|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Banking(1)
|
|
Factoring
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
61,252
|
|
$
|
9,188
|
|
$
|
70,440
|
|
Intersegment interest allocations
|
|
|
863
|
|
|
(863
|
)
|
|
|
|
Total interest expense
|
|
|
2,344
|
|
|
|
|
|
2,344
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
59,771
|
|
|
8,325
|
|
|
68,096
|
|
Provision for loan losses
|
|
|
949
|
|
|
48
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
58,822
|
|
|
8,277
|
|
|
67,099
|
|
Noninterest income
|
|
|
8,069
|
|
|
517
|
|
|
8,586
|
|
Noninterest expense
|
|
|
38,036
|
|
|
5,326
|
|
|
43,362
|
|
Intersegment expense allocations
|
|
|
623
|
|
|
(623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
29,478
|
|
|
2,845
|
|
|
32,323
|
|
Income tax expense
|
|
|
10,962
|
|
|
1,195
|
|
|
12,157
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,516
|
|
$
|
1,650
|
|
$
|
20,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,464,438
|
|
$
|
63,524
|
|
$
|
2,527,962
|
|
Loans, net of deferred fees
|
|
$
|
1,402,330
|
|
$
|
47,846
|
|
$
|
1,450,176
|
|
Goodwill
|
|
$
|
32,620
|
|
$
|
13,044
|
|
$
|
45,664
|
|
-
(1)
-
Includes
the holding company's results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Banking(1)
|
|
Factoring
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
46,458
|
|
$
|
9,389
|
|
$
|
55,847
|
|
Intersegment interest allocations
|
|
|
822
|
|
|
(822
|
)
|
|
|
|
Total interest expense
|
|
|
1,664
|
|
|
|
|
|
1,664
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
45,616
|
|
|
8,567
|
|
|
54,183
|
|
Provision (credit) for loan losses
|
|
|
(328
|
)
|
|
(11
|
)
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
45,944
|
|
|
8,578
|
|
|
54,522
|
|
Noninterest income
|
|
|
5,581
|
|
|
575
|
|
|
6,156
|
|
Noninterest expense
|
|
|
35,930
|
|
|
5,382
|
|
|
41,312
|
|
Intersegment expense allocations
|
|
|
266
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,861
|
|
|
3,505
|
|
|
19,366
|
|
Income tax expense
|
|
|
5,820
|
|
|
1,472
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,041
|
|
$
|
2,033
|
|
$
|
12,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,204,963
|
|
$
|
57,244
|
|
$
|
2,262,207
|
|
Loans, net of deferred fees
|
|
$
|
1,290,062
|
|
$
|
42,343
|
|
$
|
1,332,405
|
|
Goodwill
|
|
$
|
31,854
|
|
$
|
13,044
|
|
$
|
44,898
|
|
-
(1)
-
Includes
the holding company's results of operations
Banking.
Our banking segment's net income increased to $6.3 million for the three months ended September 30, 2016, compared to
net
income of $2.8 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, our banking segment's net income was $18.5 million,
compared to $10.0 million for the nine months ended September 30, 2015. Net interest
73
Table of Contents
income
increased to $20.2 million for the three months ended September 30, 2016, compared to $16.8 million for the three months ended September 30, 2015. For the nine
months ended September 30, 2016, net interest income increased to $59.8 million, compared to $45.6 million for the nine months ended September 30, 2015. The increase in net
interest income for the three months and nine months ended September 30, 2016, compared to the comparable periods in 2015, was primarily as a result of the Focus acquisition and organic growth
in the loan portfolio and an increase in the average balance of investment securities. The provision for loan losses was $237,000 for the three months ended September 30, 2016, compared to a
credit provision for loan losses of $291,000 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, the provision for loan losses was $949,000,
compared with a credit provision for loan losses of $328,000 for the nine months ended September 30, 2015. The increase in the provision for loan losses was primarily due to an increase in loan
balances in the banking segment's commercial loan portfolio and one commercial relationship that went on nonaccrual during the third quarter, and was fully reserved for. Noninterest income increased
to $2.2 million for the three months ended September 30, 2016, compared to $1.9 million for the three months ended September 30, 2015. Noninterest income increased to
$8.1 million for the nine months ended September 30, 2016, compared to $5.6 million for the nine months ended September 30, 2015. Noninterest income for the third quarter
and first nine months of 2016 increased compared to the respective periods in 2105, primarily due to a $1.0 million gain from company owned life insurance and gains on sales of securities.
Noninterest expense decreased to $12.4 million for the three months ended
September 30, 2016, compared to $14.6 million for the three months ended September 30, 2015, primarily due to pre-tax acquisition, serverance and retention costs incurred by the
Company related to the Focus transaction totaling $2.9 million for the third quarter of 2015. For the nine months ended September 30, 2016, noninterest expense was $38.0 million,
compared to $35.9 million for the nine months ended September 30, 2015. The increase in noninterest expense for the nine months ended September 30, 2016, compared to the nine
months ended September 30, 2015, was primarily due to additional employees retained from Focus, an increase in amortization of the core deposit intangible assets as a result of the Focus
acquisition, annual salary increases and additional newly hired employees. The increase in noninterest expense for the nine months ended September 30, 2016 was partially offset by
$3.4 million of pre-tax acquisition, serverance and retention costs incurred by the Company for the nine months ended September 30, 2015.
Factoring.
Bay View Funding's primary business operation is purchasing and collecting factored receivables. Factored receivables are
receivables that
have been transferred by the originating organization and typically have not been subject to previous collection efforts. In a factoring transaction Bay View Funding directly purchases the receivables
generated by its clients at a discount to their face value. The transactions are structured to provide the clients with immediate working capital when there is a mismatch between payments to the
client for a good or service and the incurrence of operating costs required to provide for such good or service. The average life of the factored receivables is 34 days. The balance of the
purchased receivables as of September 30, 2016 and 2015 was $47.8 million and $42.3 million, respectively. Bay View Funding's net income was $471,000 for the three months ended
September 30, 2016, compared $697,000 for the three months ended September 30, 2015. For the nine months ended September 30, 2016, Bay View Funding's net income was
$1.7 million, compared to $2.0 million for the nine months ended September 30. 2015. Net interest income was $2.8 million for the three months ended September 30,
2016, and $2.9 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, net interest income was $8.3 million, compared to
$8.6 million for the nine months ended September 30, 2015. The decrease in net interest income for the three months and nine months ended September 30, 2016, compared to the
respective periods in 2015, was primarily due to a decrease in the average yield on the factored receivables portfolio, partially offset by an increase in the average balance of factored receivables
outstanding. The provision for loan losses was $8,000 for the three months ended September 30, 2016, compared to a credit provision for loan losses of $10,000 for the three months ended
September 30,
74
Table of Contents
2015.
For the nine months ended September 30, 2016, the provision for loan losses was $48,000, compared to a credit provision for loan losses of $11,000 for the nine months ended
September 30, 2015. Noninterest income was $152,000 for the three months ended September 30, 2016, compared to $197,000 for the three months ended September 30, 2015. For the nine
months ended September 30, 2016, noninterest income was $517,000, compared to $575,000 for the nine months ended September 30, 2015. Noninterest expense was $1.9 million for the
three months ended September 30, 2016, and $1.8 million for the three months ended September 30, 2015. For the nine months ended September 30, 2016, noninterest expense was
$5.3 million, compared to $5.4 million for the nine months ended September 30, 2015.
FINANCIAL CONDITION
As of September 30, 2016, total assets increased to $2.53 billion, compared to $2.26 billion at September 30, 2015,
and $2.36 billion at December 31, 2015. Securities available-for-sale (at fair value) were $370.0 million at September 30, 2016, an increase of 44% from
$257.4 million at September 30, 2015, and decreased 4% from $385.1 million at December 31, 2015. Securities held-to-maturity (at amortized cost) were $202.4 million
at September 30, 2016, an increase of 82% from $111.0 million at September 30, 2015, and an increase of 85% from $109.3 million at December 31, 2015. Total loans
(excluding loans held-for-sale) increased $117.8 million, or 9%, to $1.45 billion at September 30, 2016, compared to $1.33 billion at September 30, 2015, which
included an increase of $68.5 million, or 5%, in the Company's legacy loan portfolio, and $49.3 million of purchased residential mortgage loans. Loans increased $91.5 million, or
7%, at September 30, 2016, compared to $1.36 billion at December 31, 2015, which included an increase of $42.2 million, or 3%, in the Company's legacy portfolio, and
$49.3 million of purchased residential mortgage loans.
