|
Average interest-bearing liabilities
|
|
|
774,213
|
|
|
|
2,228
|
|
|
|
0.58
|
%
|
|
|
741,984
|
|
|
|
2,640
|
|
|
|
0.72
|
%
|
Noninterest-bearing demand
|
|
|
268,994
|
|
|
|
|
|
|
|
|
|
|
|
201,457
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
14,439
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
103,888
|
|
|
|
|
|
|
|
|
|
|
|
91,312
|
|
|
|
|
|
|
|
|
|
Average liabilities and shareholders’ equity
|
|
$
|
1,159,438
|
|
|
|
|
|
|
|
|
|
|
$
|
1,049,192
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
(4)
|
|
|
|
|
|
$
|
19,909
|
|
|
|
3.70
|
%
|
|
|
|
|
|
$
|
17,521
|
|
|
|
3.60
|
%
|
Tax equivalent net interest margin
(3)
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
3.72
|
%
|
(1)
Interest income on loans is net of deferred fees and costs of approximately $328 thousand and $667 thousand for the six months ended June 30, 2017 and 2016, respectively.
(2)
Net loans includes average nonaccrual loans of $10.3 million and $10.9 million for the six months ended June 30, 2017 and 2016, respectively.
(3)
Tax-exempt income has been adjusted to a tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $548 thousand and $609 thousand for the six months ended June 30, 2017 and 2016, respectively.
(4)
Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
(5)
Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Changes in Net Interest Income
The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume variance) and changes in average rates (rate variance) for the three and six months ended June 30, 2017 and 2016. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.
|
|
Three Months Ended June 30, 2017 Over
Three Months Ended June 30, 2016
|
|
(Amounts in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Increase in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
934
|
|
|
$
|
28
|
|
|
$
|
962
|
|
Taxable securities
|
|
|
112
|
|
|
|
(48
|
)
|
|
|
64
|
|
Tax-exempt securities
(1)
|
|
|
(37
|
)
|
|
|
(45
|
)
|
|
|
(82
|
)
|
Interest-bearing deposits in other banks
|
|
|
22
|
|
|
|
69
|
|
|
|
91
|
|
Total increase
|
|
|
1,031
|
|
|
|
4
|
|
|
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
14
|
|
|
|
40
|
|
|
|
54
|
|
Savings deposits
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
Certificates of deposit
|
|
|
(30
|
)
|
|
|
60
|
|
|
|
30
|
|
Net term debt
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
12
|
|
|
|
12
|
|
Total (decrease) increase
|
|
|
(14
|
)
|
|
|
119
|
|
|
|
105
|
|
Net increase (decrease)
|
|
$
|
1,045
|
|
|
$
|
(115
|
)
|
|
$
|
930
|
|
(1)
Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.
|
|
Six Months Ended June 30, 2017 Over
Six Months Ended June 30, 2016
|
|
(Amounts in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,936
|
|
|
$
|
(41
|
)
|
|
$
|
1,895
|
|
Taxable securities
|
|
|
182
|
|
|
|
(113
|
)
|
|
|
69
|
|
Tax-exempt securities
(1)
|
|
|
(85
|
)
|
|
|
(94
|
)
|
|
|
(179
|
)
|
Interest-bearing deposits in other banks
|
|
|
30
|
|
|
|
100
|
|
|
|
130
|
|
Total increase (decrease)
|
|
|
2,063
|
|
|
|
(148
|
)
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
52
|
|
|
|
28
|
|
|
|
80
|
|
Savings deposits
|
|
|
10
|
|
|
|
(2
|
)
|
|
|
8
|
|
Certificates of deposit
|
|
|
(56
|
)
|
|
|
18
|
|
|
|
(38
|
)
|
Net term debt
|
|
|
(711
|
)
|
|
|
225
|
|
|
|
(486
|
)
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
24
|
|
|
|
24
|
|
Total (decrease) increase
|
|
|
(705
|
)
|
|
|
293
|
|
|
|
(412
|
)
|
Net increase (decrease)
|
|
$
|
2,768
|
|
|
$
|
(441
|
)
|
|
$
|
2,327
|
|
(1)
Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.
PROVISION FOR LOAN AND LEASE LOSSES
Due to a combination of net loan losses and loan portfolio growth, we recorded a $300 thousand and $500 thousand provision for loan and lease losses during the three and six months ended June 30, 2017, respectively. We made no provision for loan and lease losses during the year ended December 31, 2016. See Note 5 -
Loans
in the
Notes to Consolidated Financial Statements
for further discussion.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME
The following table presents the key components of noninterest income for the three and six months ended June 30, 2017 and 2016.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
(Amounts in thousands)
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
142
|
|
|
$
|
88
|
|
|
$
|
54
|
|
|
|
61
|
%
|
|
$
|
269
|
|
|
$
|
160
|
|
|
$
|
109
|
|
|
|
68
|
%
|
ATM and point of sale
|
|
|
288
|
|
|
|
335
|
|
|
|
(47
|
)
|
|
|
(14
|
)
%
|
|
|
554
|
|
|
|
427
|
|
|
|
127
|
|
|
|
30
|
%
|
Payroll and benefit processing fees
|
|
|
147
|
|
|
|
139
|
|
|
|
8
|
|
|
|
6
|
%
|
|
|
338
|
|
|
|
299
|
|
|
|
39
|
|
|
|
13
|
%
|
Life insurance
|
|
|
135
|
|
|
|
153
|
|
|
|
(18
|
)
|
|
|
(12
|
)
%
|
|
|
781
|
|
|
|
309
|
|
|
|
472
|
|
|
|
153
|
%
|
Gain on investment securities, net
|
|
|
35
|
|
|
|
28
|
|
|
|
7
|
|
|
|
25
|
%
|
|
|
101
|
|
|
|
122
|
|
|
|
(21
|
)
|
|
|
(17
|
)
%
|
Other than temporary impairment on investment securities
|
|
|
—
|
|
|
|
(546
|
)
|
|
|
546
|
|
|
|
100
|
%
|
|
|
—
|
|
|
|
(546
|
)
|
|
|
546
|
|
|
|
100
|
%
|
Federal Home Loan Bank of San Francisco dividends
|
|
|
54
|
|
|
|
99
|
|
|
|
(45
|
)
|
|
|
(45
|
)
%
|
|
|
157
|
|
|
|
189
|
|
|
|
(32
|
)
|
|
|
(17
|
)
%
|
Other
|
|
|
182
|
|
|
|
141
|
|
|
|
41
|
|
|
|
29
|
%
|
|
|
325
|
|
|
|
426
|
|
|
|
(101
|
)
|
|
|
(24
|
)
%
|
Total noninterest income
|
|
$
|
983
|
|
|
$
|
437
|
|
|
$
|
546
|
|
|
|
125
|
%
|
|
$
|
2,525
|
|
|
$
|
1,386
|
|
|
$
|
1,139
|
|
|
|
82
|
%
|
For the three months ended June 30, 2017 compared to the same period a year ago:
|
●
|
Noninterest income for 2016 was negatively impacted by the $546 thousand impairment of a bond investment.
|
For the six months ended June 30, 2017 compared to the same period a year ago:
|
●
|
During the current year we recognized life insurance death benefit proceeds of $502 thousand.
