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 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,” “intend,” “plan,” “believes,” “estimate,” “consider” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The 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.
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 failure to realize all of the anticipated benefits of our branch purchases;
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Difficulties in integrating the acquired bank branches from Bank of America, including our ability to retain the acquired deposits;
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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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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 consumer spending, borrowing and savings habits;
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Changes in the level of our nonperforming assets and charge offs;
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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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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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The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
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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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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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; and
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Our inability to manage the risks involved in 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.
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, 2015
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, 2015 to June 30, 2016. Also discussed are significant trends and changes in the Company’s results of operations for the six months ended June 30, 2016, compared to the same period in 2015. 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 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 1901 Churn Creek Road, Redding, California and the telephone number is (530) 722-3939.
EXECUTIVE OVERVIEW
Net income available to common shareholders for the three and six months ended June 30, 2016 was $1.6 million or $0.11 per share – diluted and $596 thousand or $0.04 per share – diluted, respectively. This compared to net income available to common shareholders for the same periods a year ago of $2.3 million or $0.18 per share – diluted and $4.1 million or $0.31 per share – diluted respectively.
The current year results were impacted by the following expenses totaling $3.0 million related to the acquisition of five Bank of America branches and the execution of our plans to reconfigure our Balance Sheet using liquidity provided by those branches:
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$2.3 million loss on termination of interest rate hedge
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$580 thousand of branch acquisition transition costs
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$57 thousand prepayment penalty on early repayment of $75.0 million Federal Home Loan Bank of San Francisco hedged term debt.
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$39 thousand accelerated amortization of broker fees recorded in interest expense when $17.5 million of brokered time deposits were called and redeemed
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unrelated to the branch acquisition, the second quarter results were negatively impacted by the $546 thousand impairment of a bond investment and the six month results were negatively impacted by the $363 thousand write-off of a deferred tax asset.
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.
On March 11, 2016, we completed the purchase of five Bank of America branches located in Northern California. The transaction was most 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 are using the remaining liquidity to fund loan growth.
The acquired branches are located in Colusa, Willows, Orland, Corning, and Yreka. The Bank also acquired three offsite ATM locations in Williams, Orland and Corning.
The Bank paid cash consideration of $6.7 million and acquired $155.2 million in assets recorded at fair value, primarily cash and premises. The Bank assumed $149.2 million in liabilities recorded at fair value, primarily deposits with an average interest cost of 0.09%.
The current quarter is the first full quarter, which includes the benefits derived from the acquisition of five Bank of America branches and the reconfiguration of the Company’s Balance Sheet. As a result, c
ompared against the first quarter of 2016 we realized the following improvements:
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Net interest income increased $913 thousand (11%)
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Net interest margin increased from 3.44% to 3.74%
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Average interest rate paid on all deposits decreased from 37 basis points to 30 basis points
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Significant items for the three months ended June 30, 2016 were as follows:
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Performance
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Return on average assets decreased to 0.59% for
the second quarter of 2016 compared to 0.94% for
the same quarter of 2015
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Return on average equity decreased to 6.85% for
the second quarter of 2016 compared to 8.84% for
the same quarter of 2015
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Tangible book value per common share was $6.71 at June 30, 2016 compared with $6.76 at December 31, 2015
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Efficiency ratio was 79.4% during the second quarter of 2016 compared to 64.6% during the same period in 2015
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Credit Quality
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Nonperforming assets at June 30, 2016 totaled $11.7 million or 1.09% of total assets, a decrease of $3.8 million from $15.5 million or 1.53% of total assets at December 31, 2015
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Net loan loss recoveries of $369 thousand combined with continuing improved asset quality resulted in no provision for loan and lease losses during the second quarter
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant items for the
six
months ended June 30, 2016 were as follows:
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Performance
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Return on average assets decreased to 0.11% for the first six months of 2016 compared to 0.84% for the same period in 2015
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Return on average equity decreased to 1.31% for the first six months of 2016 compared to 7.83% for the same period in 2015
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Efficiency ratio was 93.5% during the first six months of 2016 compared to 68.0% during the same period in 2015.
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Excluding $3.0 million of one-time expenses related to the branch acquisition and reconfiguring of our Balance Sheet the efficiency ratio for the first six months of 2016 would have been 77.6%
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Credit Quality
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Nonperforming assets at June 30, 2016 totaled $11.7 million or 1.09% of total assets, a decrease of $6.7 million from $18.4 million or 1.87% of total assets at June 30, 2015
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Net loan loss recoveries were $684 thousand for the first six months of 2016 compared with net recoveries of $582 thousand for the same period a year ago
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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, 2015 filed with the SEC on March 8, 2016. 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 Committee’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 loan categories are based on analysis of local economic 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 scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.
In projecting future taxable income, management develops assumptions including the amount of future state and federal 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) 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 have 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 are recorded in accumulated other comprehensive income until earnings are impacted by the hedged instrument. No components of our hedging instruments are excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.
Classification of the gain or loss in the
Consolidated Statements of Operations
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.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 2015, we had one active interest rate swap, and one forward starting interest rate swap to hedge interest rate risk associated with current and forecasted variable rate Federal Home Loan Bank of San Francisco advances. The hedge strategy converted LIBOR based variable rate of interest on active and forecasted Federal Home Loan Bank of San Francisco advances to fixed interest rates.
The following table summarizes our interest rate swap contracts with counterparties outstanding at December 31, 2015. The interest rate swap contracts were made with a single issuer and included the right of offset.
(Amounts in thousands)
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Description
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We Pay Fixed
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We Receive Variable
(1)
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Notional Amount
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Effective Date
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Maturity Date
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Interest rate swap
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2.64
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%
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0.33
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%
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$
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75,000
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August 3, 2015
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August 1, 2016
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Forward starting interest rate swap
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3.22
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%
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Variable
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$
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75,000
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August 1, 2016
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August 1, 2017
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(1)
Rate floats to three month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.
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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 15
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. Other sources of noninterest income include fees earned on deposit related services, ATM and point of sale income,
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.
Our income depends to a great extent on net interest income, which correlates strongly with certain interest rate characteristics. These interest rate characteristics are highly sensitive to 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 earn on our 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.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Net income available to common shareholders for the first six months of 2016 decreased $3.5 million compared to the same period a year ago. The difference is centered in branch acquisition and Balance Sheet reconfiguration costs totaling $3.0 million, a $546 thousand impairment of a bond investment
and the write-off of a $363 thousand deferred tax asset.
Compared to the first six months of 2015, net interest income increased $557 thousand. Noninterest income decreased $349 thousand including a $546 thousand impairment of a bond investment. Noninterest expense increased $5.0 million including branch acquisition and Balance Sheet reconfiguration costs of $3.0 million.
During the six months ended June 30, 2016, we recorded an income tax expense of $279 thousand and wrote-off a $363 thousand deferred tax asset; a total expense of $642 thousand. This compared to income tax expense of $1.8 million for the same period a year ago. Net income per share available to common shareholders was $0.04 – diluted for the six months ended June 30, 2016 compared to net income available to common shareholders
per share of $0.31 - diluted for the same period a year ago.
We continued our quarterly cash dividends of $0.03 per share during the six months ended June 30, 2016. 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, average total equity and average common shareholders' equity for the six months ended June 30, 2016 and 2015. For each of the periods presented, the table includes the calculated ratios based on reported net income and net income available to common shareholders as shown in the
Consolidated Statements of Operations
incorporated in this document.