Total
deposits increased $256.6 million, or 13%, to $2.22 billion at September 30, 2016, compared to $1.96 billion at September 30, 2015, and increased
$155.9 million, or 8%, from $2.06 billion at December 31, 2015. Deposits excluding all time deposits and CDARS deposits increased $291.2 million, or 17%, to
$1.98 billion at September 30, 2016, from $1.69 billion at September 30, 2015, and increased $166.2 million, or 9% from $1.81 billion at December 31,
2015.
Securities Portfolio
The following table reflects the balances for each category of securities at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
December 31,
2015
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale (at fair value):
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
352,552
|
|
$
|
170,399
|
|
$
|
324,230
|
|
Trust preferred securities
|
|
|
16,425
|
|
|
15,000
|
|
|
15,132
|
|
Corporate bonds
|
|
|
1,022
|
|
|
36,608
|
|
|
6,673
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
11,791
|
|
|
|
|
U.S. Government sponsored entities
|
|
|
|
|
|
11,125
|
|
|
9,041
|
|
Municipalsexempt from Federal tax
|
|
|
|
|
|
5,765
|
|
|
|
|
U.S. Treasury
|
|
|
|
|
|
4,039
|
|
|
30,003
|
|
Municipalstaxable
|
|
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
369,999
|
|
$
|
257,410
|
|
$
|
385,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity (at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
111,591
|
|
$
|
16,300
|
|
$
|
15,793
|
|
Municipalsexempt from Federal tax
|
|
|
90,813
|
|
|
94,704
|
|
|
93,518
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
202,404
|
|
$
|
111,004
|
|
$
|
109,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
Table of Contents
The following table summarizes the weighted average life and weighted average yields of securities at September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life
|
|
|
|
Within One
Year
or Less
|
|
After One and
Within Five
Years
|
|
After Five and
Within Ten
Years
|
|
After Ten Years
|
|
Total
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale (at fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
|
|
|
|
|
$
|
333,154
|
|
|
2.07
|
%
|
$
|
19,398
|
|
|
2.23
|
%
|
$
|
|
|
|
|
|
$
|
352,552
|
|
|
2.08
|
%
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,425
|
|
|
5.95
|
%
|
|
16,425
|
|
|
5.95
|
%
|
Corporate bonds
|
|
|
|
|
|
|
|
|
1,022
|
|
|
4.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022
|
|
|
4.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
$
|
334,176
|
|
|
2.08
|
%
|
$
|
19,398
|
|
|
2.23
|
%
|
$
|
16,425
|
|
|
5.95
|
%
|
$
|
369,999
|
|
|
2.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity (at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
2,581
|
|
|
3.19
|
%
|
$
|
98,557
|
|
|
1.60
|
%
|
$
|
2,823
|
|
|
2.07
|
%
|
$
|
7,630
|
|
|
3.26
|
%
|
$
|
111,591
|
|
|
1.76
|
%
|
Municipalsexempt from Federal tax(1)
|
|
|
1,747
|
|
|
2.39
|
%
|
|
39,676
|
|
|
3.80
|
%
|
|
43,692
|
|
|
3.99
|
%
|
|
5,698
|
|
|
3.67
|
%
|
|
90,813
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,328
|
|
|
2.87
|
%
|
$
|
138,233
|
|
|
2.23
|
%
|
$
|
46,515
|
|
|
3.88
|
%
|
$
|
13,328
|
|
|
3.44
|
%
|
$
|
202,404
|
|
|
2.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Reflects
tax equivalent yield based on a 35% tax rate.
The
securities portfolio is the second largest component of the Company's interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the
financial condition of the Company. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required
by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as
an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better
match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more
rapidly than loans.
The
Company's portfolio may include: (i) U.S. Treasury securities and U.S. Government sponsored entities' debt securities for liquidity and pledging; (ii) mortgage-backed
securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited
pledging potential; and (iv) single entity issue trust preferred securities, which generally enhance the yield on the portfolio.
The
Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to
fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders' equity. Monthly adjustments are made to reflect changes in the fair value of the Company's
available-for-sale securities.
The
investment securities available-for-sale portfolio totaled $370.0 million at September 30, 2016, an increase of 44% from $257.4 million at September 30,
2015, and decreased 4% from $385.1 million at December 31, 2015. At September 30, 2016, the Company's securities available-for-sale portfolio was comprised of
$352.6 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $16.4 million of single entity issue trust preferred securities, and
$1.0 million of corporate bonds. The pre-tax unrealized gain on securities available-for-sale at September 30, 2016 was
76
Table of Contents
$8.0 million,
compared to a pre-tax unrealized gain on securities available-for-sale of $4.5 million at September 30, 2015, and a pre-tax unrealized gain on securities
available-for-sale of $501,000 at December 31, 2015.
The
Company received gross proceeds of $49.2 million on investment securities available-for-sale it sold during the nine months ended September 30, 2016 with a book value
totaling $48.7 million, resulting in a gain on sale of securities of $527,000. The $48.7 million book value of investment securities sold included $30.1 million of U.S. Treasury
securities, $9.0 million of U.S. Government sponsored entities, $5.5 million of corporate bonds, and $4.1 million of agency mortgage-backed securities.
During
the nine months ended September 30, 2016, the Company purchased $75.8 million of investment securities available-for-sale, which consisted of $51.8 million of
Federal Home Loan Mortgage Corporation ("FHLMC") securities, with an average book yield of 1.96%, and $24.0 million of Federal National Mortgage Association ("FNMA") securities, with an average
book yield of 1.95%.
At
September 30, 2016, investment securities held-to-maturity totaled $202.4 million, compared to $111.0 million at September 30, 2015, and
$109.3 million at December 31, 2015. At September 30, 2016, the Company's securities held-to-maturity portfolio, at amortized cost, was comprised of $111.6 million agency
mortgage-backed securities, and $90.8 million tax-exempt municipal bonds.
During
the nine months ended September 30, 2016, the Company purchased $31.3 million of Government National Mortgage Association ("GNMA") securities held-to-maturity, with
an average book yield of 1.49%.
The
Company has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities.
Loans
The Company's loans represent the largest portion of invested assets, substantially greater than the securities portfolio or any other asset
category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company's financial condition.
Gross
loans, excluding loans held-for-sale, represented 57% of total assets at September 30, 2016, represented 59% at September 30, 2015, and represented 58% at
December 31, 2015. The ratio of loans to deposits was 65.36% at September 30, 2016, compared to 67.91% at September 30, 2015, and 65.87% at December 31, 2015.
77
Table of Contents
Loan Distribution
The Loan Distribution table that follows sets forth the Company's gross loans, excluding loans held-for-sale, outstanding and the percentage
distribution in each category at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
December 31, 2015
|
|
|
|
Balance
|
|
% of Total
|
|
Balance
|
|
% of Total
|
|
Balance
|
|
% of Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
606,281
|
|
|
42
|
%
|
$
|
554,169
|
|
|
42
|
%
|
$
|
556,522
|
|
|
41
|
%
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
612,030
|
|
|
42
|
%
|
|
606,819
|
|
|
45
|
%
|
|
625,665
|
|
|
46
|
%
|
Land and construction
|
|
|
88,371
|
|
|
6
|
%
|
|
84,867
|
|
|
6
|
%
|
|
84,428
|
|
|
6
|
%
|
Home equity
|
|
|
76,536
|
|
|
5
|
%
|
|
74,624
|
|
|
6
|
%
|
|
76,833
|
|
|
6
|
%
|
Residential mortgages
|
|
|
49,255
|
|
|
3
|
%
|
|
|
|
|
0
|
%
|
|
|
|
|
0
|
%
|
Consumer
|
|
|
18,328
|
|
|
2
|
%
|
|
12,595
|
|
|
1
|
%
|
|
16,010
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,450,801
|
|
|
100
|
%
|
|
1,333,074
|
|
|
100
|
%
|
|
1,359,458
|
|
|
100
|
%
|
Deferred loan (fees) costs, net
|
|
|
(625
|
)
|
|
|
|
|
(669
|
)
|
|
|
|
|
(742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including deferred fees and costs
|
|
|
1,450,176
|
|
|
100
|
%
|
|
1,332,405
|
|
|
100
|
%
|
|
1,358,716
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(20,032
|
)
|
|
|
|
|
(18,737
|
)
|
|
|
|
|
(18,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,430,144
|
|
|
|
|
$
|
1,313,668
|
|
|
|
|
$
|
1,339,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's loan portfolio is concentrated in commercial loans, primarily manufacturing, wholesale, and services, and commercial real estate, with other portfolios in land development
and construction, home equity and consumer loans. During the second and third quarters of 2016, the Company purchased jumbo single family residential mortgage loans totaling $51.6 million, all
of which are domiciled in California. The average loan principal amount is approximately $834,000, and the weighted average yield on the portfolio is 3.00%, net of servicing fees to the servicer.