|
|
●
|
Our branch and offsite ATM acquisition completed late in the first quarter of 2016, enhanced 2017 point of sale and ATM fees by $127 thousand and enhanced service charges on deposit accounts by $109 thousand.
|
NONINTEREST EXPENSE
The following table presents the key elements of noninterest expense for the three and six months ended June 30, 2017 and 2016.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
(Amounts in thousands)
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
|
2017
|
|
|
2016
|
|
|
Amount
|
|
|
Percent
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & related benefits
|
|
$
|
4,147
|
|
|
$
|
4,086
|
|
|
$
|
61
|
|
|
|
1
|
%
|
|
$
|
9,005
|
|
|
$
|
8,315
|
|
|
$
|
690
|
|
|
|
8
|
%
|
Premises & equipment
|
|
|
1,054
|
|
|
|
987
|
|
|
|
67
|
|
|
|
7
|
%
|
|
|
2,102
|
|
|
|
1,776
|
|
|
|
326
|
|
|
|
18
|
%
|
Federal Deposit Insurance Corporation insurance premium
|
|
|
104
|
|
|
|
181
|
|
|
|
(77
|
)
|
|
|
(43
|
)
%
|
|
|
152
|
|
|
|
337
|
|
|
|
(185
|
)
|
|
|
(55
|
)
%
|
Data processing fees
|
|
|
450
|
|
|
|
374
|
|
|
|
76
|
|
|
|
20
|
%
|
|
|
857
|
|
|
|
678
|
|
|
|
179
|
|
|
|
26
|
%
|
Professional service fees
|
|
|
501
|
|
|
|
470
|
|
|
|
31
|
|
|
|
7
|
%
|
|
|
894
|
|
|
|
906
|
|
|
|
(12
|
)
|
|
|
(1
|
)
%
|
Telecommunications
|
|
|
223
|
|
|
|
199
|
|
|
|
24
|
|
|
|
12
|
%
|
|
|
434
|
|
|
|
346
|
|
|
|
88
|
|
|
|
25
|
%
|
Branch acquisition costs
|
|
|
—
|
|
|
|
168
|
|
|
|
(168
|
)
|
|
|
(100
|
)
%
|
|
|
—
|
|
|
|
580
|
|
|
|
(580
|
)
|
|
|
(100
|
)
%
|
Loss on cancellation of interest rate swap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
2,325
|
|
|
|
(2,325
|
)
|
|
|
(100
|
)
%
|
Other
|
|
|
1,235
|
|
|
|
1,203
|
|
|
|
32
|
|
|
|
3
|
%
|
|
|
2,331
|
|
|
|
2,406
|
|
|
|
(75
|
)
|
|
|
(3
|
)
%
|
Total noninterest expense
|
|
$
|
7,714
|
|
|
$
|
7,668
|
|
|
$
|
46
|
|
|
|
1
|
%
|
|
$
|
15,775
|
|
|
$
|
17,669
|
|
|
$
|
(1,894
|
)
|
|
|
(11
|
)
%
|
For the three months ended June 30, 2017 compared to the same period a year ago:
Noninterest expense for the three months ended June 30, 2017 increased $46 thousand compared to the same period a year previous. The increase was primarily due to termination and write-off of a $137 thousand software development project and data processing fees that increased $76 thousand. In 2017, branch acquisition and balance sheet reconfiguration costs of $168 thousand recorded in the same period a year previous did not recur.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the six months ended June 30, 2017 compared to the same period a year ago:
Noninterest expense for the six months ended June 30, 2017 decreased $1.9 million compared to the same period a year ago. The decrease in noninterest expense was primarily due to the $3.0 million of branch acquisition and balance sheet restructuring costs recorded in the prior year that did not recur. The decrease was partially offset by the following items.
|
●
|
Salaries and related benefits costs increased $286 thousand directly related to the branch locations acquired late in the first quarter of 2016.
|
|
●
|
Premises and equipment expense increased $202 thousand directly related to the branch and offsite ATM locations acquired in the first quarter of 2016.
|
|
●
|
Termination and write-off of a $137 thousand software development project during the second quarter of 2017.
|
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 following table reflects our tax provision and the related effective tax rate for the periods indicated.
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
(Amounts in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income before provision for income taxes
|
|
$
|
3,144
|
|
|
$
|
1,986
|
|
|
$
|
6,159
|
|
|
$
|
1,238
|
|
Provision for income taxes
|
|
$
|
935
|
|
|
$
|
430
|
|
|
$
|
1,698
|
|
|
$
|
642
|
|
Effective tax rate
|
|
|
29.74
|
%
|
|
|
21.65
|
%
|
|
|
27.57
|
%
|
|
|
51.86
|
%
|
Provision for income taxes - excluding DTA write-off
|
|
$
|
935
|
|
|
$
|
430
|
|
|
$
|
1,698
|
|
|
$
|
279
|
|
Effective tax rate - excluding DTA write-off
|
|
|
29.74
|
%
|
|
|
21.65
|
%
|
|
|
27.57
|
%
|
|
|
22.54
|
%
|
During the three months ended June 30, 2017, the Company recorded a provision for income taxes of $935 thousand (29.74% effective tax rate) compared with a provision for income taxes of $430 thousand (21.65% effective tax rate) for the same period a year ago.
During the six months ended June 30, 2017, the Company recorded a provision for income taxes of $1.7 million (27.57% effective tax rate) compared with a provision for income taxes of $642 thousand (51.86% effective tax rate) for the same period a year previous.
|
●
|
Life insurance death benefits of $502 thousand recorded during the current year are not subject to income tax, and if excluded from pretax income, the effective tax rate would have been 30.0% for the six months ended June 30, 2017.
|
|
●
|
During the six months ended June 30, 2016, the Company recorded an income tax expense of $642 thousand which was comprised of a $279 thousand tax provision on operating income (22.5% of pretax income of $1.2 million) and the write-off of a $363 thousand deferred tax asset.
|
Excluding the unique items described above, the company’s effective tax rate on operating income has increased from 21.7% and 22.5% (three and six month periods ended June 30, 2016, respectively) to 29.7% and 30.0% (three and six month periods ended June 30, 2017, respectively). The increase has occurred as the items which lower the company’s effective tax rate (muni income, tax credits and permanent deductions arising from investments in low income housing partnerships) remain essentially unchanged in amount from year to year, but comprise a significantly smaller percentage of pre-tax income.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CONSOLIDATED BALANCE SHEETS
As of June 30, 2017, we had total consolidated assets of $1.2 billion, gross loans of $815.4 million, allowance for loan and lease losses (“ALLL”) of $11.7 million, total deposits of $1.0 billion, and shareholders’ equity of $126.0 million.
We continued to maintain a strong liquidity position during the reporting period. As of June 30, 2017, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $23.4 million. We also held interest-bearing deposits in the amount of $73.4 million.
Available-for-sale investment securities totaled $209.6 million at June 30, 2017, compared to $175.2 million at December 31, 2016. Our available-for-sale investment portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations.