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For the Six Months Ended
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June 30, 2016
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June 30, 2015
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Return on average assets:
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Net income
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0.11
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%
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0.86
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%
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Income available to common shareholders
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0.11
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%
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0.84
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%
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Return on average total equity:
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Net income
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1.31
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%
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8.02
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%
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Income available to common shareholders
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1.31
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%
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7.83
|
%
|
Return on average common shareholders’ equity:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.31
|
%
|
|
|
9.89
|
%
|
Income available to common shareholders
|
|
|
1.31
|
%
|
|
|
9.65
|
%
|
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is the largest source of our operating income. For the three months ended June 30, 2016 compared to the same period a year ago:
●
|
Net interest income increased $622 thousand
|
●
|
Interest income increased $494 thousand or 5% to $10.3 million
|
|
o
|
Interest and fees on loans increased $492 thousand due to increased average loan balances
|
|
o
|
Interest on interest bearing deposits due from banks increased $9 thousand
|
|
o
|
Interest on securities decreased $7 thousand
|
●
|
Interest expense for the second quarter of 2016 decreased $128 thousand or 11% to $1.0 million
|
|
o
|
Interest on interest bearing deposits decreased $70 thousand. Interest bearing deposits increased $105.0 million however, the rate paid on all interest bearing deposits decreased by 11 basis points
|
|
o
|
Interest on Federal Home Loan Bank of San Francisco term debt decreased $361 thousand
|
|
o
|
Interest on $20.0 million of senior and subordinated term debt increased $294 thousand
|
|
o
|
Interest on junior subordinated debentures and other borrowings increased $10 thousand
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the six months ended June 30, 2016 compared to the same period a year ago:
●
|
Net interest income increased $557 thousand
|
●
|
Interest income increased $872 thousand or 5% to $20.2 million
|
|
o
|
Interest and fees on loans increased $1.0 million due to increased average loan balances
|
|
o
|
Interest on interest bearing deposits due from banks increased $13 thousand
|
|
o
|
Interest on securities decreased $173 thousand due to decreased securities balances and decreased yield on the portfolio
.
|
●
|
Interest expense increased $315 thousand or 14% to $2.6 million
|
|
o
|
Interest on interest bearing deposits decreased $67 thousand. Interest bearing deposits increased $105.0 million compared to the prior year however, the rate paid on all interest bearing deposits decreased by 7 basis points
|
|
o
|
Interest on Federal Home Loan Bank of San Francisco term debt decreased $226 thousand. During the first quarter of 2016 all Federal Home Loan Bank of San Francisco term debt was repaid and an interest rate hedge associated with $75.0 million of that debt was terminated
|
|
o
|
Interest on $20.0 million of senior and subordinated term debt increased $591 thousand. The senior and subordinated term debt was issued during the fourth quarter of 2015 to redeem $20.0 million of preferred stock
|
|
o
|
Interest on junior subordinated debentures and other borrowings increased $17 thousand
|
The current quarter net interest margin increased 30 basis points to 3.74% as compared to the prior quarter. This was caused by increased yield on the loan portfolio, a decrease in the overall cost of interest bearing deposits, and by the elimination of our contractual interest payments on $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt
. These positive changes were partially offset by interest on $20.0 million of new term debt issued during the fourth quarter of 2015.
The net interest margin was 3.60% for the six months ended June 30, 2016, a decrease of 12 basis points as compared to the same period a year ago. The decrease was caused by decreased yields on average interest earning assets, and increased interest expense to fund average earning assets. During the first six months of 2016, interest on the $20.0 million of new term debt issued during the fourth quarter of 2015 totaled $591 thousand.
During the first six months of 2016, deposit balances increased $133.8 million. The increase in deposit balances results from the recent branch acquisition. Our overall cost of total deposits decreased to 0.33% for the six months ended June 30, 2016 from 0.40% for the same period a year ago.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2016 and 2015.
|
|
Three Months Ended June 30, 2016
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
(2)
|
|
$
|
742,684
|
|
|
$
|
8,796
|
|
|
|
4.76
|
%
|
|
$
|
703,008
|
|
|
$
|
8,304
|
|
|
|
4.74
|
%
|
Taxable securities
|
|
|
124,183
|
|
|
|
808
|
|
|
|
2.62
|
%
|
|
|
121,110
|
|
|
|
801
|
|
|
|
2.65
|
%
|
Tax-exempt securities
|
|
|
77,168
|
|
|
|
588
|
|
|
|
3.06
|
%
|
|
|
76,772
|
|
|
|
602
|
|
|
|
3.15
|
%
|
Interest-bearing deposits in other banks
|
|
|
46,097
|
|
|
|
65
|
|
|
|
0.57
|
%
|
|
|
27,688
|
|
|
|
56
|
|
|
|
0.81
|
%
|
Average interest-earning assets
|
|
|
990,132
|
|
|
|
10,257
|
|
|
|
4.17
|
%
|
|
|
928,578
|
|
|
|
9,763
|
|
|
|
4.22
|
%
|
Cash and due from banks
|
|
|
17,028
|
|
|
|
|
|
|
|
|
|
|
|
10,833
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
15,632
|
|
|
|
|
|
|
|
|
|
|
|
11,767
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
41,394
|
|
|
|
|
|
|
|
|
|
|
|
42,637
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
1,064,186
|
|
|
|
|
|
|
|
|
|
|
$
|
993,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
382,811
|
|
|
|
130
|
|
|
|
0.14
|
%
|
|
$
|
268,784
|
|
|
|
107
|
|
|
|
0.16
|
%
|
Savings deposits
|
|
|
103,990
|
|
|
|
41
|
|
|
|
0.16
|
%
|
|
|
93,291
|
|
|
|
55
|
|
|
|
0.24
|
%
|
Certificates of deposit
|
|
|
223,958
|
|
|
|
515
|
|
|
|
0.92
|
%
|
|
|
245,573
|
|
|
|
594
|
|
|
|
0.97
|
%
|
Net term debt
|
|
|
19,510
|
|
|
|
295
|
|
|
|
6.08
|
%
|
|
|
105,330
|
|
|
|
363
|
|
|
|
1.38
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
59
|
|
|
|
2.30
|
%
|
|
|
10,310
|
|
|
|
49
|
|
|
|
1.91
|
%
|
Average interest-bearing liabilities
|
|
$
|
740,579
|
|
|
|
1,040
|
|
|
|
0.56
|
%
|
|
$
|
723,288
|
|
|
|
1,168
|
|
|
|
0.65
|
%
|
Noninterest-bearing demand
|
|
|
220,377
|
|
|
|
|
|
|
|
|
|
|
|
147,442
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,913
|
|
|
|
|
|
|
|
|
|
|
|
16,887
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
91,317
|
|
|
|
|
|
|
|
|
|
|
|
106,198
|
|
|
|
|
|
|
|
|
|
Average liabilities and shareholders’ equity
|
|
$
|
1,064,186
|
|
|
|
|
|
|
|
|
|
|
$
|
993,815
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
|
|
|
|
|
|
$
|
9,217
|
|
|
|
3.74
|
%
|
|
|
|
|
|
$
|
8,595
|
|
|
|
3.71
|
%
|
Tax equivalent net interest margin
(3)
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%
|
(1)
|
Interest income on loans is reduced by net fee expense of approximately $352 thousand and $63 thousand for the three months ended June 30, 2016 and 2015, respectively.