Residential mortgages outstanding at September 30, 2016 totaled $49.3 million. The Company does not have any concentrations by industry or group of industries in its loan portfolio,
however, 57% of its gross loans were secured by real property at September 30, 2016, and September 30, 2015, and 58% at December 31, 2015. While no specific industry concentration
is considered significant, the Company's bank lending operations are substantially located in areas that are dependent on the technology and real estate industries and their supporting companies.
The
Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others. All
loan types are within established limits. The Company uses underwriting guidelines to assess the borrowers' historical cash
flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow the
Company to react to a borrower's deteriorating financial condition should that occur.
The
Company's commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging
from thirty days to one year and "term loans" with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically
provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.
The
Company is an active participant in the SBA and U.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Lender
Program. The Company regularly makes such guaranteed loans (collectively referred to as "SBA
78
Table of Contents
loans").
The guaranteed portion of these loans is typically sold in the secondary market depending on market conditions. When the guaranteed portion of an SBA loan is sold the Company retains the
servicing rights for the sold portion. During the third quarter and nine months ended September 30, 2016, loans were sold resulting in a gain on sales of SBA loans of $69,000, and $653,000,
respectively.
The
Company's factoring receivables are from the operations of Bay View Funding whose primary business is purchasing and collecting factored receivables. Factored receivables are
receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. These receivables are acquired from a variety of companies,
including but not limited to service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The portfolio of
factored receivables is included in the Company's commercial loan portfolio.
The
commercial loan portfolio increased $49.8 million to $606.3 million at September 30, 2016, compared to $556.5 million at December 31, 2015, which
was primarily the result of an increase of $23.2 million in the asset-based lending portfolio, $18.8 million in the C&I portfolio, and $7.8 million in the factored receivables
portfolio. C&I line usage increased to 41% at September 30, 2016, compared to 39% at December 31, 2015.
As
of September 30, 2016, commercial real estate mortgage loans of $612.0 million consist primarily of adjustable and fixed-rate loans secured by deeds of trust on
commercial and residential property. The
real estate mortgage loans at September 30, 2016, consist of $266.1 million, or 43%, of commercial owner occupied properties, $345.8 million, or 57%, of commercial investment
properties, and $91,000 of other properties. Properties securing the commercial real estate mortgage loans are generally located in the Greater San Francisco Bay Area, the Company's primary market.
The
Company's commercial real estate loans consist primarily of loans based on the borrower's cash flow and are secured by deeds of trust on commercial and residential property to
provide a secondary source of repayment. The Company generally restricts real estate term loans to no more than 75% of the property's appraised value or the purchase price of the property during the
initial underwriting of the credit, depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities on real estate mortgage loans are generally
between five and ten years (with amortization ranging from fifteen to twenty-five years and a balloon payment due at maturity); however, SBA and certain other real estate loans that can be sold in the
secondary market may be granted for longer maturities.
The
Company's land and construction loans are primarily to finance the development/construction of commercial and single family residential properties. The Company utilizes underwriting
guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Construction loans are
provided only in our market area, and the Company has extensive controls for the disbursement process. Land and construction loans increased $3.5 million to $88.4 million, at
September 30, 2016, from $84.9 million, at September 30, 2015. Land and construction loans increased $3.9 million at September 30, 2016, from $84.4 million at
December 31, 2015.
The
Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio. Home
equity lines are reviewed semi-annually, with specific emphasis on loans with a loan to value ratio greater than 70%. The Company takes measures to work with customers to reduce line commitments and
minimize potential losses.
During
the second and third quarters of 2016, the Company purchased jumbo single family residential mortgage loans totaling $51.6 million, all of which are domiciled in
California. The average loan principal amount is approximately $834,000, and the weighted average yield on the portfolio is
79
Table of Contents
3.00%,
net of servicing fees to the servicer. Residential mortgages outstanding at September 30, 2016 totaled $49.3 million.
Additionally,
the Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Consumer loans generally provide
for the monthly payment of principal and interest. Most of the Company's consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines, real
property.
With
certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank's capital and reserves for unsecured loans and
up to 25% of the bank's capital and reserves for secured loans. For HBC, these lending limits were $41.7 million and $69.6 million at September 30, 2016, respectively.
Loan Maturities
The following table presents the maturity distribution of the Company's loans (excluding loans held-for-sale) as of September 30, 2016.
The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with
changes in the prime rate as reflected in the Western Edition of The Wall Street Journal. As of September 30, 2016, approximately 57% of the Company's loan portfolio consisted of floating
interest rate loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
One Year
or Less
|
|
Over One
Year But
Less than
Five Years
|
|
Over
Five Years
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
508,507
|
|
$
|
84,508
|
|
$
|
13,266
|
|
$
|
606,281
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
105,094
|
|
|
222,843
|
|
|
284,093
|
|
|
612,030
|
|
Land and construction
|
|
|
88,371
|
|
|
|
|
|
|
|
|
88,371
|
|
Home equity
|
|
|
70,060
|
|
|
1,637
|
|
|
4,839
|
|
|
76,536
|
|
Residential mortgages
|
|
|
1,226
|
|
|
|
|
|
48,029
|
|
|
49,255
|
|
Consumer
|
|
|
16,604
|
|
|
1,724
|
|
|
|
|
|
18,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
789,862
|
|
$
|
310,712
|
|
$
|
350,227
|
|
$
|
1,450,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with variable interest rates
|
|
$
|
705,518
|
|
$
|
65,081
|
|
$
|
59,308
|
|
$
|
829,907
|
|
Loans with fixed interest rates
|
|
|
84,344
|
|
|
245,631
|
|
|
290,919
|
|
|
620,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
789,862
|
|
$
|
310,712
|
|
$
|
350,227
|
|
$
|
1,450,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Servicing
As of September 30, 2016 and 2015, $169.6 million and $116.6 million, respectively, in SBA loans were serviced by the
Company for others. Activity for loan servicing rights was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Beginning of period balance
|
|
$
|
2,101
|
|
$
|
510
|
|
$
|
2,209
|
|
$
|
565
|
|
Additions
|
|
|
20
|
|
|
1,993
|
|
|
183
|
|
|
2,084
|
|
Amortization
|
|
|
(127
|
)
|
|
(124
|
)
|
|
(398
|
)
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period balance
|
|
$
|
1,994
|
|
$
|
2,379
|
|
$
|
1,994
|
|
$
|
2,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Table of Contents
Loan
servicing rights are included in accrued interest receivable and other assets on the unaudited consolidated balance sheets and reported net of amortization. There was no valuation
allowance as of September 30, 2016 and 2015, as the fair value of the assets was greater than the carrying value.