During the first six months of 2017, we purchased 49 securities with a par value of $67.4 million and weighted average yield of 2.51% and sold 22 securities with a par value of $26.1 million and weighted average yield of 2.00%. The sales activity on available-for-sale securities resulted in $101 thousand in net realized gains for the six months ended June 30, 2017. During the six months ended June 30, 2017, we also received $9.8 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.
At June 30, 2017, our net unrealized gains on available-for-sale investment securities were $682 thousand compared to net unrealized losses of $1.3 million at December 31, 2016. The unrealized gains arising during the six months ended June 30, 2017 were primarily driven by a narrowing of market spreads and changes in interest rates.
We recorded gross loan balances of $815.4 million at June 30, 2017, compared to $804.2 million at December 31, 2016; an increase of $11.2 million. The increase in gross loans occurred primarily in the Bank’s Sacramento marketplace and is the result of investments in our SBA division and in our expanded Sacramento commercial banking group.
The ALLL at June 30, 2017 increased $144 thousand to $11.7 million compared to $11.5 million at December 31, 2016. A combination of net loan losses and loan portfolio growth supported management’s decision to record a $500 thousand provision for loan and lease losses during the six months ended June 30, 2017. During the year ended December 31, 2016, there were no provisions for loan and lease losses. Net loan charge-offs were $356 thousand during the six months ended June 30, 2017, compared to net loan loss recoveries of $684 thousand during the same period a year previous. At June 30, 2017, relying on our ALLL methodology, which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, we believe the ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses.
Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, decreased by $2.2 million to $9.2 million, or 1.12% of gross loans, as of June 30, 2017, compared to $11.4 million, or 1.42% of gross loans as of December 31, 2016. Past due loans as of June 30, 2017 decreased $ 1.1 million to $3.4 million, compared to $4.6 million as of December 31, 2016. We believe that risk grading for past due loans appropriately reflects the risk associated with the past due loans. See Note 5
Loans
in the
Notes to Consolidated Financial Statements
in this document for further detail on the ALLL and the loan portfolio.
Premises and equipment totaled $15.4 million at June 30, 2017 a decrease of $809 thousand compared to $16.2 million at December 31, 2016.
Our OREO balance at June 30, 2017 was $1.5 million compared to $759 thousand at December 31, 2016. For the six months ended June 30, 2017, we transferred five foreclosed properties in the amount of $924 thousand to OREO and we sold four properties with balances of $113 thousand for a net loss of $59 thousand. During the six months ended June 30, 2017, we recognized a write-down of $52 thousand on one OREO property.
Bank-owned life insurance decreased $1.5 million during the six months ended June 30, 2017 to $21.6 million compared to $23.1 million at December 31, 2016. During the first quarter of 2017, we received $2.2 million from life insurance death benefit proceeds, of which $502 thousand was recorded in income. Our net deferred tax assets were $8.7 million at June 30, 2017 compared to $9.5 million at December 31, 2016.
Other assets which include the Bank’s investment in low income housing tax credit partnerships and investment in Federal Home Loan Bank of San Francisco stock totaled $19.6 million at June 30, 2017 compared to $20.4 million at December 31, 2016.
Total deposits at June 30, 2017 increased $108.7 million or 12% to $1.0 billion compared to the same date a year ago and increased $41.6 million or 8% annualized compared to December 31, 2016.
|
●
|
Total non-maturing deposits increased $124.5 million or 17% compared to the same date a year ago and increased $50.6 million or 13% annualized compared to December 31, 2016.
|
|
●
|
Certificates of deposit decreased $15.9 million or 7% compared to the same date a year ago and decreased $9.0 million or 8% annualized compared to December 31, 2016.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other liabilities which include the Bank’s income tax liabilities, supplemental executive retirement plan and funding obligation for investments in qualified affordable housing partnerships decreased $1.7 million to $11.5 million as of June 30, 2017 compared to $13.2 million at December 31, 2016.
Investment Securities
The composition of our investment securities portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.
The investment securities portfolio also:
|
●
|
Mitigates interest rate risk;
|
|
●
|
Mitigates a portion of credit risk inherent in the loan portfolio;
|
|
●
|
Provides a vehicle for the investment of excess liquidity;
|
|
●
|
Provides a source of liquidity when pledged as collateral for lines of credit;
|
|
●
|
Can be used as collateral for certain public funds.
|
Available-for-sale investment securities totaled $209.6 million at June 30, 2017, compared to $175.2 million at December 31, 2016. During the first six months of 2017, we continued to deploy liquidity provided by the March 2016 branch acquisition, strong organic deposit growth and the sale of common stock into loan originations, interest bearing deposits at other banks and available for sale securities.
Our held-to-maturity investment portfolio is generally utilized to hold longer term securities that may have greater price risk, many of which are pledged as collateral for our local agency deposit program. This portfolio includes securities with longer durations and higher coupons than securities held in the available-for-sale securities portfolio. Held-to-maturity investment securities had amortized costs of $31.3 million at June 30, 2017, compared to $31.2 million at December 31, 2016. There were no held-to-maturity securities purchased during the six months ended June 30, 2017.
The following table presents the carrying value of the investment securities portfolio by classification and major type as of June 30, 2017 and December 31, 2016.
|
|
June 30,
|
|
|
December 31,
|
|
(Amounts in thousands)
|
|
2017
|
|
|
2016
|
|
Available-for-sale securities:
(1)
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
$
|
24,231
|
|
|
$
|
10,354
|
|
Obligations of state and political subdivisions
|
|
|
58,400
|
|
|
|
59,428
|
|
mortgage-backed securities and collateralized mortgage obligations
|
|
|
91,375
|
|
|
|
69,604
|
|
Corporate securities
|
|
|
8,312
|
|
|
|
16,116
|
|
Commercial mortgage-backed securities
|
|
|
23,421
|
|
|
|
15,514
|
|
Other asset-backed securities
|
|
|
3,870
|
|
|
|
4,158
|
|
Total
|
|
$
|
209,609
|
|
|
$
|
175,174
|
|
Held-to-maturity securities:
(1)
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
31,329
|
|
|
$
|
31,187
|
|
(1)
Available-for-sale securities are reported at fair value, and held-to-maturity securities are reported at amortized cost.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents information regarding the amortized cost, maturity structure and average yield of the investment portfolio at June 30, 2017.