|
(2)
|
Average nonaccrual loans of $11.4 million and $17.1 million for the three months ended June 30, 2016 and 2015 are included, 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 $303 thousand and $310 thousand for the three months ended June 30, 2016 and 2015, respectively.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Six Months Ended June 30, 2016
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
(2)
|
|
$
|
731,740
|
|
|
$
|
17,247
|
|
|
|
4.74
|
%
|
|
$
|
688,146
|
|
|
$
|
16,215
|
|
|
|
4.75
|
%
|
Taxable securities
|
|
|
122,050
|
|
|
|
1,592
|
|
|
|
2.62
|
%
|
|
|
128,791
|
|
|
|
1,746
|
|
|
|
2.73
|
%
|
Tax-exempt securities
|
|
|
77,510
|
|
|
|
1,182
|
|
|
|
3.07
|
%
|
|
|
77,043
|
|
|
|
1,201
|
|
|
|
3.14
|
%
|
Interest-bearing deposits in other banks
|
|
|
48,676
|
|
|
|
140
|
|
|
|
0.58
|
%
|
|
|
26,795
|
|
|
|
127
|
|
|
|
0.96
|
%
|
Average interest-earning assets
|
|
|
979,976
|
|
|
|
20,161
|
|
|
|
4.14
|
%
|
|
|
920,775
|
|
|
|
19,289
|
|
|
|
4.22
|
%
|
Cash and due from banks
|
|
|
14,665
|
|
|
|
|
|
|
|
|
|
|
|
10,566
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
14,008
|
|
|
|
|
|
|
|
|
|
|
|
11,980
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
40,543
|
|
|
|
|
|
|
|
|
|
|
|
43,085
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
1,049,192
|
|
|
|
|
|
|
|
|
|
|
$
|
986,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
353,291
|
|
|
|
252
|
|
|
|
0.14
|
%
|
|
$
|
272,349
|
|
|
|
223
|
|
|
|
0.17
|
%
|
Savings deposits
|
|
|
100,008
|
|
|
|
86
|
|
|
|
0.17
|
%
|
|
|
92,227
|
|
|
|
109
|
|
|
|
0.24
|
%
|
Certificates of deposit
|
|
|
222,897
|
|
|
|
1,112
|
|
|
|
1.00
|
%
|
|
|
246,137
|
|
|
|
1,185
|
|
|
|
0.97
|
%
|
Net term debt
|
|
|
55,478
|
|
|
|
1,077
|
|
|
|
3.90
|
%
|
|
|
94,779
|
|
|
|
712
|
|
|
|
1.51
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
113
|
|
|
|
2.20
|
%
|
|
|
10,310
|
|
|
|
96
|
|
|
|
1.88
|
%
|
Average interest-bearing liabilities
|
|
$
|
741,984
|
|
|
|
2,640
|
|
|
|
0.72
|
%
|
|
$
|
715,802
|
|
|
|
2,325
|
|
|
|
0.66
|
%
|
Noninterest-bearing demand
|
|
|
201,457
|
|
|
|
|
|
|
|
|
|
|
|
148,179
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
14,439
|
|
|
|
|
|
|
|
|
|
|
|
17,013
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
91,312
|
|
|
|
|
|
|
|
|
|
|
|
105,412
|
|
|
|
|
|
|
|
|
|
Average liabilities and shareholders’ equity
|
|
$
|
1,049,192
|
|
|
|
|
|
|
|
|
|
|
$
|
986,406
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
|
|
|
|
|
|
$
|
17,521
|
|
|
|
3.60
|
%
|
|
|
|
|
|
$
|
16,964
|
|
|
|
3.72
|
%
|
Tax equivalent net interest margin
(3)
|
|
|
|
|
|
|
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%
|
(1)
|
Interest income on loans is reduced by net fee expense of approximately $667 thousand and $122 thousand for the six months ended June 30, 2016 and 2015, respectively.
|
(2)
|
Average nonaccrual loans of $10.9 million and $18.8 million for the six months ended June 30, 2016 and 2015 are included, 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 additional to recorded income of approximately $609 thousand and $619 thousand for the six months ended June 30, 2016 and 2015, respectively.
|
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, 2016 and 2015. 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, 2016 Over
Three Months Ended June 30, 2015
|
|
(Amounts in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
470
|
|
|
$
|
22
|
|
|
$
|
492
|
|
Taxable securities
|
|
|
19
|
|
|
|
(12
|
)
|
|
|
7
|
|
Tax-exempt securities
(1)
|
|
|
5
|
|
|
|
(26
|
)
|
|
|
(21
|
)
|
Interest-bearing deposits in other banks
|
|
|
16
|
|
|
|
(7
|
)
|
|
|
9
|
|
Total increase (decrease)
|
|
|
510
|
|
|
|
(23
|
)
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
35
|
|
|
|
(12
|
)
|
|
|
23
|
|
Savings deposits
|
|
|
7
|
|
|
|
(21
|
)
|
|
|
(14
|
)
|
Certificates of deposit
|
|
|
(51
|
)
|
|
|
(28
|
)
|
|
|
(79
|
)
|
Net term debt
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
(68
|
)
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
10
|
|
|
|
10
|
|
Total (decrease)
|
|
|
(43
|
)
|
|
|
(85
|
)
|
|
|
(128
|
)
|
Net increase
|
|
$
|
553
|
|
|
$
|
62
|
|
|
$
|
615
|
|
(1)
Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.
|
|
|
Six Months Ended June 30, 2016 Over
Six Months Ended June 30, 2015
|
|
(Amounts in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,110
|
|
|
$
|
(78
|
)
|
|
$
|
1,032
|
|
Taxable securities
|
|
|
(89
|
)
|
|
|
(65
|
)
|
|
|
(154
|
)
|
Tax-exempt securities
(1)
|
|
|
11
|
|
|
|
(40
|
)
|
|
|
(29
|
)
|
Interest-bearing deposits in other banks
|
|
|
25
|
|
|
|
(12
|
)
|
|
|
13
|
|
Total increase (decrease)
|
|
|
1,057
|
|
|
|
(195
|
)
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
51
|
|
|
|
(22
|
)
|
|
|
29
|
|
Savings deposits
|
|
|
10
|
|
|
|
(33
|
)
|
|
|
(23
|
)
|
Certificates of deposit
|
|
|
(118
|
)
|
|
|
45
|
|
|
|
(73
|
)
|
Net term debt
|
|
|
(129
|
)
|
|
|
494
|
|
|
|
365
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
17
|
|
|
|
17
|
|
Total (decrease) increase
|
|
|
(186
|
)
|
|
|
501
|
|
|
|
315
|
|
Net increase (decrease)
|
|
$
|
1,243
|
|
|
$
|
(696
|
)
|
|
$
|
547
|
|
(1)
Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION FOR LOAN AND LEASE LOSSES
We made no provision for loan and lease losses during the six months ended June 30, 2016 and 2015. See Note 5 -
Loans
in the
Notes to Consolidated Financial Statements
for further discussion.
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 2016 was $1.4 million, a decrease of $349 thousand, or 20%, compared to the same period a year ago. The following table presents the key components of noninterest income for the three and six months ended June 30, 2016 and 2015.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
Percent
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
88
|
|
|
$
|
52
|
|
|
$
|
36
|
|
|
|
69
|
%
|
|
$
|
160
|
|
|
$
|
101
|
|
|
$
|
59
|
|
|
|
58
|
%
|
Payroll and benefit processing fees
|
|
|
139
|
|
|
|
130
|
|
|
|
9
|
|
|
|
7
|
%
|
|
|
299
|
|
|
|
278
|
|
|
|
21
|
|
|
|
8
|
%
|
Earnings on cash surrender value – life insurance
|
|
|
153
|
|
|
|
159
|
|
|
|
(6
|
)
|
|
|
(4
|
)
%
|
|
|
309
|
|
|
|
324
|
|
|
|
(15
|
)
|
|
|
(5
|
)
%
|
Gain on investment securities, net
|
|
|
28
|
|
|
|
61
|
|
|
|
(33
|
)
|
|
|
(54
|
)
%
|
|
|
122
|
|
|
|
276
|
|
|
|
(154
|
)
|
|
|
(56
|
)
%
|
Other than temporary impairment on investment securities
|
|
|
(546
|
)
|
|
|
—
|
|
|
|
(546
|
)
|
|
|
100
|
%
|
|
|
(546
|
)
|
|
|
—
|
|
|
|
(546
|
)
|
|
|
100
|
%
|
ATM and point of sale
|
|
|
335
|
|
|
|
95
|
|
|
|
240
|
|
|
|
253
|
%
|
|
|
427
|
|
|
|
183
|
|
|
|
244
|
|
|
|
133
|
%
|
Other
|
|
|
240
|
|
|
|
384
|
|
|
|
(144
|
)
|
|
|
(38
|
)
%
|
|
|
615
|
|
|
|
573
|
|
|
|
42
|
|
|
|
7
|
%
|
Total noninterest income
|
|
$
|
437
|
|
|
$
|
881
|
|
|
$
|
(444
|
)
|
|
|
(50
|
)
%
|
|
$
|
1,386
|
|
|
$
|
1,735
|
|
|
$
|
(349
|
)
|
|
|
(20
|
)
%
|
Changes in noninterest income included the following:
For the three months ended June 30, 2016 compared to the same period a year ago:
●
|
Service charges on deposit accounts increased $36 thousand due to the completion of the branch acquisition completed in the first quarter of 2016.