Activity
for the I/O strip receivable was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Beginning of period balance
|
|
$
|
1,154
|
|
$
|
1,441
|
|
$
|
1,367
|
|
$
|
1,481
|
|
Unrealized holding gain
|
|
|
(53
|
)
|
|
|
|
|
(266
|
)
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period balance
|
|
$
|
1,101
|
|
$
|
1,441
|
|
$
|
1,101
|
|
$
|
1,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality
Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than a full return
of principal and interest if a debtor becomes
unable or unwilling to repay. Since loans are the most significant assets of the Company and generate the largest portion of its revenues, the Company's management of credit quality risk is focused
primarily on loan quality. Banks have generally suffered their most severe earnings declines as a result of customers' inability to generate sufficient cash flow to service their debts and/or
downturns in national and regional economies and declines in overall asset values including real estate. In addition, certain debt securities that the Company may purchase have the potential of
declining in value if the obligor's financial capacity to repay deteriorates.
The
Company's policies and procedures identify market segments, set goals for portfolio growth or contraction, and establish limits on industry and geographic credit concentrations. In
addition, these policies establish the Company's underwriting standards and the methods of monitoring ongoing credit quality. The Company's internal credit risk controls are centered in underwriting
practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio.
The
Company's credit risk may also be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in
particular industries or geographic markets. As an independent community bank serving a specific geographic area, the Company must contend with the unpredictable changes in the general California
market and, particularly, primary local markets. The Company's asset quality has suffered in the past from the impact of national and regional economic recessions, consumer bankruptcies, and depressed
real estate values.
Nonperforming
assets are comprised of the following: loans for which the Company is no longer accruing interest; restructured loans which have been current under six months; loans
90 days or more past due and still accruing interest (although they are generally placed on nonaccrual when they become 90 days past due, unless they are both well-secured and in the
process of collection); and foreclosed assets. Past due loans 30 days or greater totaled $12.5 million and $5.9 million at September 30, 2016 and December 31, 2015,
respectively, of which $2.2 million and $591,000 were on nonaccrual. At September 30, 2016, there were also $4.0 million loans less than 30 days past due included in
nonaccrual loans held-for-investment. At December 31, 2015, there were also $4.1 million loans less than 30 days past due included in nonaccrual loans held-for-investment.
Management's
classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the
Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The
81
Table of Contents
Company
begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not
be collateralized, and collection efforts are pursued. Loans may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original
repayment terms and where the Company believes the borrower will eventually overcome those circumstances and make full restitution. Foreclosed assets consist of properties acquired by foreclosure or
similar means that management is offering or will offer for sale.
The
following table summarizes the Company's nonperforming assets at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
December 31,
2015
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans-held-for-investment
|
|
$
|
4,496
|
|
$
|
5,503
|
|
$
|
4,716
|
|
Restructured and loans over 90 days past due and still accruing
|
|
|
|
|
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
4,496
|
|
|
5,503
|
|
|
6,378
|
|
Foreclosed assets
|
|
|
292
|
|
|
393
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
4,788
|
|
$
|
5,896
|
|
$
|
6,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percentage of loans plus foreclosed assets
|
|
|
0.33
|
%
|
|
0.44
|
%
|
|
0.50
|
%
|
Nonperforming assets as a percentage of total assets
|
|
|
0.19
|
%
|
|
0.26
|
%
|
|
0.29
|
%
|
The
following table presents nonperforming loans by class at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
Nonaccrual
|
|
Restructured and
Loans Over 90 Days
Past Due and
Still Accruing
|
|
Total
|
|
Nonaccrual
|
|
Restructured and
Loans Over 90 Days
Past Due and
Still Accruing
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
3,577
|
|
$
|
|
|
$
|
3,577
|
|
$
|
724
|
|
$
|
1,378
|
|
$
|
2,102
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
440
|
|
|
|
|
|
440
|
|
|
2,992
|
|
|
|
|
|
2,992
|
|
Land and construction
|
|
|
201
|
|
|
|
|
|
201
|
|
|
219
|
|
|
|
|
|
219
|
|
Home equity
|
|
|
275
|
|
|
|
|
|
275
|
|
|
777
|
|
|
284
|
|
|
1,061
|
|
Consumer
|
|
|
3
|
|
|
|
|
|
3
|
|
|
4
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,496
|
|
$
|
|
|
$
|
4,496
|
|
$
|
4,716
|
|
$
|
1,662
|
|
$
|
6,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets were $4.8 million, or 0.19% of total assets, at September 30, 2016, compared to $5.9 million, or 0.26% of total assets, at September 30,
2015, and $6.7 million, or 0.29% of total assets, at December 31, 2015. Included in total nonperforming assets were foreclosed assets of $292,000 at September 30, 2016, compared
to $393,000 at September 30, 2015, and $364,000 at December 31, 2015.
Loans
with a well-defined weakness, which are characterized by the distinct possibility that the Company will sustain a loss if the deficiencies are not corrected, are categorized as
"classified." Classified loans include all loans considered as substandard, substandard-nonaccrual, and doubtful and may result from problems specific to a borrower's business or from economic
downturns that affect the borrower's ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate). The principal balance of classified loans, was
$18.4 million at September 30, 2016, $17.6 million at September 30, 2015, and $18.6 million at December 31, 2015. There were no loans held-for-sale included
in classified loans at September 30, 2016, September 30, 2015, and December 31, 2015. Loans held-for-sale are carried at the lower of cost or estimated fair value, and are not
allocated an allowance for loan losses.
82
Table of Contents
The following table provides a summary of the loan portfolio by loan type and credit quality classification at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
December 31, 2015
|
|
|
|
Nonclassified
|
|
Classified
|
|
Total
|
|
Nonclassified
|
|
Classified
|
|
Total
|
|
Nonclassified
|
|
Classified
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
591,554
|
|
$
|
14,727
|
|
$
|
606,281
|
|
$
|
543,879
|
|
$
|
10,290
|
|
$
|
554,169
|
|
$
|
547,536
|
|
$
|
8,986
|
|
$
|
556,522
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
609,179
|
|
|
2,851
|
|
|
612,030
|
|
|
601,671
|
|
|
5,148
|
|
|
606,819
|
|
|
617,865
|
|
|
7,800
|
|
|
625,665
|
|
Land and construction
|
|
|
88,170
|
|
|
201
|
|
|
88,371
|
|
|
84,375
|
|
|
492
|
|
|
84,867
|
|
|
84,209
|
|
|
219
|
|
|
84,428
|
|
Home equity
|
|
|
75,931
|
|
|
605
|
|
|
76,536
|
|
|
73,286
|
|
|
1,338
|
|
|
74,624
|
|
|
75,511
|
|
|
1,322
|
|
|
76,833
|
|
Residential mortgages
|
|
|
49,255
|
|
|
|
|
|
49,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
18,311
|
|
|
17
|
|
|
18,328
|
|
|
12,279
|
|
|
316
|
|
|
12,595
|
|
|
15,705
|
|
|
305
|
|
|
16,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,432,400
|
|
$
|
18,401
|
|
$
|
1,450,801
|
|
$
|
1,315,490
|
|
$
|
17,584
|
|
$
|
1,333,074
|
|
$
|
1,340,826
|
|
$
|
18,632
|
|
$
|
1,359,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified
commercial loans increased to $14.7 million at September 30, 2016, from $9.0 million at December 31, 2015, primarily due to commercial loan
downgrades in excess of upgrades during the nine months ended September 30, 2016. Classified commercial real estate loans decreased to $2.9 million at September 30, 2016, compared
to December 31, 2015, mainly as a result of upgrades and payoffs in the commercial real estate loan portfolio.
The
following provides a rollforward of troubled debt restructurings ("TDRs"):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Performing
TDRs
|
|
Nonperforming
TDRs
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance at January 1, 2016
|
|
$
|
149
|
|
$
|
4
|
|
$
|
153
|
|
Principal repayments
|
|
|
(12
|
)
|
|
(1
|
)
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
137
|
|
$
|
3
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Performing
TDRs
|
|
Nonperforming
TDRs
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance at January 1, 2015
|
|
$
|
167
|
|
$
|
916
|
|
$
|
1,083
|
|
Principal repayments
|
|
|
16
|
|
|
(912
|
)
|
|
(896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
183
|
|
$
|
4
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management's methodology for estimating the
allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk
characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
Specific
allowances are established for impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due
according to the original contractual terms of the loan agreement, including scheduled interest payments. Loans for which the terms have been modified with a concession granted, and for which the
borrower is
83
Table of Contents
experiencing
financial difficulties, are considered troubled debt restructurings and classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the
fair value of the collateral less costs to sell if the loan is collateral dependent, or on the present value of expected future cash flows or values that are observable in the secondary market. If the
measure of the impaired loans is less than the investment in the loan, the deficiency will be charged-off against the allowance for loan losses if the amount is a confirmed loss, or, alternatively, a
specific allocation within the allowance will be established. Loans that are considered impaired are specifically excluded from the formula portion of the allowance for loan losses analysis.