|
|
|
|
|
|
|
|
|
|
Over One Through
|
|
|
Over Five Through
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
(Amounts in thousands)
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Available-for-sale securities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
1,782
|
|
|
|
2.30
|
%
|
|
$
|
22,438
|
|
|
|
2.57
|
%
|
|
$
|
24,220
|
|
|
|
2.55
|
%
|
Obligations of state and political subdivisions
|
|
|
189
|
|
|
|
2.73
|
%
|
|
|
5,807
|
|
|
|
2.66
|
%
|
|
|
24,615
|
|
|
|
2.81
|
%
|
|
|
26,465
|
|
|
|
2.53
|
%
|
|
|
57,076
|
|
|
|
2.66
|
%
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
214
|
|
|
|
4.70
|
%
|
|
|
45,764
|
|
|
|
2.25
|
%
|
|
|
39,704
|
|
|
|
2.77
|
%
|
|
|
6,160
|
|
|
|
2.89
|
%
|
|
|
91,842
|
|
|
|
2.52
|
%
|
Corporate securities
|
|
|
1,023
|
|
|
|
1.74
|
%
|
|
|
6,245
|
|
|
|
3.32
|
%
|
|
|
1,000
|
|
|
|
2.00
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
8,268
|
|
|
|
2.97
|
%
|
Commercial mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
%
|
|
|
939
|
|
|
|
1.28
|
%
|
|
|
5,240
|
|
|
|
2.09
|
%
|
|
|
17,405
|
|
|
|
2.39
|
%
|
|
|
23,584
|
|
|
|
2.28
|
%
|
Other asset-backed securities
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
3,937
|
|
|
|
2.26
|
%
|
|
|
3,937
|
|
|
|
2.26
|
%
|
Total
|
|
$
|
1,426
|
|
|
|
2.31
|
%
|
|
$
|
58,755
|
|
|
|
2.39
|
%
|
|
$
|
72,341
|
|
|
|
2.71
|
%
|
|
$
|
76,405
|
|
|
|
2.53
|
%
|
|
$
|
208,927
|
|
|
|
2.55
|
%
|
Held-to-maturity securities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
6,750
|
|
|
|
3.32
|
%
|
|
$
|
11,448
|
|
|
|
2.83
|
%
|
|
$
|
13,131
|
|
|
|
3.39
|
%
|
|
$
|
31,329
|
|
|
|
3.17
|
%
|
(1)
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.
Loan Portfolio
Loan Concentrations
Historically, we have concentrated our loan origination activities primarily within El Dorado, Placer, Sacramento, and Shasta counties in California. In recent years our loan origination activity has expanded to include other portions of California and northern Nevada. We manage our credit risk through various diversifications of our loan portfolio, the application of sound underwriting policies and procedures, and ongoing credit monitoring practices. Generally, the loans are secured by real estate or other assets located in California. Repayment is expected from the borrower’s cash flows or cash flows from real estate investments.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the composition of the loan portfolio as of June 30, 2017 and December 31, 2016.
(Amounts in thousands)
|
|
June 30,
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Loan Portfolio
|
|
2017
|
|
|
%
|
|
|
2016
|
|
|
%
|
|
Commercial
|
|
$
|
152,204
|
|
|
|
19
|
%
|
|
$
|
153,844
|
|
|
|
19
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
22,275
|
|
|
|
3
|
|
|
|
36,792
|
|
|
|
5
|
|
Real estate - commercial non-owner occupied
|
|
|
310,995
|
|
|
|
38
|
|
|
|
292,615
|
|
|
|
36
|
|
Real estate - commercial owner occupied
|
|
|
184,868
|
|
|
|
23
|
|
|
|
167,335
|
|
|
|
21
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
43,229
|
|
|
|
5
|
|
|
|
45,566
|
|
|
|
6
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
18,904
|
|
|
|
2
|
|
|
|
20,425
|
|
|
|
3
|
|
Real estate - residential - equity lines
|
|
|
32,133
|
|
|
|
4
|
|
|
|
35,953
|
|
|
|
4
|
|
Consumer and other
|
|
|
50,780
|
|
|
|
6
|
|
|
|
51,681
|
|
|
|
6
|
|
Gross loans
|
|
|
815,388
|
|
|
|
100
|
%
|
|
|
804,211
|
|
|
|
100
|
%
|
Deferred loan fees
|
|
|
1,541
|
|
|
|
|
|
|
|
1,324
|
|
|
|
|
|
Loans, net of deferred fees and costs
|
|
|
816,929
|
|
|
|
|
|
|
|
805,535
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(11,688
|
)
|
|
|
|
|
|
|
(11,544
|
)
|
|
|
|
|
Net loans
|
|
$
|
805,241
|
|
|
|
|
|
|
$
|
793,991
|
|
|
|
|
|
The following table sets forth the maturity and re-pricing distribution of our gross loans outstanding as of June 30, 2017, which, based on remaining scheduled repayments of principal, are due within the periods indicated.
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
|
|
Within One
|
|
|
Through
|
|
|
After Five
|
|
|
|
|
|
(Amounts in thousands)
|
|
Year
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
Commercial
|
|
$
|
41,972
|
|
|
$
|
57,220
|
|
|
$
|
53,012
|
|
|
$
|
152,204
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
4,930
|
|
|
|
3,952
|
|
|
|
13,393
|
|
|
|
22,275
|
|
Real estate - commercial non-owner occupied
|
|
|
4,538
|
|
|
|
56,585
|
|
|
|
249,872
|
|
|
|
310,995
|
|
Real estate - commercial owner occupied
|
|
|
5,113
|
|
|
|
20,353
|
|
|
|
159,402
|
|
|
|
184,868
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
—
|
|
|
|
—
|
|
|
|
43,229
|
|
|
|
43,229
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
295
|
|
|
|
3,133
|
|
|
|
15,476
|
|
|
|
18,904
|
|
Real estate - residential - equity lines
|
|
|
22
|
|
|
|
4,595
|
|
|
|
27,516
|
|
|
|
32,133
|
|
Consumer and other
|
|
|
47,922
|
|
|
|
607
|
|
|
|
2,251
|
|
|
|
50,780
|
|
Gross loans
|
|
$
|
104,792
|
|
|
$
|
146,445
|
|
|
$
|
564,151
|
|
|
$
|
815,388
|
|
Loans due after one year with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
|
|
|
|
$
|
62,446
|
|
|
$
|
176,045
|
|
|
$
|
238,491
|
|
Variable rates
|
|
|
|
|
|
|
83,999
|
|
|
|
388,106
|
|
|
|
472,105
|
|
Total
|
|
|
|
|
|
$
|
146,445
|
|
|
$
|
564,151
|
|
|
$
|
710,596
|
|
Loans with unique credit characteristics
In April of 2009, we completed a loan ‘swap’ transaction, which included a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans are geographically disbursed throughout the United States and are made to legal United States residents who do not possess a social security number. The ITIN loan portfolio is serviced through a third party. The majority of the ITIN loans are variable rate loans and may have an increased default risk in a rising rate environment. 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 become responsible for servicing of these ITIN loans, then we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.
Purchased Loans
In addition to loans we have originated, the loan portfolio includes purchased loan pools and purchased participations. Purchased loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an ALLL is not recorded at the acquisition date. Additional information regarding the individual purchased loan pools can be found in Note 13
Purchase of Financial Assets
in the
Notes to Consolidated Financial Statements
in this document.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the recorded investment in purchased loans at June 30, 2017 and December 31, 2016.