|
●
|
During the second quarter of 2016 we recorded a $546 thousand other-than-temporary impairment on an investment security. See Note 4
Securities
in the
Notes to Consolidated Financial Statements
in this document for further detail on other-than-temporary impairment.
|
●
|
As a result of the branch and offsite ATM acquisition completed in the first quarter of 2016, ATM and point of sale fees increased $240 thousand for the quarter ended June 30, 2016 compared to the same period a year ago.
|
●
|
During the first quarter of 2016, we recorded a $176 thousand gain on payoff of a purchased impaired loan in other noninterest income.
|
●
|
The three months ended June 30, 2015 included a $205 thousand special dividend on Federal Home Loan Bank of San Francisco stock in other noninterest income.
|
For the six months ended June 30, 2016 compared to the same period a year ago:
●
|
Service charges on deposit accounts increased $59 thousand due to the completion of the branch acquisition completed in the first quarter of 2016.
|
●
|
We recorded net gains on sale of available-for-sale investment securities of $122 thousand compared to net gains of $276 thousand for the same period a year ago. During the six months ended June 30, 2016, we purchased 30 securities with weighted average yields of 2.23%. During the same period, we sold 17 securities with weighted average yields 2.28%.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONINTEREST EXPENSE
Noninterest expense for the six months ended June 30, 2016 was $17.7 million, an increase of $5.0 million or 39% compared to the same period a year ago. The following table presents the key elements of noninterest expense for the three and six months ended June 30, 2016 and 2015.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
Percent
|
|
|
2016
|
|
|
2015
|
|
|
Amount
|
|
|
Percent
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & related benefits
|
|
$
|
4,086
|
|
|
$
|
3,575
|
|
|
$
|
511
|
|
|
|
14
|
%
|
|
$
|
8,315
|
|
|
$
|
7,485
|
|
|
$
|
830
|
|
|
|
11
|
%
|
Premises & equipment
|
|
|
987
|
|
|
|
709
|
|
|
|
278
|
|
|
|
39
|
%
|
|
|
1,776
|
|
|
|
1,443
|
|
|
|
333
|
|
|
|
23
|
%
|
Federal Deposit Insurance Corporation insurance premium
|
|
|
181
|
|
|
|
178
|
|
|
|
3
|
|
|
|
2
|
%
|
|
|
337
|
|
|
|
385
|
|
|
|
(48
|
)
|
|
|
(12
|
)
%
|
Data processing fees
|
|
|
373
|
|
|
|
251
|
|
|
|
122
|
|
|
|
49
|
%
|
|
|
678
|
|
|
|
493
|
|
|
|
185
|
|
|
|
38
|
%
|
Professional service fees
|
|
|
470
|
|
|
|
442
|
|
|
|
28
|
|
|
|
6
|
%
|
|
|
906
|
|
|
|
830
|
|
|
|
76
|
|
|
|
9
|
%
|
Telecommunications
|
|
|
199
|
|
|
|
109
|
|
|
|
90
|
|
|
|
83
|
%
|
|
|
346
|
|
|
|
219
|
|
|
|
127
|
|
|
|
58
|
%
|
Branch acquisition costs
|
|
|
168
|
|
|
|
—
|
|
|
|
168
|
|
|
|
100
|
%
|
|
|
580
|
|
|
|
—
|
|
|
|
580
|
|
|
|
100
|
%
|
Loss on cancellation of interest rate swap
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
2,325
|
|
|
|
—
|
|
|
|
2,325
|
|
|
|
100
|
%
|
Other
|
|
|
1,204
|
|
|
|
858
|
|
|
|
346
|
|
|
|
40
|
%
|
|
|
2,406
|
|
|
|
1,860
|
|
|
|
546
|
|
|
|
29
|
%
|
Total noninterest expense
|
|
$
|
7,668
|
|
|
$
|
6,122
|
|
|
$
|
1,546
|
|
|
|
25
|
%
|
|
$
|
17,669
|
|
|
$
|
12,715
|
|
|
$
|
4,954
|
|
|
|
39
|
%
|
Noninterest expense for the three and six months ended June 30, 2016 increased $1.5 million and $5.0 million respectively, compared to the same periods a year ago. The increase was primarily driven by increased costs to operate the five newly acquired branches and three offsite ATM locations and balance sheet reconfiguration costs.
For the three months ended June 30, 2016 compared to the same period a year ago:
●
|
Salaries and related benefits expense for the three months ended June 30, 2016 were $4.1 million, an increase of $511 thousand or 14% compared to the same period a year ago. The increase in salaries and related benefits included costs directly related to the newly acquired branch locations of $413 thousand.
|
●
|
Premises and equipment expense for the three months ended June 30, 2016 were $987 thousand, an increase of $278 thousand or 39% compared to the same period a year ago. The increase in premises and equipment expenses included costs directly related to the newly acquired branch locations of $188 thousand.
|
For the six months ended June 30, 2016 compared to the same period a year ago:
●
|
Noninterest expenses for the six months ended June 30, 2016 were impacted by the following expenses totaling $3.0 million related to the acquisition of five Bank of America branches and the execution of our plans to reconfigure our Balance Sheet using liquidity provided by those branches:
|
|
o
|
$2.3 million loss on termination of interest rate hedge.
|
|
o
|
$580 thousand of branch acquisition transition costs.
|
|
o
|
$57 thousand prepayment penalty on early repayment of $75.0 million Federal Home Loan Bank of San Francisco hedged term debt.
|
●
|
Salaries and related benefits costs directly related to the newly acquired branch locations totaled $514 thousand
|
●
|
Premises and equipment expense directly related to the newly acquired branch and offsite ATM locations totaled $214 thousand
|
●
|
ATM processing fees increased $84 thousand as a result of the additional activity at the recently acquired branch and offsite ATM locations
|
●
|
Loss on sale of other real estate owned increased $155 thousand
|
●
|
Stationary and supplies expenses increased $111 thousand compared to the same period a year ago
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in noninterest expense compared to the same period a year ago was partially offset by the following positive items:
●
|
Salary Continuation Plan savings of $186 thousand.
|
●
|
The first six months of 2015 included $237 thousand write-down of a fixed asset.
|
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)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Provision for income taxes
|
|
$
|
430
|
|
|
$
|
964
|
|
|
$
|
642
|
|
|
$
|
1,793
|
|
Effective tax rate
|
|
|
21.65
|
%
|
|
|
28.74
|
%
|
|
|
51.86
|
%
|
|
|
29.96
|
%
|
Provision for income taxes - excluding DTA write-off
|
|
$
|
430
|
|
|
$
|
964
|
|
|
$
|
279
|
|
|
$
|
1,793
|
|
Effective tax rate - excluding DTA write-off
|
|
|
21.65
|
%
|
|
|
28.74
|
%
|
|
|
22.54
|
%
|
|
|
29.96
|
%
|
During the six months ended June 30, 2016, we recorded an income tax expense of $279 thousand and wrote-off a $363 thousand deferred tax asset; a net expense of $642 thousand. This compared to income tax expense of $1.8 million for the same period a year ago. Pre-tax income for 2016 is less than in 2015, while permanent deductions and tax credits are essentially unchanged resulting in a decrease in the effective tax rate for 2016. As a result, excluding the write-off of the $363 thousand deferred tax asset, the Company’s effective tax rate decreased for the three and six months compared to the same period a year ago.
The $363 thousand deferred tax asset written off during the first quarter of 2016 was associated with our investment in affordable housing partnerships. The deferred tax asset represented the timing difference between the book amortization of the investments and the Bank’s share of the tax deductible losses incurred by the projects reported on the partnerships’ Schedule K-1. In accordance with ASC 323, deferred tax treatment for these items is not permissible under the proportional amortization method of accounting.