The
estimated loss factors for pools of loans that are not impaired are based on determining the probability of default and loss given default for loans within each segment of the
portfolio, adjusted for significant factors that, in management's judgment, affect collectability as of the evaluation date. The Company's historical delinquency experience and loss experience are
utilized to determine the probability of default and loss given default for segments of the portfolio where the Company has experienced losses in the past. For segments of the portfolio where the
Company has no significant prior loss experience, the Company uses quantifiable observable industry data to determine the probability of default and loss given default.
The
following provides a summary of the risks associated with various segments of the Company's loan portfolio, which are factors management regularly considers when evaluating the
adequacy of the allowance:
-
-
Commercial loans consist primarily of commercial and industrial loans (business lines of credit), and other commercial purpose loans. Repayment
of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made. Adverse changes in economic conditions may result in a decline in
business activity, which may impact a borrower's ability to continue to make scheduled payments. The factored receivables at Bay View Funding are included in the Company's commercial loan portfolio;
however, they are evaluated for risk primarily based on the agings of the receivables. Faster turning receivables imply less risk and therefore warrant a lower associated allowance. Should the overall
aging for the portfolio increase, this structure will by formula increase the allowance to reflect the increasing risk. Should the portfolio turn more quickly, it would reduce the associated allowance
to reflect the reducing risk.
-
-
Real estate loans consist primarily of loans secured by commercial and residential real estate. Also included in this segment are land and
construction loans and home equity lines of credit secured by real estate. As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lay
primarily within these loan types. Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties. These factors, in conjunction with a
decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined
to a level such that it no longer fully covers the Company's recorded investment in the loan.
-
-
Consumer loans consist primarily of a large number of small loans and lines of credit. The majority of installment loans are made for consumer
and business purchases. Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay
their obligations.
As
a result of the matters mentioned above, changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the condition of the various
markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.
84
Table of Contents
It
is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. On an ongoing basis, we have engaged an outside
firm to perform independent credit reviews of our loan portfolio. The Federal Reserve Board and the California Department of Business OversightDivision of Financial Institutions also
review the allowance for loan losses as an integral part of the examination process. Based on information currently available, management believes that the allowance for loan losses is adequate.
However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company's market area were to weaken. Also, any weakness of a prolonged nature
in the technology industry would have a negative impact on the local market. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans
and increased loan losses, which could adversely affect the Company's future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
The
following tables summarize the Company's loan loss experience, as well as provisions and charges to the allowance for loan losses and certain pertinent ratios for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
11,528
|
|
$
|
8,277
|
|
$
|
116
|
|
$
|
19,921
|
|
Charge-offs
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
(160
|
)
|
Recoveries
|
|
|
21
|
|
|
5
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(139
|
)
|
|
5
|
|
|
|
|
|
(134
|
)
|
Provision (credit) for loan losses
|
|
|
792
|
|
|
(519
|
)
|
|
(28
|
)
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
12,181
|
|
$
|
7,763
|
|
$
|
88
|
|
$
|
20,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average loans(1)
|
|
|
0.04
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.04
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
270.93
|
%
|
|
172.66
|
%
|
|
1.96
|
%
|
|
445.55
|
%
|
-
(1)
-
Average
loans and total loans exclude loans held-for-sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
11,193
|
|
$
|
7,450
|
|
$
|
114
|
|
$
|
18,757
|
|
Charge-offs
|
|
|
(8
|
)
|
|
|
|
|
(9
|
)
|
|
(17
|
)
|
Recoveries
|
|
|
284
|
|
|
14
|
|
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
276
|
|
|
14
|
|
|
(9
|
)
|
|
281
|
|
Provision (credit) for loan losses
|
|
|
(941
|
)
|
|
672
|
|
|
(32
|
)
|
|
(301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
10,528
|
|
$
|
8,136
|
|
$
|
73
|
|
$
|
18,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1)
|
|
|
0.09
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.09
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
191.31
|
%
|
|
147.85
|
%
|
|
1.33
|
%
|
|
340.49
|
%
|
-
(1)
-
Average
loans and total loans exclude loans held-for-sale.
85
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
10,748
|
|
$
|
8,076
|
|
$
|
102
|
|
$
|
18,926
|
|
Charge-offs
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
(300
|
)
|
Recoveries
|
|
|
182
|
|
|
227
|
|
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(118
|
)
|
|
227
|
|
|
|
|
|
109
|
|
Provision (credit) for loan losses
|
|
|
1,551
|
|
|
(540
|
)
|
|
(14
|
)
|
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
12,181
|
|
$
|
7,763
|
|
$
|
88
|
|
$
|
20,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1)
|
|
|
0.01
|
%
|
|
0.02
|
%
|
|
0.00
|
%
|
|
0.01
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
270.93
|
%
|
|
172.66
|
%
|
|
1.96
|
%
|
|
445.55
|
%
|
-
(1)
-
Average
loans and total loans exclude loans held-for-sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
11,187
|
|
$
|
7,070
|
|
$
|
122
|
|
$
|
18,379
|
|
Charge-offs
|
|
|
(229
|
)
|
|
(2
|
)
|
|
(9
|
)
|
|
(240
|
)
|
Recoveries
|
|
|
766
|
|
|
141
|
|
|
30
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries
|
|
|
537
|
|
|
139
|
|
|
21
|
|
|
697
|
|
Provision (credit) for loan losses
|
|
|
(1,196
|
)
|
|
927
|
|
|
(70
|
)
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
10,528
|
|
$
|
8,136
|
|
$
|
73
|
|
$
|
18,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1)
|
|
|
0.06
|
%
|
|
0.02
|
%
|
|
0.00
|
%
|
|
0.08
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
191.31
|
%
|
|
147.85
|
%
|
|
1.33
|
%
|
|
340.49
|
%
|
-
(1)
-
Average
loans and total loans exclude loans held-for-sale.
The
following table provides a summary of the allocation of the allowance for loan losses by class at the dates indicated. The allocation presented should not be interpreted as an
indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount
available for charge-offs that may occur within these classes.
86
Table of Contents
Allocation of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
December 31, 2015
|
|
|
|
Allowance
|
|
Percent of Loans
in each category
to total loans
|
|
Allowance
|
|
Percent of Loans
in each category
to total loans
|
|
Allowance
|
|
Percent of Loans
in each category
to total loans
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
12,181
|
|
|
42
|
%
|
$
|
10,528
|
|
|
42
|
%
|
$
|
10,748
|
|
|
41
|
%
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,704
|
|
|
42
|
%
|
|
5,094
|
|
|
45
|
%
|
|
4,980
|
|
|
46
|
%
|
Land and construction
|
|
|
1,367
|
|
|
6
|
%
|
|
1,571
|
|
|
6
|
%
|
|
1,504
|
|
|
6
|
%
|
Home equity
|
|
|
1,496
|
|
|
5
|
%
|
|
1,471
|
|
|
6
|
%
|
|
1,592
|
|
|
6
|
%
|
Residential mortgages
|
|
|
196
|
|
|
3
|
%
|
|
|
|
|
0
|
%
|
|
|
|
|
0
|
%
|
Consumer
|
|
|
88
|
|
|
2
|
%
|
|
73
|
|
|
1
|
%
|
|
102
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,032
|
|
|
100
|
%
|
$
|
18,737
|
|
|
100
|
%
|
$
|
18,926
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
allowance for loan losses totaled $20.0 million, or 1.38% of total loans at September 30, 2016, compared to $18.7 million, or 1.41% of total loans at
September 30, 2015, and $18.9 million, or 1.39% of total loans at December 31, 2015. The Company had net charge-offs of $134,000, or 0.04% of average loans, for the third quarter
of 2016, compared to net recoveries of $281,000, or 0.09% of average loans, for the third quarter of 2015, and net recoveries of $515,000, or 0.04% of average loans,
for the fourth quarter of 2015.