(Amounts in thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Purchased Loans
|
|
Balance
|
|
|
% of Gross Loan Portfolio
|
|
|
Balance
|
|
|
% of Gross Loan Portfolio
|
|
Commercial
|
|
$
|
108
|
|
|
|
—
|
%
|
|
$
|
109
|
|
|
|
—
|
%
|
Commercial real estate
|
|
|
31,405
|
|
|
|
4
|
|
|
|
31,662
|
|
|
|
4
|
|
Residential real estate
|
|
|
50,061
|
|
|
|
6
|
|
|
|
52,888
|
|
|
|
7
|
|
Consumer and other
|
|
|
48,686
|
|
|
|
6
|
|
|
|
49,057
|
|
|
|
6
|
|
Total purchased loans
|
|
$
|
130,260
|
|
|
|
16
|
%
|
|
$
|
133,716
|
|
|
|
17
|
%
|
Asset Quality
Nonperforming Assets
Our loan portfolio is heavily concentrated in real estate, and a significant portion of our borrowers’ ability to repay their loans is dependent upon the professional services, commercial real estate market and the residential real estate development industry sectors. Loans secured by real estate or other assets primarily located in California are expected to be repaid from cash flows of the borrower or proceeds from the sale of collateral. As such, our dependence on real estate secured loans could increase the risk of loss in our loan portfolio in a market of declining real estate values. Furthermore, declining real estate values negatively impact holdings of OREO.
We manage asset quality and mitigate credit risk through the application of policies designed to promote sound underwriting and loan monitoring practices. Our Loan Committee is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for loan and lease losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable incurred losses. The amount of provision charge is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of loan portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of these factors is performed through an analysis of the adequacy of the ALLL. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the ALLL, and to determine the adequacy of the allowance, are conducted on a monthly basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan portfolio, prevailing economic conditions and other factors.
A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when we identify a loan as impaired, we measure the loan for potential impairment using discount cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor our Exclusionary List of appraisers and brokers. In most cases, appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.
Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by our Chief Credit Officer. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, we do not believe there are significant time lapses for the recognition of additional provision for loan and lease loss or charge-offs from the date they become known.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans are classified as nonaccrual when collection of principal or interest is doubtful; generally these are loans that are past due as to maturity or payment of principal or interest by 90 days or more, unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for nonaccrual status. Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear certain.
Upon acquisition of real estate collateral, typically through the foreclosure process, we promptly begin to market the property for sale. If we do not begin to receive offers or indications of interest, we will analyze the price and review market conditions to assess the pricing level that would enable us to sell the property. At the time of foreclosure, OREO is recorded at fair value less costs to sell (“cost”), which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, management periodically performs valuations and the property is carried at the lower of the cost or fair value less expected selling costs. We obtain updated appraisals on OREO property every six to twelve months. Increases in valuation adjustments recorded in a period are primarily based on (1) updated appraisals received during the period, or (2) management’s authorization to reduce the selling price of the property during the period. Unless a current appraisal is available, an appraisal will be ordered prior to a loan migrating to OREO.
The following table summarizes our nonperforming assets as of June 30, 2017 and December 31, 2016.
(Amounts in thousands)
|
|
June 30,
|
|
|
December 31,
|
|
Nonperforming Assets
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
2,410
|
|
|
$
|
2,749
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
1,196
|
|
|
|
1,196
|
|
Real estate - commercial owner occupied
|
|
|
639
|
|
|
|
784
|
|
Total commercial real estate
|
|
|
1,835
|
|
|
|
1,980
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
3,346
|
|
|
|
3,576
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
653
|
|
|
|
1,914
|
|
Real estate - residential - equity lines
|
|
|
872
|
|
|
|
917
|
|
Total residential real estate
|
|
|
4,871
|
|
|
|
6,407
|
|
Consumer and other
|
|
|
38
|
|
|
|
250
|
|
Total nonaccrual loans
|
|
|
9,154
|
|
|
|
11,386
|
|
90 days past due and still accruing
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
|
9,154
|
|
|
|
11,386
|
|
Other real estate owned
|
|
|
1,517
|
|
|
|
759
|
|
Total nonperforming assets
|
|
$
|
10,671
|
|
|
$
|
12,145
|
|
Nonperforming loans to loans, net of deferred fees and costs
|
|
|
1.12
|
%
|
|
|
1.41
|
%
|
Nonperforming assets to total assets
|
|
|
0.88
|
%
|
|
|
1.06
|
%
|
We are continually performing extensive reviews of the commercial real estate portfolio, including stress testing. These reviews are performed on both our non-owner and owner occupied credits. These reviews are completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects. Stress testing is performed to determine the effect of rising cap rates, interest rates, and vacancy rates on the portfolio. Based on our analysis, we believe our lending teams are effectively managing the risks in this portfolio. There can be no assurance that any further declines in economic conditions, such as potential increases in retail or office vacancy rates, will not exceed the projected assumptions utilized in stress testing resulting in additional nonperforming loans in the future.
Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent troubled debt restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement to the loans carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.
As of June 30, 2017, we had $11.3 million in troubled debt restructurings compared to $12.1 million as of December 31, 2016. As of June 30, 2017, we had 118 restructured loans that qualified as troubled debt restructurings, of which 111 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.39% of gross loans as of June 30, 2017, compared to 1.50% at December 31, 2016.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Impaired loans of $6.7 million and $7.1 million were classified as accruing troubled debt restructurings at June 30, 2017 and December 31, 2016, respectively. The restructured loans on accrual status represent the majority of impaired loans accruing interest at each respective date. For a restructured loan to be on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. As of June 30, 2017, we had one restructured commercial line of credit in nonaccrual status
that had $107 thousand in available credit. We had no other obligations to lend additional funds on any other restructured loans as of June 30, 2017 or December 31, 2016.
The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of June 30, 2017 and December 31, 2016.
(Amounts in thousands)
|
|
June 30,
|
|
|
December 31,
|
|
Troubled Debt Restructurings
|
|
2017
|
|
|
2016
|
|
Accruing troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
703
|
|
|
$
|
776
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
806
|
|
|
|
808
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
4,712
|
|
|
|
5,033
|
|
Real estate - residential - equity lines
|
|
|
445
|
|
|
|
454
|
|
Total accruing troubled debt restructurings
|
|
$
|
6,666
|
|
|
$
|
7,071
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,757
|
|
|
$
|
1,940
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
2,524
|
|
|
|
2,691
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
321
|
|
|
|
335
|
|
Consumer and other
|
|
|
28
|
|
|
|
29
|
|
Total nonaccruing troubled debt restructurings
|
|
$
|
4,630
|
|
|
$
|
4,995
|
|
Total troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,460
|
|
|
$
|
2,716
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
806
|
|
|
|
808
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
7,236
|
|
|
|
7,724
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
321
|
|
|
|
335
|
|
Real estate - residential - equity lines
|
|
|
445
|
|
|
|
454
|
|
Consumer and other
|
|
|
28
|
|
|
|
29
|
|
Total troubled debt restructurings
|
|
$
|
11,296
|
|
|
$
|
12,066
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings to gross loans outstanding at period end
|
|
|
1.39
|
%
|
|
|
1.50
|
%
|
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
The ALLL at June 30, 2017 increased $144 thousand to $11.7 million compared to $11.5 million at December 31, 2016. A combination of net loan losses and loan portfolio growth supported management’s decision to record a $300 thousand and $500 thousand provision for loan and lease losses during the three and six months ended June 30, 2017, respectively. During the year ended December 31, 2016 there were no provisions for loan and lease losses.