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, 2016, we had total consolidated assets of $1.1 billion, gross loans of $754.1 million, allowance for loan and lease losses (“ALLL”) of $11.9 million, total deposits of $937.6 million, and shareholders’ equity of $92.5 million.
We continued to maintain a strong liquidity position during the reporting period. As of June 30, 2016, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $14.7 million. We also held interest-bearing deposits in the amount of $51.3 million.
Available-for-sale investment securities totaled $157.9 million at June 30, 2016, compared to $159.0 million at December 31, 2015. Our available-for-sale investment portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations and wholesale loan purchases.
During the first six months of 2016, we purchased 30 securities with a par value of $45.1 million and weighted average yield of 2.23% and sold 30 securities with a par value of $32.4 million and weighted average yield of 2.8%. The sales activity resulted in $122 thousand in net realized gains for the six months ended June 30, 2016. During the six months ended June 30, 2016, we also received $11.4 million in proceeds from principal payments, calls and maturities within the available-for-sale investment securities portfolio.
At June 30, 2016, our net unrealized gains on available-for-sale investment securities were $2.6 million compared to $1.6 million at December 31, 2015. The increase in net unrealized gains is primarily due to interest rate declines over the
past six months.
We recorded gross loan balances of $754.1 million at June 30, 2016, compared to $716.6 million at December 31, 2015; an increase of $37.5 million. The increase in gross loans was driven by organic loan originations.
The ALLL at June 30, 2016 increased $684 thousand to $11.9 million compared to $11.2 million at December 31, 2015. During the six months ended June 30, 2016 and 2015 there were no provisions for loan and lease losses. Net loan loss recoveries were $684 thousand during the six months ended June 30, 2016, compared to net loan loss recoveries of $582 thousand during the same period a year previous. At June 30, 2016, 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 $3.2 million to $10.9 million, or 1.45% of gross loans, as of June 30, 2016, compared to $14.1 million, or 1.97% of gross loans as of December 31, 2015. Past due loans as of June 30, 2016 decreased $6.2 million to $5.0 million, compared to $11.2 million as of December 31, 2015. The decrease in past due loans was primarily attributable to the repayment of $5.5 million on two commercial real estate loans and
repayment of $475 thousand on a commercial loan. 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.
Our OREO balance at June 30, 2016 was $765
thousand compared to $1.4 million at December 31, 2015. For the six months ended June 30, 2016, we transferred one foreclosed property in the amount of $81 thousand to OREO and we sold eight properties with balances of $664 thousand for a net loss of $149 thousand. During the six months ended June 30, 2016, we recognized a write-down for three properties totaling $76 thousand. See Note 6,
Other Real Estate Owned
in the
Notes to Consolidated Financial Statements
in this document, for further details relating to our OREO portfolio. We remain committed to working with customers who are experiencing financial difficulties to find potential solutions.
Premises and equipment totaled $15.7 million at June 30, 2016 an increase of $4.6 million compared to $11.1 million at December 31, 2015. The increase in premises
and equipment is due to the recent
branch acquisition, which includes a $2.4 million positive fair value adjustment on the purchased properties. Bank-owned life insurance increased $309 thousand during the six months ended June 30, 2016 to $22.8 million compared to $22.5 million at December 31, 2015. Our net deferred tax assets were $8.0 million at June 30, 2016 compared to $9.8 million at December 31, 2015. As part of the branch acquisition, we recorded a core deposit intangible of $1.8 million and preliminary goodwill of $665 thousand. 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 $17.9 million at June 30, 2016 compared to $18.3 million at December 31, 2015.
Total deposits at June 30, 2016, increased $133.8
million or 17
% to $937.6 million compared to December 31, 2015. Total non-maturing deposits increased $194.0 million or 37% compared to the same date a year ago and increased $135.6 million or 23% compared to December 31, 2015. Certificates of deposit decreased $16.5 million or 7% compared to the same date a year ago and decreased $1.8 million or 1% compared to December 31, 2015.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the first quarter of 2016, the branch acquisition provided an additional $149.0 million of deposits and we called and redeemed $17.5 million of brokered certificates of deposit
. At June 30, 2016, the deposits in the acquired branches totaled $139.0 million.
During the first quarter of 2016, we paid off $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and terminated the interest rate hedge associated with that debt eliminating future contractual interest payments on $75.0 million at 2.64% for the period from payoff to August 1, 2016; and at 3.22% for the period August 1, 2016 to August 1, 2017.
Other liabilities which include the Bank’s supplemental executive retirement plan, and funding obligation for investments in qualified affordable housing partnerships decreased $5.7 million to $10.5 million as of June 30, 2016 compared to $16.2 million at December 31, 2015. The decrease in other liabilities is primarily caused by a $2.3 million decrease related to the termination of interest rate swaps.
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 $157.9 million at June 30, 2016, compared to $159.0 million at December 31, 2015. During the second quarter of 2016, net sales of available-for-sale investment securities provided additional liquidity to fund loan growth.
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 $35.4 million at June 30, 2016, compared to $35.9 million at December 31, 2015. There were no held-to-maturity securities purchased during the six months ended June 30, 2016.
The following table presents the carrying value of the investment securities portfolio by classification and major type as of June 30, 2016 and December 31, 2015.
|
|
June 30,
|
|
|
December 31,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
Available-for-sale securities:
(1)
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
$
|
3,262
|
|
|
$
|
3,943
|
|
Obligations of state and political subdivisions
|
|
|
59,015
|
|
|
|
61,104
|
|
Mortgage backed securities and collateralized mortgage obligations
|
|
|
45,015
|
|
|
|
32,137
|
|
Corporate securities
|
|
|
22,313
|
|
|
|
33,778
|
|
Commercial mortgage backed securities
|
|
|
14,865
|
|
|
|
12,769
|
|
Other asset backed securities
|
|
|
13,436
|
|
|
|
15,299
|
|
Total
|
|
$
|
157,906
|
|
|
$
|
159,030
|
|
Held-to-maturity securities:
(1)
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
35,415
|
|
|
$
|
35,899
|
|
(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, 2016.