The
allowance for loan losses related to the commercial portfolio increased $1.4 million, at September 30, 2016 from December 31, 2015, primarily due to an increase
in commercial loans outstanding and net charge-offs of $118,000, resulting in a provision to the allowance for loan losses of $1.5 million. The allowance for loan losses balance attributed to
commercial loans individually evaluated for impairment increased to $1.7 million at September 30, 2016, from $174,000 at December 31, 2015, primarily due to one commercial
relationship that went on nonaccrual during the third quarter of 2016, which was fully reserved for. The allowance for loan losses related to the real estate portfolio decreased $313,000 at
September 30, 2016 from December 31, 2015, as a result of net recoveries of $227,000, partially offset by a credit provision for loan losses of $540,000, as a result of improving credit
quality factors.
Goodwill and Other Intangible Assets
On November 1, 2014, estimated goodwill of $13.0 million resulted from the acquisition Bay View Funding. On August 20,
2015, estimated goodwill of $32.6 million resulted from the merger of Focus. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities
and identifiable intangible assets. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional
information becomes available to indicate a more accurate or appropriate value for an asset or liability. Total goodwill at September 30, 2016 and December 31, 2015 was
$45.6 million, which was consisted of $32.6 million related to the Focus acquisition, and $13.0 million related to the Bay View Funding acquisition.
Goodwill
impairment exists when a reporting unit's carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the
fair value of
equity of the reporting unit exceeds the carrying value ("Step Zero"). If the qualitative assessment indicates it is more likely than not that the fair value of equity of a reporting unit is less than
book value, than a quantitative two step impairment test is required. Step 1 includes the determination of the carrying value of the Company's single reporting unit, including the existing goodwill
and intangible
87
Table of Contents
assets,
and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to perform a second step to the impairment test.
Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
The
Company tests goodwill for impairment on an annual basis as of November 30. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances
change between annual tests that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. The Company completed its annual impairment analysis on the goodwill
as of November 30, 2015 with the assistance of an independent valuation firm. Based on the Step Zero qualitative analysis performed, the Company determined that it is more likely than not that
the fair value of the Company's equity exceeded its reported book value of equity at November 30, 2015. As such, no impairment was indicated and no further testing was required.
Other
intangible assets were $7.3 million at September 30, 2016, compared to $8.5 million at December 31, 2015. Core deposit and customer relationship
intangible assets arising from the acquisition of Diablo Valley Bank in June 2007 were $301,000 at September 30, 2016 and $621,000 at December 31, 2015, net of accumulated amortization.
The core deposit intangible asset arising from the acquisition of Focus was $5.4 million at September 30, 2016 and $6.0 million at December 31, 2105, net of accumulated
amortization. A below market lease, customer relationship and brokered relationship, and a non-compete agreement intangible assets arising from the acquisition of Bay View Funding were
$1.7 million at September 30, 2016 and $1.9 million at December 31, 2015, net of accumulated amortization.
Deposits
The composition and cost of the Company's deposit base are important components in analyzing the Company's net interest margin and balance sheet
liquidity characteristics, both of which are discussed in greater detail in other sections herein. The Company's liquidity is impacted by the volatility of deposits from the propensity of that money
to leave the institution for
rate-related or other reasons. Deposits can be adversely affected if economic conditions weaken in California, and the Company's market area in particular. Potentially, the most volatile deposits in a
financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of that magnitude are typically more
rate-sensitive than customers with smaller balances.
The
following table summarizes the distribution of deposits and the percentage of distribution in each category of deposits for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
December 31, 2015
|
|
|
|
Balance
|
|
% to Total
|
|
Balance
|
|
% to Total
|
|
Balance
|
|
% to Total
|
|
|
|
(Dollars in thousands)
|
|
Demand, noninterest-bearing
|
|
$
|
889,075
|
|
|
40
|
%
|
$
|
758,440
|
|
|
39
|
%
|
$
|
821,405
|
|
|
40
|
%
|
Demand, interest-bearing
|
|
|
536,541
|
|
|
24
|
%
|
|
440,517
|
|
|
22
|
%
|
|
496,278
|
|
|
24
|
%
|
Savings and money market
|
|
|
555,156
|
|
|
24
|
%
|
|
490,572
|
|
|
25
|
%
|
|
496,843
|
|
|
24
|
%
|
Time depositsunder $250
|
|
|
57,718
|
|
|
2
|
%
|
|
65,629
|
|
|
3
|
%
|
|
62,026
|
|
|
3
|
%
|
Time deposits$250 and over
|
|
|
169,485
|
|
|
8
|
%
|
|
174,700
|
|
|
9
|
%
|
|
160,815
|
|
|
8
|
%
|
Time depositsbrokered
|
|
|
3,000
|
|
|
1
|
%
|
|
24,150
|
|
|
1
|
%
|
|
17,825
|
|
|
1
|
%
|
CDARSmoney market and time deposits
|
|
|
7,659
|
|
|
1
|
%
|
|
8,015
|
|
|
1
|
%
|
|
7,583
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,218,634
|
|
|
100
|
%
|
$
|
1,962,023
|
|
|
100
|
%
|
$
|
2,062,775
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
Table of Contents
The
Company obtains deposits from a cross-section of the communities it serves. The Company's business is not generally seasonal in nature. Public funds were 4% of deposits at
September 30, 2016, and 5% at September 30, 2015, and 4% at December 31, 2015.
Total
deposits increased $256.6 million, or 13%, to $2.22 billion at September 30, 2016, compared to $1.96 billion at September 30, 2015, and increased
$155.9 million, or 8%, at September 30, 2016, compared to $2.06 billion at December 31, 2015. Noninterest-bearing demand deposits increased $130.6 million at
September 30, 2016 from September 30, 2015, and increased $67.7 million from December 31, 2015. Interest-bearing demand deposits increased $96.0 million at
September 30, 2016 from September 30, 2015, and increased $40.3 million from December 31, 2015. Savings and money market deposits increased $64.6 million at
September 30, 2016 from September 30, 2015, and increased $58.3 million from December 31, 2015. Brokered deposits decreased $21.2 million at September 30,
2016 from September 30, 2015, and decreased $14.8 million from December 31, 2015. Deposits excluding all time deposits and CDARS deposits increased $291.2 million, or 17%,
to $1.98 billion at September 30, 2016, from $1.69 billion at September 30, 2015, and increased $166.2 million, or 9%, from $1.81 billion at
December 31, 2015.
At
September 30, 2016, the Company had $96.7 million (at fair value) of securities pledged for $85.1 million in certificates of deposits from the State of
California. At September 30, 2015, the Company had $108.8 million (at fair value) of securities pledged for $98.0 million in certificates of deposits from the State of California.
At December 31, 2015, the Company had $93.0 million (at fair value) of securities pledged for $78.0 million in certificates of deposits from the State of California.
CDARS
deposits were comprised of $4.1 million of money market accounts and $3.6 million of time deposits at September 30, 2016. CDARS deposits were comprised of
$2.9 million of money market accounts and $5.1 million of time deposits at September 30, 2015. CDARS deposits were comprised of $3.4 million of money market accounts and
$4.2 million of time deposits at December 31, 2015.
The
following table indicates the contractual maturity schedule of the Company's time deposits of $250,000 and over, and all CDARS time deposits and brokered deposits as of
September 30, 2016:
|
|
|
|
|
|
|
|
|
|
Balance
|
|
% of Total
|
|
|
|
(Dollars in thousands)
|
|
Three months or less
|
|
$
|
74,474
|
|
|
42
|
%
|
Over three months through six months
|
|
|
66,294
|
|
|
38
|
%
|
Over six months through twelve months
|
|
|
26,280
|
|
|
15
|
%
|
Over twelve months
|
|
|
9,527
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,575
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company focuses primarily on providing and servicing business deposit accounts that are frequently over $250,000 in average balance per account. As a result, certain types of
business clients that the Company serves typically carry average deposits in excess of $250,000. The account activity for some account types and client types necessitates appropriate liquidity
management practices by the Company to help ensure its ability to fund deposit withdrawals.