We recorded net loan charge-offs of $356 thousand for the six months ended June 30, 2017 compared to net loan loss recoveries of $364 thousand for the year ended December 31, 2016. Charge-offs of $466 thousand during the six months ended June 30, 2017 occurred primary from purchased consumer loans and were partially offset by recoveries of $235 thousand from five commercial loan relationships. Our ALLL as a percentage of gross loans was 1.43% as of June 30, 2017 and 1.44% as of December 31, 2016.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the ALLL roll forward for the six months ended June 30, 2017, twelve months ended December 31, 2016 and the six months ended June 30, 2016. This table also includes impaired loan information at June 30, 2017, December 31, 2016 and June 30, 2016.
|
|
For The Six
Months Ended
|
|
|
For The Twelve
Months Ended
|
|
|
For The Six
Months Ended
|
|
(Amounts in thousands)
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
Beginning balance ALLL
|
|
$
|
11,544
|
|
|
$
|
11,180
|
|
|
$
|
11,180
|
|
Provision for loan and lease loss charged to expense
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
Loans charged off
|
|
|
(806
|
)
|
|
|
(2,784
|
)
|
|
|
(2,041
|
)
|
Loan and lease loss recoveries
|
|
|
450
|
|
|
|
3,148
|
|
|
|
2,725
|
|
Ending balance ALLL
|
|
$
|
11,688
|
|
|
$
|
11,544
|
|
|
$
|
11,864
|
|
|
|
At June 30,
2017
|
|
|
At December 31,
2016
|
|
|
At June 30,
2016
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,410
|
|
|
$
|
2,749
|
|
|
$
|
2,149
|
|
Real estate - commercial non-owner occupied
|
|
|
1,196
|
|
|
|
1,196
|
|
|
|
1,197
|
|
Real estate - commercial owner occupied
|
|
|
639
|
|
|
|
784
|
|
|
|
816
|
|
Real estate - residential - ITIN
|
|
|
3,346
|
|
|
|
3,576
|
|
|
|
3,664
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
653
|
|
|
|
1,914
|
|
|
|
1,824
|
|
Real estate - residential - equity lines
|
|
|
872
|
|
|
|
917
|
|
|
|
995
|
|
Consumer and other
|
|
|
38
|
|
|
|
250
|
|
|
|
266
|
|
Total nonaccrual loans
|
|
|
9,154
|
|
|
|
11,386
|
|
|
|
10,911
|
|
Accruing troubled-debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
703
|
|
|
|
776
|
|
|
|
760
|
|
Real estate - commercial non-owner occupied
|
|
|
806
|
|
|
|
808
|
|
|
|
816
|
|
Real estate - residential - ITIN
|
|
|
4,712
|
|
|
|
5,033
|
|
|
|
5,336
|
|
Real estate - residential - equity lines
|
|
|
445
|
|
|
|
454
|
|
|
|
548
|
|
Total accruing restructured loans
|
|
|
6,666
|
|
|
|
7,071
|
|
|
|
7,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other accruing impaired loans
|
|
|
—
|
|
|
|
337
|
|
|
|
550
|
|
Total impaired loans
|
|
$
|
15,820
|
|
|
$
|
18,794
|
|
|
$
|
18,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans outstanding
|
|
$
|
815,388
|
|
|
$
|
804,211
|
|
|
$
|
754,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of ALLL to gross loans outstanding
|
|
|
1.43
|
%
|
|
|
1.44
|
%
|
|
|
1.57
|
%
|
Nonaccrual loans to gross loans outstanding
|
|
|
1.12
|
%
|
|
|
1.42
|
%
|
|
|
1.45
|
%
|
As of June 30, 2017, impaired loans totaled $15.8 million, of which $9.2 million were in nonaccrual status. Of the total impaired loans, $8.1 million or 116 were ITIN loans with an average balance of approximately $69 thousand. The remaining impaired loans consist of nine commercial loans, three commercial real estate loans, four residential mortgages, ten home equity loans and two consumer loans.
At June 30, 2017, impaired loans had a corresponding specific allowance of $1.1 million. The specific allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the allocation of the ALLL and percent of loans in each category to gross loans as of June 30, 2017 and December 31, 2016.
(Amounts in thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
ALLL
|
|
Amount
|
|
|
% Loan Category
|
|
|
Amount
|
|
|
% Loan Category
|
|
Commercial
|
|
$
|
2,850
|
|
|
|
24
|
%
|
|
$
|
2,849
|
|
|
|
25
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
104
|
|
|
|
1
|
|
|
|
177
|
|
|
|
2
|
|
Real estate - commercial non-owner occupied
|
|
|
4,106
|
|
|
|
34
|
|
|
|
3,637
|
|
|
|
32
|
|
Real estate - commercial owner occupied
|
|
|
1,862
|
|
|
|
16
|
|
|
|
1,764
|
|
|
|
15
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
545
|
|
|
|
5
|
|
|
|
973
|
|
|
|
8
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
92
|
|
|
|
1
|
|
|
|
106
|
|
|
|
1
|
|
Real estate - residential - equity lines
|
|
|
560
|
|
|
|
5
|
|
|
|
637
|
|
|
|
5
|
|
Consumer and other
|
|
|
1,137
|
|
|
|
10
|
|
|
|
955
|
|
|
|
8
|
|
Unallocated
|
|
|
432
|
|
|
|
4
|
|
|
|
446
|
|
|
|
4
|
|
Total ALLL
|
|
$
|
11,688
|
|
|
|
100
|
%
|
|
$
|
11,544
|
|
|
|
100
|
%
|
The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk grading-based component, or in the specific reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of June 30, 2017 and December 31, 2016, the unallocated allowance amount represented 4% of the ALLL. While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ.
Deposits
Total deposits as of June 30, 2017 were $1.0 billion compared to $1.0 billion at December 31, 2016, an increase of $41.6 million or 8% annualized. The following table presents the deposit balances by major category as of June 30, 2017, and December 31, 2016.
(Amounts in thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Deposits
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Noninterest-bearing demand
|
|
$
|
303,560
|
|
|
|
30
|
%
|
|
$
|
270,398
|
|
|
|
27
|
%
|
Interest-bearing demand
|
|
|
197,753
|
|
|
|
19
|
|
|
|
198,328
|
|
|
|
20
|
|
Money market accounts
|
|
|
229,045
|
|
|
|
22
|
|
|
|
207,241
|
|
|
|
20
|
|
Savings
|
|
|
109,472
|
|
|
|
10
|
|
|
|
113,309
|
|
|
|
11
|
|
Certificates of deposit, $100,000 or greater
|
|
|
161,907
|
|
|
|
15
|
|
|
|
167,962
|
|
|
|
17
|
|
Certificates of deposit, less than $100,000
|
|
|
44,488
|
|
|
|
4
|
|
|
|
47,428
|
|
|
|
5
|
|
Total
|
|
$
|
1,046,225
|
|
|
|
100
|
%
|
|
$
|
1,004,666
|
|
|
|
100
|
%
|
The following table sets forth the distribution of our year-to-date average daily balances and their respective average rates for the six months ended June 30, 2017, and the year ended December 31, 2016.