|
|
|
|
|
|
|
|
|
|
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:
|
|
U.S. government & agencies
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
3,250
|
|
|
|
9.13
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
3,250
|
|
|
|
9.13
|
%
|
Obligations of state and political subdivisions
|
|
|
1,437
|
|
|
|
2.72
|
%
|
|
|
8,961
|
|
|
|
2.69
|
%
|
|
|
19,993
|
|
|
|
3.09
|
%
|
|
|
26,427
|
|
|
|
2.59
|
%
|
|
|
56,818
|
|
|
|
2.79
|
%
|
Mortgage backed securities and collateralized mortgage obligations
|
|
|
217
|
|
|
|
4.68
|
%
|
|
|
33,658
|
|
|
|
2.37
|
%
|
|
|
8,096
|
|
|
|
3.04
|
%
|
|
|
2,844
|
|
|
|
2.71
|
%
|
|
|
44,815
|
|
|
|
2.52
|
%
|
Corporate securities
|
|
|
3,952
|
|
|
|
1.54
|
%
|
|
|
10,547
|
|
|
|
2.55
|
%
|
|
|
4,989
|
|
|
|
2.85
|
%
|
|
|
2,668
|
|
|
|
2.36
|
%
|
|
|
22,156
|
|
|
|
2.42
|
%
|
Commercial mortgage backed securities
|
|
|
—
|
|
|
|
—
|
%
|
|
|
1,306
|
|
|
|
1.27
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
13,595
|
|
|
|
2.49
|
%
|
|
|
14,901
|
|
|
|
2.39
|
%
|
Other asset backed securities
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
3,089
|
|
|
|
1.05
|
%
|
|
|
10,254
|
|
|
|
2.39
|
%
|
|
|
13,343
|
|
|
|
2.08
|
%
|
Total
|
|
$
|
5,606
|
|
|
|
1.97
|
%
|
|
$
|
57,722
|
|
|
|
2.80
|
%
|
|
$
|
36,167
|
|
|
|
2.87
|
%
|
|
$
|
55,788
|
|
|
|
2.53
|
%
|
|
$
|
155,283
|
|
|
|
2.69
|
%
|
Held-to-maturity securities:
|
|
Obligations of state and political subdivisions
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
1,543
|
|
|
|
3.42
|
%
|
|
$
|
16,514
|
|
|
|
2.97
|
%
|
|
$
|
17,358
|
|
|
|
3.30
|
%
|
|
$
|
35,415
|
|
|
|
3.15
|
%
|
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. 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, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
June 30,
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Loan Portfolio
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Commercial
|
|
$
|
150,410
|
|
|
|
20
|
%
|
|
$
|
132,805
|
|
|
|
19
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
39,009
|
|
|
|
5
|
|
|
|
28,319
|
|
|
|
4
|
|
Real estate - commercial non-owner occupied
|
|
|
253,873
|
|
|
|
35
|
|
|
|
243,374
|
|
|
|
33
|
|
Real estate - commercial owner occupied
|
|
|
154,480
|
|
|
|
20
|
|
|
|
156,299
|
|
|
|
22
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
47,188
|
|
|
|
6
|
|
|
|
49,106
|
|
|
|
7
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
10,862
|
|
|
|
1
|
|
|
|
11,390
|
|
|
|
2
|
|
Real estate - residential - equity lines
|
|
|
43,971
|
|
|
|
6
|
|
|
|
45,473
|
|
|
|
6
|
|
Consumer and other
|
|
|
54,347
|
|
|
|
7
|
|
|
|
49,873
|
|
|
|
7
|
|
Gross loans
|
|
|
754,140
|
|
|
|
100
|
%
|
|
|
716,639
|
|
|
|
100
|
%
|
Deferred loan fees
|
|
|
1,028
|
|
|
|
|
|
|
|
870
|
|
|
|
|
|
Loans, net of deferred fees and costs
|
|
|
755,168
|
|
|
|
|
|
|
|
717,509
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
(11,864
|
)
|
|
|
|
|
|
|
(11,180
|
)
|
|
|
|
|
Net loans
|
|
$
|
743,304
|
|
|
|
|
|
|
$
|
706,329
|
|
|
|
|
|
The following table sets forth the maturity and re-pricing distribution of our gross loans outstanding as of June 30, 2016, which, based on remaining scheduled repayments of principal, were due within the periods indicated.
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
|
|
Within One
|
|
|
Through
|
|
|
After Five
|
|
|
|
|
|
(Amounts in thousands)
|
|
Year
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
Commercial
|
|
$
|
39,861
|
|
|
$
|
60,912
|
|
|
$
|
49,637
|
|
|
$
|
150,410
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
7,855
|
|
|
|
11,191
|
|
|
|
19,963
|
|
|
|
39,009
|
|
Real estate - commercial non-owner occupied
|
|
|
1,857
|
|
|
|
41,744
|
|
|
|
210,272
|
|
|
|
253,873
|
|
Real estate - commercial owner occupied
|
|
|
3,921
|
|
|
|
22,254
|
|
|
|
128,305
|
|
|
|
154,480
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
—
|
|
|
|
—
|
|
|
|
47,188
|
|
|
|
47,188
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
—
|
|
|
|
2,734
|
|
|
|
8,128
|
|
|
|
10,862
|
|
Real estate - residential - equity lines
|
|
|
752
|
|
|
|
1,531
|
|
|
|
41,688
|
|
|
|
43,971
|
|
Consumer and other
|
|
|
49,952
|
|
|
|
944
|
|
|
|
3,451
|
|
|
|
54,347
|
|
Gross loans
|
|
$
|
104,198
|
|
|
$
|
141,310
|
|
|
$
|
508,632
|
|
|
$
|
754,140
|
|
Loans due after one year with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
|
|
|
|
$
|
65,681
|
|
|
$
|
152,556
|
|
|
$
|
218,237
|
|
Variable rates
|
|
|
|
|
|
|
75,629
|
|
|
|
356,076
|
|
|
|
431,705
|
|
Total
|
|
|
|
|
|
$
|
141,310
|
|
|
$
|
508,632
|
|
|
$
|
649,942
|
|
Loans with unique credit characteristics
In April of 2009, we completed a loan ‘swap’ transaction, which included the purchase of a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans are made to legal United States residents who do not possess a social security number, and are geographically dispersed throughout the United States. The ITIN loan portfolio is serviced through third parties. 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 are forced to foreclose and service these ITIN properties ourselves, we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.
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
16 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, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Purchased Loans
|
|
Balance
|
|
|
% of Gross Loan Portfolio
|
|
|
Balance
|
|
|
% of Gross Loan Portfolio
|
|
Commercial
|
|
$
|
112
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
Commercial real estate
|
|
|
38,627
|
|
|
|
5
|
|
|
|
46,999
|
|
|
|
7
|
|
Residential real estate
|
|
|
55,535
|
|
|
|
7
|
|
|
|
58,471
|
|
|
|
8
|
|
Consumer and other
|
|
|
51,666
|
|
|
|
8
|
|
|
|
46,783
|
|
|
|
7
|
|
Total purchased loans
|
|
$
|
145,940
|
|
|
|
20
|
%
|
|
$
|
152,253
|
|
|
|
22
|
%
|
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 six to twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor our Exclusionary List of appraisers and brokers. In certain 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 relatively 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. In addition, 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. 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.
The following table summarizes our nonperforming assets as of June 30, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
June 30,
|
|
|
December 31,
|
|
Provision for loan and lease losses charged to expense
|
|
2016
|
|
|
2015
|
|
Commercial
|
|
$
|
2,149
|
|
|
$
|
1,994
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
1,197
|
|
|
|
5,488
|
|
Real estate - commercial owner occupied
|
|
|
816
|
|
|
|
1,071
|
|
Total commercial real estate
|
|
|
2,013
|
|
|
|
6,559
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
3,664
|
|
|
|
3,649
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,824
|
|
|
|
1,775
|
|
Real estate - residential - equity lines
|
|
|
995
|
|
|
|
—
|
|
Total residential real estate
|
|
|
6,483
|
|
|
|
5,424
|
|
Consumer and other
|
|
|
266
|
|
|
|
32
|
|
Total nonaccrual loans
|
|
|
10,911
|
|
|
|
14,009
|
|
90 days past due and still accruing
|
|
|
10
|
|
|
|
88
|
|
Total nonperforming loans
|
|
|
10,921
|
|
|
|
14,097
|
|
Other real estate owned
|
|
|
765
|
|
|
|
1,423
|
|
Total nonperforming assets
|
|
$
|
11,686
|
|
|
$
|
15,520
|
|
Nonperforming loans to loans, net of deferred fees and costs
|
|
|
1.45
|
%
|
|
|
1.96
|
%
|
Nonperforming assets to total assets
|
|
|
1.09
|
%
|
|
|
1.53
|
%
|
We are continually performing extensive reviews of the commercial real estate portfolio, including stress testing. These reviews are being performed on both our non-owner and owner occupied credits. These reviews are being completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects. Stress testing has been 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 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. These impairment reserves are recognized as a specific component to be provided for in the ALLL.
As of June 30, 2016, we had $11.2 million in troubled debt restructurings compared to $15.9 million as of December 31, 2015. As of June 30, 2016, we had 118 restructured loans that qualified as troubled debt restructurings, of which 108 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.49% of gross loans as of June 30, 2016, compared to 2.22% at December 31, 2015.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At June 30, 2016 and December 31, 2015, impaired loans of $7.5 million and $6.9 million were classified as accruing troubled debt restructurings, respectively. The restructured loans on accrual status represent the majority of impaired loans accruing interest at each respective date. In order 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. We had no obligation to lend additional funds on the restructured loans as of June 30, 2016.