89
Table of Contents
Return on Equity and Assets
The following table indicates the ratios for return on average assets and average equity, and average equity to average assets for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
Nine Months
Ended
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Annualized return on average assets
|
|
|
1.11
|
%
|
|
0.70
|
%
|
|
1.13
|
%
|
|
0.92
|
%
|
Annualized return on average tangible assets
|
|
|
1.13
|
%
|
|
0.71
|
%
|
|
1.16
|
%
|
|
0.93
|
%
|
Annualized return on average equity
|
|
|
10.38
|
%
|
|
6.41
|
%
|
|
10.61
|
%
|
|
8.25
|
%
|
Annualized return on average tangible equity
|
|
|
13.06
|
%
|
|
7.46
|
%
|
|
13.45
|
%
|
|
9.22
|
%
|
Average equity to average assets ratio
|
|
|
10.67
|
%
|
|
10.95
|
%
|
|
10.68
|
%
|
|
11.17
|
%
|
Off-Balance Sheet Arrangements
In the normal course of business the Company makes commitments to extend credit to its customers as long as there are no violations of any
conditions established in the contractual arrangements. These commitments are obligations that represent a potential credit risk to the Company, but are not reflected on the Company's consolidated
balance sheets. Total unused commitments to extend credit were $601.1 million at September 30, 2016, compared to $579.0 million at September 30, 2015, and
$573.7 million at December 31, 2015. Unused commitments represented 41% outstanding gross loans at September 30, 2016, 43% outstanding gross loans at September 30, 2015,
and 42% at December 31, 2015.
The
effect on the Company's revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no
certainty that lines of credit and letters of credit will ever be fully utilized. The following table presents the Company's commitments to extend credit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
December 31, 2015
|
|
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
|
|
(Dollars in thousands)
|
|
Unused lines of credit and commitments to make loans
|
|
$
|
18,748
|
|
$
|
566,902
|
|
$
|
18,082
|
|
$
|
548,361
|
|
$
|
16,917
|
|
$
|
539,897
|
|
Standby letters of credit
|
|
|
3,479
|
|
|
12,019
|
|
|
3,402
|
|
|
8,569
|
|
|
3,402
|
|
|
13,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,227
|
|
$
|
578,921
|
|
$
|
21,484
|
|
$
|
556,930
|
|
$
|
20,319
|
|
$
|
553,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Asset/Liability Management
Liquidity refers to the Company's ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in
a timely and cost effective fashion. At various times the Company requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or
liability repayments. An integral part of the Company's ability to manage its liquidity position appropriately is the Company's large base of core deposits, which are generated by offering traditional
banking services in its service area and which have historically been a stable source of funds. To manage liquidity needs properly cash inflows must be timed to coincide with anticipated outflows or
sufficient liquidity resources must be available to meet varying demands. The Company manages liquidity to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities
without maintaining excessive amounts of balance sheet liquidity. Excess
90
Table of Contents
balance
sheet liquidity can negatively impact the Company's interest margin. In order to meet short-term liquidity needs the Company utilizes overnight Federal funds purchase arrangements and other
borrowing arrangements with correspondent banks, solicits brokered deposits if cost effective
deposits are not available from local sources, and maintains collateralized lines of credit with the FHLB and FRB. In addition, the Company can raise cash for temporary needs by selling securities
under agreements to repurchase and selling securities available-for-sale.
The
loan to deposit ratio is one of the measures we analyze for liquidity. Our loan to deposit ratio was 65.36% at September 30, 2016, compared to 67.91% at September 30,
2015, and 65.87% at December 31, 2015.
FHLB and FRB Borrowings and Available Lines of Credit
The Company has off-balance sheet liquidity in the form of Federal funds purchase arrangements with correspondent banks, including the FHLB and
FRB. The Company can borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. The Company had no overnight borrowings from the FHLB at September 30, 2016,
September 30, 2015 and December 31, 2015. The Company had $219.5 million of loans pledged to the FHLB as collateral on an available line of credit of $182.4 million at
September 30, 2016.
The
Company can also borrow from the FRB's discount window. The Company had $479.3 million of loans pledged to the FRB as collateral on an available line of credit of
$314.9 million at September 30, 2016, none of which was outstanding.
At
September 30, 2016, the Company had Federal funds purchase arrangements available of $55.0 million. There were no Federal funds purchased outstanding at
September 30, 2016, September 30, 2015, and December 31, 2015.
The
Company has a $5.0 million line of credit with a correspondent bank, of which none was outstanding at September 30, 2016.
The
Company may also utilize securities sold under repurchase agreements to manage our liquidity position. There were no securities sold under agreements to repurchase at
September 30, 2016, September 30, 2015, and December 31, 2015.
The
following table summarizes the Company's borrowings under its Federal funds purchased, security repurchase arrangements and lines of credit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
December 31,
2015
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Average balance year-to-date
|
|
$
|
558
|
|
$
|
36
|
|
$
|
578
|
|
Average interest rate year-to-date
|
|
|
2.57
|
%
|
|
0.36
|
%
|
|
3.14
|
%
|
Maximum month-end balance during the quarter
|
|
$
|
|
|
$
|
1,000
|
|
$
|
3,000
|
|
Average rate at period-end
|
|
|
N/A
|
|
|
N/A
|
|
|
3.00
|
%
|
Capital Resources
The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis and
takes appropriate action to ensure that such measurements are within established internal and external guidelines. The external guidelines, which are issued by the Federal Reserve and the FDIC,
establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
91
Table of Contents
The
following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the consolidated Company under the Basel III requirements as of
September 30, 2016, September 30, 2015 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
September 30,
2015
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Capital components:
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital
|
|
$
|
210,021
|
|
$
|
180,353
|
|
$
|
181,222
|
|
Additional Tier 1 capital
|
|
|
|
|
|
17,367
|
|
|
18,077
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
210,021
|
|
|
197,720
|
|
|
199,299
|
|
Tier 2 capital
|
|
|
20,676
|
|
|
19,480
|
|
|
19,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
230,697
|
|
$
|
217,200
|
|
$
|
218,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
$
|
1,812,623
|
|
$
|
1,763,709
|
|
$
|
1,750,515
|
|
Average assets for capital purposes
|
|
$
|
2,370,179
|
|
$
|
1,901,985
|
|
$
|
2,322,940
|
|
Capital ratios:
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
12.7
|
%
|
|
12.3
|
%
|
|
12.5
|
%
|
Tier 1 risk-based capital
|
|
|
11.6
|
%
|
|
11.2
|
%
|
|
11.4
|
%
|
Common equity Tier 1 risk-based capital
|
|
|
11.6
|
%
|
|
10.2
|
%
|
|
10.4
|
%
|
Leverage(1)
|
|
|
8.9
|
%
|
|
10.4
|
%
|
|
8.6
|
%
|
-
(1)
-
Tier 1
capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
The
following table summarizes risk based capital, risk weighted assets, and risk based capital ratios of HBC under the Basel III requirements as of September 30, 2016, of
September 30, 2015 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
September 30,
2015
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Capital components:
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital
|
|
$
|
207,070
|
|
$
|
194,039
|
|
$
|
200,327
|
|
Additional Tier 1 capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
207,070
|
|
|
194,039
|
|
|
200,327
|
|
Tier 2 capital
|
|
|
20,676
|
|
|
19,480
|
|
|
19,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
$
|
227,746
|
|
$
|
213,519
|
|
$
|
219,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
|
$
|
1,812,204
|
|
$
|
1,760,434
|
|
$
|
1,750,222
|
|
Average assets for capital purposes
|
|
$
|
2,369,430
|
|
$
|
1,900,304
|
|
$
|
2,322,232
|
|
Capital ratios:
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital
|
|
|
12.6
|
%
|
|
12.1
|
%
|
|
12.6
|
%
|
Tier 1 risk-based capital
|
|
|
11.4
|
%
|
|
11.0
|
%
|
|
11.4
|
%
|
Common equity Tier 1 risk-based capital
|
|
|
11.4
|
%
|
|
11.0
|
%
|
|
11.4
|
%
|
Leverage(1)
|
|
|
8.7
|
%
|
|
10.2
|
%
|
|
8.6
|
%
|
-
(1)
-
Tier 1
capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
92
Table of Contents
The
following table presents the applicable well-capitalized regulatory guidelines and the standards for minimum capital adequacy requirements under Basel III:
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios
|
|
Transitional
Minimum
Regulatory
Requirement(1)
Effective
January 1,
2016
|
|
Fully Phased-in
Minimum
Regulatory
Requirement(2)
Effective
January 1,
2019
|
|
Well-capitalized
Financial
Institution
Regulatory
Guidelines
|
|
Total Risk-Based
|
|
|
8.625
|
%
|
|
10.5
|
%
|
|
10.0
|
%
|
Tier 1 Risk-Based
|
|
|
6.625
|
%
|
|
8.5
|
%
|
|
8.0
|
%
|
Common Equity Tier 1 Risk-based
|
|
|
5.125
|
%
|
|
7.0
|
%
|
|
6.5
|
%
|
Leverage
|
|
|
4.000
|
%
|
|
4.0
|
%
|
|
5.0
|
%
|
-
(1)
-
Includes
0.625% capital conservation buffer, except the leverage capital ratio.