|
|
For the Six Months Ended June 30, 2017
|
|
|
For the Year Ended December 31, 2016
|
|
(Amounts in thousands)
|
|
Average Balance
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Rate
|
|
Interest-bearing demand
|
|
$
|
205,488
|
|
|
|
0.13
|
%
|
|
$
|
172,011
|
|
|
|
0.12
|
%
|
Money market accounts
|
|
|
215,668
|
|
|
|
0.19
|
%
|
|
|
202,159
|
|
|
|
0.16
|
%
|
Savings
|
|
|
111,742
|
|
|
|
0.17
|
%
|
|
|
104,771
|
|
|
|
0.17
|
%
|
Certificates of deposit
|
|
|
211,934
|
|
|
|
1.02
|
%
|
|
|
221,074
|
|
|
|
0.99
|
%
|
Interest-bearing deposits
|
|
|
744,832
|
|
|
|
0.41
|
%
|
|
|
700,015
|
|
|
|
0.41
|
%
|
Noninterest-bearing demand
|
|
|
268,994
|
|
|
|
|
|
|
|
226,368
|
|
|
|
|
|
Average total deposits
|
|
$
|
1,013,826
|
|
|
|
|
|
|
$
|
926,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term debt
|
|
$
|
19,071
|
|
|
|
6.25
|
%
|
|
$
|
37,286
|
|
|
|
4.47
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
2.68
|
%
|
|
|
10,310
|
|
|
|
2.28
|
%
|
Average total borrowings
|
|
$
|
29,381
|
|
|
|
5.00
|
%
|
|
$
|
47,596
|
|
|
|
4.00
|
%
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposit Maturity Schedule
The following table sets forth the remaining maturities of certificates of deposit in amounts of $100,000 or more as of June 30, 2017.
(Amounts in thousands)
|
|
June 30,
|
|
Maturing in:
|
|
2017
|
|
Three months or less
|
|
$
|
22,964
|
|
Three through six months
|
|
|
24,764
|
|
Six through twelve months
|
|
|
39,577
|
|
Over twelve months
|
|
|
74,602
|
|
Total
|
|
$
|
161,907
|
|
We have an agreement with Promontory Interfinancial Network LLC (“Promontory”) allowing provision of FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. Promontory’s Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) use a deposit-matching program to exchange Bank deposits in excess of the current deposit insurance limits for excess balances at other participating banks, on a dollar-for-dollar basis, that would be fully insured at the Bank. These products are designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers. CDARS and ICS deposits can be reciprocal or one-way; and are considered brokered deposits by the FDIC.
In accordance with regulatory Call Report instructions, we filed quarterly Call Reports, which listed brokered deposits of $56.8 million, and $65.2 million at June 30, 2017 and December 31, 2016, respectively. These amounts were obtained through the CDARS and ICS programs.
Borrowings
Term Debt
At June 30, 2017, we had term debt outstanding with a carrying value of $18.1 million compared to $18.7 million at December 31, 2016. Term debt consisted of the following:
Federal Home Loan Bank of San Francisco Borrowings
As of June 30, 2017 and December 31, 2016 the Bank had no Federal Home Loan Bank of San Francisco advances outstanding. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the six months ended June 30, 2017 and the year ended December 31, 2016 was $608 thousand and $18.0 million, respectively. See Note 7
Federal Funds Purchased and Lines of Credit
in the
Notes to Consolidated Financial Statements
for information on our Federal Home Loan Bank of San Francisco borrowings and our remaining line of credits.
Senior Debt
In December of 2015, the Holding Company, entered into a senior debt loan agreement to borrow $10.0 million. The debt is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce. At June 30, 2017, the Senior Debt had a balance of $8.3 million net of unamortized debt issuance costs at a variable rate of three month LIBOR plus 400 basis points and matures in 2020. The effective interest rate at June 30, 2017, was 5.30%
Subordinated Debt
In December of 2015, the Holding Company issued $10.0 million of fixed to floating rate subordinated notes. The subordinated debt initially bears interest at 6.88% per annum for a five-year term. Thereafter, interest on the subordinated debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points. At June 30, 2017, the Subordinated Debt had a balance of $9.8 million net of unamortized debt issuance costs due in 2025.
Junior Subordinated Debentures
Bank of Commerce Holdings Trust II
During July 2005, the Holding Company participated in a $10.0 million private placement of fixed rate trust-preferred securities (the "Trust-Preferred Securities") through a wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). Trust II simultaneously issued $310 thousand common securities to the Holding Company. Rates paid on the Trust-Preferred Securities have transitioned from fixed to floating and are now paid on a quarterly basis at three month LIBOR plus 158 basis points. The effective interest rate at June 30, 2017 was 2.83%.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The final maturity on the Trust-Preferred Securities is September 15, 2035, and the covenants allow for redemption at the Holding Company’s option during any quarter until maturity.
The proceeds from the sale of the Trust-Preferred Securities were used by the Trust II to purchase from the Holding Company the aggregate principal amount of $10.3 million of the Holding Company’s junior subordinate debentures (the "Notes"). The net proceeds to the Holding Company from the sale of the Notes to the Trust II were partially distributed to the Bank for general corporate purposes, including funding the growth of the Bank’s various financial services. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.
LIQUIDITY AND CASH FLOW
Redding Bank of Commerce
On March 11, 2016, we completed the purchase of five Bank of America branches located in northern California. The transaction was attractive to us because it provided a new source of low cost core deposits and allowed us to execute our plan to reconfigure our Balance Sheet. The acquisition provided approximately $142.3 million of new liquidity ($149.0 million of new deposits less payments of $6.7 million made to Bank of America). We utilized a portion of that new liquidity to reduce our reliance on wholesale funding sources, repaying $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and redeeming $17.5 million of brokered time deposits. We utilized the remaining liquidity to fund loan growth.
The principal objective of our liquidity management program is to maintain our ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds on deposit or to draw upon their credit facilities.
We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. We may be required to collateralize a portion of public deposits that exceed FDIC insurance limitations based on the state of California’s risk assessment of the Bank. Public deposits represent 2% of total deposits at June 30, 2017 and December 31, 2016.
In addition to liquidity from core deposits, loan repayments and maturities of securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities, borrow on a secured basis from the Federal Home Loan Bank of San Francisco, borrow on a secured basis from the Federal Reserve Bank, or issue brokered certificates of deposit.
The Bank had the following lines of credit:
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Line of credit with the Federal Home Loan Bank of San Francisco totaling $332.4 million as of June 30, 2017; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities.
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Line of credit with the Federal Reserve Bank totaling $25.2 million subject to collateral requirements, namely the amount of certain pledged loans.
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Uncommitted federal funds line of credit agreements with additional financial institutions totaling $35.0 million at June 30, 2017. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.
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Bank of Commerce Holdings
The Holding Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Holding Company's cash flows are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company. As described in the paragraph below, the Holding Company has received $26.8 million in proceeds from the sale of common stock and there are no plans to pay dividends from the Bank to the Holding Company.
On May 10, 2017, the Company completed the sale of 2,738,096 shares of its common stock at a public offering price of $10.50 and received net proceeds of $26.8 million. These proceeds will support lending and investment activities, support or fund acquisitions of other institutions or branches as and if opportunities for such transactions become available, or repay certain borrowings. During the second quarter of 2017, we deployed liquidity provided by the sale of common stock into available-for-sale securities and interest-bearing deposits at other banks.