The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of June 30, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
June 30,
|
|
|
December 31,
|
|
Troubled Debt Restructurings
|
|
2016
|
|
|
2015
|
|
Accruing troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
760
|
|
|
$
|
49
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
816
|
|
|
|
824
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
5,336
|
|
|
|
5,458
|
|
Real estate - residential - equity lines
|
|
|
548
|
|
|
|
558
|
|
Total accruing troubled debt restructurings
|
|
$
|
7,460
|
|
|
$
|
6,889
|
|
Nonaccruing troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,194
|
|
|
$
|
863
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
—
|
|
|
|
4,292
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
1,071
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
2,354
|
|
|
|
2,538
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
206
|
|
|
|
219
|
|
Consumer and other
|
|
|
31
|
|
|
|
32
|
|
Total nonaccruing troubled debt restructurings
|
|
$
|
3,785
|
|
|
$
|
9,015
|
|
Total troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,954
|
|
|
$
|
912
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
816
|
|
|
|
5,116
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
1,071
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
7,690
|
|
|
|
7,996
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
206
|
|
|
|
219
|
|
Real estate - residential - equity lines
|
|
|
548
|
|
|
|
558
|
|
Consumer and other
|
|
|
31
|
|
|
|
32
|
|
Total troubled debt restructurings
|
|
$
|
11,245
|
|
|
$
|
15,904
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings to gross loans outstanding at period end
|
|
|
1.49
|
%
|
|
|
2.22
|
%
|
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
The ALLL at June 30, 2016 increased $684 thousand to $11.9 million compared to $11.2 million at December 31, 2015. During the six months ended June 30, 2016 and the year ended December 31, 2015 there were no provisions for loan and lease losses.
We recorded net loan loss recoveries of $684 thousand for the six months ended June 30, 2016 compared to net loan loss recoveries of $360 thousand for the year ended December 31, 2015. The recoveries occurred primarily from one commercial real estate loan relationship of $2.5 million and were partially offset by charge-offs of $1.4 million from two commercial loan relationships and one residential real estate loan relationship. During the first six months of 2016, net loan loss recoveries combined with continuing improved asset quality resulted in no provision for loan and lease losses. Our ALLL as a percentage of gross loans was 1.57% and 1.56% as of June 30, 2016 and December 31, 2015, respectively.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the activity in the ALLL reserves at June 30, 2016, December 31, 2015 and June 30, 2015.
|
|
June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Beginning balance ALLL
|
|
$
|
11,180
|
|
|
$
|
10,820
|
|
|
$
|
10,820
|
|
Provision for loan and lease loss charged to expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loans charged off
|
|
|
(2,041
|
)
|
|
|
(2,376
|
)
|
|
|
(890
|
)
|
Loan and lease loss recoveries
|
|
|
2,725
|
|
|
|
2,736
|
|
|
|
1,472
|
|
Ending balance ALLL
|
|
$
|
11,864
|
|
|
$
|
11,180
|
|
|
$
|
11,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,149
|
|
|
$
|
1,994
|
|
|
$
|
3,170
|
|
Real estate - commercial non-owner occupied
|
|
|
1,197
|
|
|
|
5,488
|
|
|
|
6,532
|
|
Real estate - commercial owner occupied
|
|
|
816
|
|
|
|
1,071
|
|
|
|
1,079
|
|
Real estate - residential - ITIN
|
|
|
3,664
|
|
|
|
3,649
|
|
|
|
4,375
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,824
|
|
|
|
1,775
|
|
|
|
1,693
|
|
Real estate - residential - equity lines
|
|
|
995
|
|
|
|
—
|
|
|
|
24
|
|
Consumer and other
|
|
|
266
|
|
|
|
32
|
|
|
|
34
|
|
Total nonaccrual loans
|
|
|
10,911
|
|
|
|
14,009
|
|
|
|
16,907
|
|
Accruing troubled-debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
760
|
|
|
|
49
|
|
|
|
10
|
|
Real estate - commercial non-owner occupied
|
|
|
816
|
|
|
|
824
|
|
|
|
832
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
849
|
|
Real estate - residential - ITIN
|
|
|
5,336
|
|
|
|
5,458
|
|
|
|
5,303
|
|
Real estate - residential - equity lines
|
|
|
548
|
|
|
|
558
|
|
|
|
569
|
|
Total accruing restructured loans
|
|
|
7,460
|
|
|
|
6,889
|
|
|
|
7,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other accruing impaired loans
|
|
|
550
|
|
|
|
492
|
|
|
|
530
|
|
Total impaired loans
|
|
$
|
18,921
|
|
|
$
|
21,390
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans outstanding at period end
|
|
$
|
754,140
|
|
|
$
|
716,639
|
|
|
$
|
699,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of ALLL to gross loans outstanding at period end
|
|
|
1.57
|
%
|
|
|
1.56
|
%
|
|
|
1.63
|
%
|
Nonaccrual loans to gross loans outstanding at period end
|
|
|
1.45
|
%
|
|
|
1.95
|
%
|
|
|
2.42
|
%
|
As of June 30, 2016, impaired loans totaled $18.9 million, of which $10.9 million were in nonaccrual status. Of the total impaired loans, $9.1 million or 122 were ITIN loans with an average balance of approximately $74 thousand. The remaining impaired loans consist of eight commercial loans, five commercial real estate loans, six residential mortgages, 12 home equity loans and two consumer loans.
At June 30, 2016, impaired loans had a corresponding valuation allowance of $903 thousand. The valuation 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, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
ALLL
|
|
Amount
|
|
|
% Loan Category
|
|
|
Amount
|
|
|
% Loan Category
|
|
Commercial
|
|
$
|
2,591
|
|
|
|
22
|
%
|
|
$
|
2,493
|
|
|
|
23
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
340
|
|
|
|
3
|
|
|
|
246
|
|
|
|
2
|
|
Real estate - commercial non-owner occupied
|
|
|
3,472
|
|
|
|
29
|
|
|
|
3,262
|
|
|
|
29
|
|
Real estate - commercial owner occupied
|
|
|
2,217
|
|
|
|
19
|
|
|
|
2,276
|
|
|
|
20
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
1,312
|
|
|
|
11
|
|
|
|
998
|
|
|
|
9
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
85
|
|
|
|
1
|
|
|
|
93
|
|
|
|
1
|
|
Real estate - residential - equity lines
|
|
|
474
|
|
|
|
4
|
|
|
|
486
|
|
|
|
4
|
|
Consumer and other
|
|
|
763
|
|
|
|
6
|
|
|
|
770
|
|
|
|
7
|
|
Unallocated
|
|
|
610
|
|
|
|
5
|
|
|
|
556
|
|
|
|
5
|
|
Total ALLL
|
|
$
|
11,864
|
|
|
|
100
|
%
|
|
$
|
11,180
|
|
|
|
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 impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of June 30, 2016, the unallocated allowance amount represented 5% of the ALLL, compared to 5% at December 31, 2015. While the ALLL composition is
an indication of specific amounts or loan categories in which future charge offs may occur, actual amounts may differ.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposits
Total deposits as of June 30, 2016 were $937.6 million compared to $803.7 million at December 31, 2015, an increase of $133.8 million or 17%. During the first quarter of 2016, the branch acquisition provided an additional $149.0 million of deposits and we called and redeemed $17.5 million of brokered certificates of deposit
.
The following table presents the deposit balances by major category as of June 30, 2016, and December 31, 2015.
(Amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Deposits
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Noninterest-bearing demand
|
|
$
|
224,467
|
|
|
|
24
|
%
|
|
$
|
169,507
|
|
|
|
21
|
%
|
Interest-bearing demand
|
|
|
174,492
|
|
|
|
19
|
|
|
|
165,316
|
|
|
|
20
|
|
Money market accounts
|
|
|
211,117
|
|
|
|
22
|
|
|
|
150,342
|
|
|
|
19
|
|
Savings
|
|
|
105,228
|
|
|
|
11
|
|
|
|
94,503
|
|
|
|
12
|
|
Certificates of deposit, $100,000 or greater
|
|
|
173,995
|
|
|
|
19
|
|
|
|
189,969
|
|
|
|
24
|
|
Certificates of deposit, less than $100,000
|
|
|
48,257
|
|
|
|
5
|
|
|
|
34,098
|
|
|
|
4
|
|
Total
|
|
$
|
937,556
|
|
|
|
100
|
%
|
|
$
|
803,735
|
|
|
|
100
|
%
|
The following table sets forth the distribution of our average daily balances and their respective rates as of June 30, 2016, and December 31, 2015.