-
(2)
-
Includes
2.5% capital conservation buffer, except the leverage capital ratio.
The
Basel III capital rules introduce a new "capital conservation buffer," for banking organizations to maintain a common equity Tier 1 ratio more than 2.5% above these minimum
risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to
risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The
implementation of the capital conservation buffer was phased in beginning on January 1, 2016 at 0.625% and will be phased in over a four-year period (increasing by that amount on each
subsequent January 1, until it reaches 2.5% on January 1, 2019).
The
Company's common equity Tier 1 risk-based capital ratio increased at September 30, 2016, compared to September 30, 2015, and December 31, 2015, primarily
due to the conversion of the Company's Series C convertible perpetual preferred stock, no par value ("Series C Preferred Stock") for 5,601,000 shares of the Company's common stock during
the third quarter of 2016, as discussed below. The conversion of the Company's Series C Preferred Stock into common stock had no effect on HBC's common equity Tier 1 risk-based capital
ratio. During the third, second and first quarters of 2016, HBC distributed dividends of $4.0 million, $4.0 million, and $6.0 million, respectively, for a total of
$14.0 million for the first nine months of 2016.
At
September 30, 2016, the Company's consolidated capital ratio exceeded regulatory guidelines and HBC's capital ratios exceed the highest regulatory capital requirement of
"well-capitalized" under Basel III prompt corrective action provisions. Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum
amounts and ratios of total risk-based capital, Tier 1 capital, and common equity Tier 1 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1
capital to average assets (as defined). Management believes that, as of September 30, 2016, September 30, 2015, and December 31, 2015, the Company and HBC met all capital adequacy
guidelines to which they were subject. There are no conditions or events since September 30, 2016, that management believes have changed the categorization of the Company or HBC as
well-capitalized.
At
September 30, 2016, the Company had total shareholders' equity of $261.3 million, compared to $248.0 million at September 30, 2015, and
$245.4 million at December 31, 2015. At September 30, 2016, total shareholders' equity included $214.6 million in common stock, $48.7 million in retained earnings,
and ($2.0) million of accumulated other comprehensive loss.
93
Table of Contents
The
accumulated other comprehensive loss was ($2.0) million at September 30, 2016, compared to accumulated other comprehensive loss of ($2.0) million at September 30, 2015,
and an accumulated other comprehensive loss of ($6.2) million at December 31, 2015. The unrealized gain on securities available-for-sale, net of taxes, included in accumulated other
comprehensive loss was an unrealized gain of $4.7 million, at September 30, 2016, compared to an unrealized gain of $2.6 million, at September 30, 2015, and an unrealized
gain of $296,000, at December 31, 2015. The components of accumulated other comprehensive loss, net of taxes, at September 30, 2016 include the following: an unrealized gain on
available-for-sale securities of $4.7 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $342,000; a split dollar insurance
contracts liability of ($3.6) million; a supplemental executive retirement plan liability of ($4.0) million; and an unrealized gain on interest-only strip from SBA loans of $639,000.
Series C Preferred Stock
On September 12, 2016, the Company entered into Exchange Agreements with Castle Creek Capital Partners IV, LP, Patriot Financial
Partners, L.P. and Patriot Financial Partners Parallel, L.P. (collectively "Preferred Stockholders") providing for the exchange of 21,003.75 shares of the Company's Series C
Preferred Stock for 5,601,000 shares of the Company's common stock. The exchange ratio was equal to the equivalent number of shares the Preferred Stockholders would have received upon conversion of
the Series C Preferred Stock.
As
a result of the exchange transaction, the Company had 37,915,736 shares of common stock issued and outstanding on September 30, 2016. Castle Creek owns 3,763,225 shares, or
9.9% of the issued and outstanding shares; and Patriot Financial and Patriot Parallel own together 4,437,204 shares, or 11.7% of the issued and outstanding shares. The exchange of the Series C
Preferred Stock for common stock resulted in an increase in the Company's common equity Tier 1 risk-based capital ratio at September 30, 2016, but had no effect on HBC's common equity
tier 1 risk-based capital ratio or other regulatory capital ratios of the Company or HBC.
The
book value per common share was $6.89 at September 30, 2016, compared to $7.12 at September 30, 2015, and $7.03 at December 31, 2015. The tangible book value per
common share was $5.49 at September 30, 2016, compared to $5.44 at September 30, 2015, and $5.35 at December 31, 2015. On a full conversion of the Series C Preferred stock
into common stock at September 30, 2015, and December 31, 2015: (i) the book value per common share would have been reduced to $6.58 and $6.51, respectively; and (ii) the
tangible book value per common share would have been reduced to $5.15 and $5.07, respectively.
Market Risk
Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that
affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Company's
role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to reduce the
volatility inherent in certain financial instruments.
Interest Rate Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company's market risk exposure is
primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest
94
Table of Contents
rates.
The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates.
The
principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the financial components of the Company in a manner that will
optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability
Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of
current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
Management realizes certain risks are inherent, and that the goal is to identify and manage the risks. Management uses two methodologies to manage interest rate risk: (i) a standard GAP
analysis; and (ii) an interest rate shock simulation model.
The
planning of asset and liability maturities is an integral part of the management of an institution's net interest margin. To the extent maturities of assets and liabilities do not
match in a changing interest rate environment, the net interest margin may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of
loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest-bearing liabilities. The Company has generally
been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities.
Interest
rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest
sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates.
The
Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company's net interest margin, and to
calculate the estimated fair values of the Company's financial instruments under different interest rate scenarios. The program imports current balances, interest rates, maturity dates and repricing
information for individual financial instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new volumes to project the effects of a
given interest rate change on the Company's interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company's investment, loan,
deposit and borrowed funds portfolios. These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates
over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels).
The
following table sets forth the estimated changes in the Company's annual net interest income that would result from the designated instantaneous parallel shift in interest rates
noted, as of September 30, 2016. Computations of prospective effects of hypothetical interest rate changes are based
95
Table of Contents
on
numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
in Estimated
Net Interest Income
|
|
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Change in Interest Rates (basis points)
|
|
|
|
|
|
|
|
+400
|
|
$
|
29,225
|
|
|
32.9
|
%
|
+300
|
|
$
|
23,075
|
|
|
26.0
|
%
|
+200
|
|
$
|
16,670
|
|
|
18.8
|
%
|
+100
|
|
$
|
9,433
|
|
|
10.6
|
%
|
0
|
|
$
|
|
|
|
0.0
|
%
|
100
|
|
$
|
(11,363
|
)
|
|
12.8
|
%
|
200
|
|
$
|
(21,663
|
)
|
|
24.4
|
%
|
This
data does not reflect any actions that we may undertake in response to changes in interest rates such as changes in rates paid on certain deposit accounts based on local competitive
factors, which could reduce the actual impact on net interest income.
As
with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous
parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also
misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in
the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag
behind the change in general market rates. Additionally, the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such
as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally,
this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the
Company's exposure to interest rate risk.