Consolidated Statements of Cash Flows
As disclosed in the
Consolidated Statements of Cash Flows
, net cash of $5.3 million was provided by operating activities for the six months ended June 30, 2017. The material differences between cash provided by operating activities and net income was due to a $278 thousand increase in cash surrender value of BOLI and non-cash items including depreciation, amortization of $2.1 million and a provision for loan and lease loss of $500 thousand.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash of $43.9 million used by investing activities consisted principally of $43.2 million in net purchases of available-for-sale investment securities and $12.5 million in net loan purchases and originations. Partially offset by $9.8 million in proceeds from maturities and payments of available-for-sale securities and $2.2 million of life insurance proceeds.
Net cash of $67.1 million provided by financing activities consisted principally of a $50.6 million increase in demand deposits and savings accounts and $26.8 million in proceeds from issuance of common stock partially offset by a decrease in certificates of deposit accounts of $9.0 million.
CAPITAL RESOURCES
We use capital to support organic growth and pay dividends. The objective of effective capital management is to produce above market long-term returns by using capital when investment returns are perceived to be high and issuing capital when costs are perceived to be low. Our sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt or trust notes.
REGULATORY CAPITAL GUIDELINES
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. On July 2, 2013, the federal banking agencies approved the final rules (the “Final Rules”) implementing the Basel Committee's December 2010 final capital framework (commonly known as Basel III). The Final Rules substantially amended the regulatory risk-based capital rules applicable to the Holding Company and the Bank. The phase-in period for the Final Rules began for the Company on January 1, 2015 with full compliance with the Final Rules phased in by January 1, 2019.
Generally speaking, effective January 1, 2015, the Final Rules did the following:
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Created “Common equity tier 1 ratio,” which is a new measure of regulatory capital closer to pure tangible common equity than the previous Tier 1 definition;
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Established a required minimum risk-based capital ratio for Common equity tier 1 at 4.5%;
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Increased the required risk-based Tier 1 capital ratio to 6.0% and the required risk-based Total capital ratio to 8.0%;
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Increased the required minimum Tier 1 leverage ratio at 4.0%;
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Added a 2.5% capital conversation buffer to the minimum Common equity tier 1, Tier 1 capital and Total capital ratios; and
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Allowed for permanent grandfathering of non-qualifying instruments, such as our trust-preferred securities, subject to a limit of 25% of Tier 1 capital.
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The Final Rules require the Bank to meet the capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. The capital conservation buffer of 2.5% was added to the minimum capital ratios will be phased in between 2016 and 2019.
When the new capital rule is fully phased in, the minimum capital requirements plus the conservation buffer will exceed the well-capitalized thresholds. This 0.5-percentage-point cushion allows institutions to dip into a portion of their capital conservation buffer before reaching a status that is considered less than well capitalized for prompt corrective action purposes.
These new capital rules also change the risk-weights of certain assets for purposes of the risk-based capital ratios and phase out certain instruments as qualifying capital. The Final Rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, if their capital levels begin to show signs of weakness.
Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well-capitalized:”
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(i)
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a new Common equity tier 1 capital ratio of at least 6.5%;
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(ii)
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a Tier 1 capital ratio of at least 8%;
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(iii)
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a Total capital ratio of at least 10%;
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(iv)
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a Tier 1 leverage ratio of at least 5%; and
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(v)
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not be subject to any order or written directive requiring a specific capital level.
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The FDIC's rules (as amended by the Final Rules) also contain other capital classification categories, such as "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," which are based on an institution's specific capital ratios.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL ADEQUACY
Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board of Directors on a monthly basis. Our regulators measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. Based on management’s review and analysis of Basel III, management believes that the Holding Company and the Bank will exceed the standards under these new rules.
As of June 30, 2017, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s risk category. The Holding Company and the Bank’s capital amounts and ratios as of June 30, 2017, are presented in the following table.
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June 30, 2017
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(Amounts in thousands)
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Capital
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Actual
Ratio
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Well Capitalized
Requirement
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Minimum Capital
Ratio plus Capital
Conservation Buffer
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Minimum Capital
Requirement
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Holding Company:
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Common equity tier 1 capital ratio
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$
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123,053
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12.55
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%
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n/a
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n/a
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4.50
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%
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Tier 1 capital ratio
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$
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132,922
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13.56
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%
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n/a
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n/a
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6.00
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%
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Total capital ratio
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$
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155,181
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15.83
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%
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n/a
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n/a
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8.00
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%
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Tier 1 leverage ratio
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$
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132,922
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11.38
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%
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n/a
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n/a
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4.00
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%
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|
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Bank:
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Common equity tier 1 capital ratio
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$
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124,302
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12.66
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%
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6.50
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%
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5.750
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%
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|
4.50
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%
|
Tier 1 capital ratio
|
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$
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124,302
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12.66
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%
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|
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8.00
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%
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7.250
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%
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|
6.00
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%
|
Total capital ratio
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$
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136,574
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|
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13.91
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%
|
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10.00
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%
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9.250
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%
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|
8.00
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%
|
Tier 1 leverage ratio
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$
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124,302
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|
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10.64
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%
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5.00
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%
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n/a
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4.00
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%
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On December 10, 2015, the Holding Company issued $10.0 million in aggregate principal amount of Subordinated Notes to certain institutional investors. The Subordinated Notes qualify as Tier 2 Capital under the Final Rules. See Item 1a -
Risk Factors
, in our Annual Report on Form 10-K for the year ended December 31, 2016 for further detail on potential risks relating to the Subordinated Notes.
As part of the branch acquisition, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. When calculating capital ratios, goodwill and a portion of the core deposit intangibles are subtracted from Tier 1 capital. The deduction for core deposit intangibles is subject to a phase in period under the Basel III risk based capital rules. During 2016, 60% of the core deposit intangible was deducted from Tier 1 capital, 80% for 2017 and 100% thereafter. Both of these intangible assets are subtracted from tangible equity as part of the calculation of tangible book value per share.
Capital Ratios for the Holding Company include the benefit of $26.8 million net proceeds from the sale of 2,738,096 shares of common stock in the second quarter of 2017.
Cash Dividends and Payout Ratios per Common Share
During the six months ended June 30, 2017 and the year ended December 31, 2016, we declared quarterly cash dividends of $0.03 per common share.
These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, capital preservation and expected growth. The dividend rate will be reassessed periodically by the Board of Directors in accordance with the dividend policy. There is no assurance that future cash dividends on common shares will be declared or increased.
The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three and six months ended June 30, 2017 and 2016.
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Three Months Ended June 30,
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Six Months Ended June 30,
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2017
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2016
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2017
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2016
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Dividends declared per common share
|
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$
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0.03
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$
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0.03
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$
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0.06
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$
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0.06
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Dividend payout ratio
|
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20
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%
|
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27
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%
|
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19
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%
|
|
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150
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%
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
Information regarding Off-Balance Sheet Arrangements is included in Note 9,
Commitments and Contingencies,
in the
Notes to Consolidated Financial Statements
incorporated in this document.
CONCENTRATION OF CREDIT RISK
Information regarding Concentration of Credit Risk is included in Note 9,
C
ommitme
nts and Contingencies,
in the
Notes to Consolidated Financial Statements
incorporated in this document.