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
(Amounts in thousands)
|
|
Average Balance
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Rate
|
|
Interest-bearing demand
|
|
$
|
164,948
|
|
|
|
0.12
|
%
|
|
$
|
145,106
|
|
|
|
0.16
|
%
|
Money market accounts
|
|
|
188,343
|
|
|
|
0.16
|
%
|
|
|
137,999
|
|
|
|
0.17
|
%
|
Savings
|
|
|
100,008
|
|
|
|
0.17
|
%
|
|
|
92,659
|
|
|
|
0.23
|
%
|
Certificates of deposit
|
|
|
222,897
|
|
|
|
1.00
|
%
|
|
|
238,626
|
|
|
|
0.99
|
%
|
Interest-bearing deposits
|
|
|
676,196
|
|
|
|
0.43
|
%
|
|
|
614,390
|
|
|
|
0.49
|
%
|
Noninterest-bearing demand
|
|
|
201,457
|
|
|
|
|
|
|
|
156,578
|
|
|
|
|
|
Average total deposits
|
|
$
|
877,653
|
|
|
|
|
|
|
$
|
770,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term debt
(1)
|
|
$
|
55,478
|
|
|
|
3.90
|
%
|
|
$
|
88,874
|
|
|
|
1.98
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
2.20
|
%
|
|
|
10,310
|
|
|
|
1.89
|
%
|
Average total borrowings
|
|
$
|
65,788
|
|
|
|
3.64
|
%
|
|
$
|
99,184
|
|
|
|
1.97
|
%
|
(1)
Borrowing rate on Federal Home Loan Bank of San Francisco borrowings includes impact of interest rate swaps. During 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.
|
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, 2016.
(Amounts in thousands)
|
|
June 30,
|
|
Maturing in:
|
|
2016
|
|
Three months or less
|
|
$
|
26,530
|
|
Three through six months
|
|
|
23,848
|
|
Six through twelve months
|
|
|
29,678
|
|
Over twelve months
|
|
|
93,939
|
|
Total
|
|
$
|
173,995
|
|
We have an agreement with Promontory Interfinancial Network LLC (“Promontory”) allowing our Bank to provide 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 $54.8 million, and $94.4 million at June 30, 2016 and December 31, 2015, respectively. These amounts include deposits obtained through the CDARS and ICS programs of $54.8 million and $76.9 million, respectively.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Borrowings
Term Debt
At June 30, 2016, we had term debt outstanding with a carrying value of $19.4 million compared to $94.7 million at December 31, 2015. Term debt consisted of the following:
Federal Home Loan Bank of San Francisco borrowings
We utilized a portion of the new liquidity from our branch acquisition to repay $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt during the first quarter of 2016. Advances from the Federal Home Loan Bank of San Francisco were $75.0 million at December 31, 2015. See Note 10
Federal Funds Purchased and
L
ines of
C
redit
in the
Notes to Consolidated Financial Statements
for information on our Federal Home Loan Bank of San Francisco borrowings and our remaining line of credit.
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, 2016 the Senior Debt had a balance of $9.4 million at a variable rate of three month LIBOR plus 400 basis points and matures in 2020.
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, 2016, the Subordinated Debt had a balance of $10.0 million due in 2025.
Capital Lease
In March of 2016, the Bank entered into a capital lease agreement with Bank of America for one of the branch locations. The total obligation under the lease agreement is $172 thousand payable over a four-year period in monthly installments of principal and interest at a 6.0% annual interest rate. The lease may terminate early upon receipt of certification that there are no adverse environmental conditions. Upon termination of the lease agreement, the net present value of the lease becomes due and title will be transferred to the Bank.
Junior Subordinate 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 newly formed 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, 2016 was 2.23%.
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). As we previously announced on March 14, 2016, 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 are utilizing the remaining liquidity to fund future 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.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 3% of total deposits at June 30, 2016 and December 31, 2015. 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 from the Federal Reserve Bank, or issue brokered certificates of deposit.
The Bank had the following lines of credit:
●
|
Available lines of credit with the Federal Home Loan Bank of San Francisco totaling $295.1 million as of June 30, 2016; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities.
|
●
|
Available lines of credit with the Federal Reserve Bank totaling $34.5 million subject to collateral requirements, namely the amount of certain pledged loans.
|
●
|
Uncommitted federal funds line of credit agreements with additional financial institutions totaling $40.0 million at June 30, 2016. 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.
|
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 of January 1, 2016, the California Financial Code requires the Bank to obtain regulatory approval for any one dividend or other distribution to the Holding Company exceeding $387 thousand. During 2016, management does not anticipate needing to obtain prior regulatory approval from the California Department of Business Oversight. We believe that such restrictions will not have an adverse impact on the ability of the Holding Company to fund its quarterly cash dividend distributions to common shareholders or to meet its ongoing cash obligations, which consist principally of debt service on junior subordinated debentures and term debt.
Consolidated Statements of Cash Flows
As disclosed in the
Consolidated Statements of Cash Flows
, net cash of $3.4 million was provided by operating activities for the six months ended June 30, 2016. The material differences between cash provided by operating activities and net income was due to a $2.3 million in loss on the cancellation of interest rate swap and non-cash items including depreciation, amortization and increased deferred tax assets were $2.2 million.
Net cash of $103.0 million provided by investing activities consisted principally of $142.4 million from the acquisition of Bank of America branches and $11.4 million in proceeds from maturities and payments of available-for-sale securities. These sources were partially offset by $2.6 million in payments to derivative counterparties for the termination of interest rate swaps, $ 10.7 million in net purchases of available-for-sale investment securities and $36.8 million in net loan purchases and originations.
Net cash of $91.5 million used for financing activities consisted principally of $75.5 million in net repayment of term debt and $26.0 million decrease in certificates of deposit, partially offset by an increase in demand deposits and savings accounts of $10.8 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 returns are perceived to be high and issuing capital when costs are perceived to be low. Our potential sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt, senior debt or trust notes.
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. Under the risk-based capital standard, assets reported on our
Consolidated Balance Sheets
and certain off-balance sheet items are assigned to risk categories, each of which is assigned a risk weight.
This standard characterizes an institution’s capital as being “Tier 1” capital (defined as principally comprising shareholders’ equity) and “Tier 2” capital (defined as principally comprising the qualifying portion of the ALLL). The minimum ratio of total risk-based capital to risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of the total risk-based capital is to be comprised of common equity; the remaining balance may consist of debt securities and a limited portion of the ALLL.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quantitative measures established by regulation to ensure capital adequacy require the Holding Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes that the Holding Company and the Bank met all capital adequacy requirements to which they are subject, as of June 30, 2016.
On July 2, 2013, the federal banking agencies substantially amended the regulatory risk-based capital rules applicable to the Holding Company and the Bank. Effective January 1, 2015, the new rules create “Tier 1 Common Equity,” a new measure of regulatory capital closer to pure tangible common equity than the present Tier 1 definition; The required minimum risk-based capital ratio for Tier 1 Common Equity is 4.5 percent and with a 2.5 percent capital conservation buffer.
The new capital rules require the Bank to meet the capital conservation buffer requirement by 2019 in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. These new capital rules also change the risk-weights of certain assets for purposes of the risk-based capital ratios and phases out certain instruments as qualifying capital. Based on management’s review and analysis of Basel III, management believes that the Holding Company and the Bank will remain in excess of the "well-capitalized" standards under these new rules.
As of June 30, 2016, 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 category. The Holding Company and the Bank’s capital amounts and ratios as of June 30, 2016, are presented in the following table.
|
|
|
|
|
|
Actual
|
|
|
Well Capitalized
|
|
|
Minimum Capital
|
|
(Amounts in thousands)
|
|
Capital
|
|
|
Ratio
|
|
|
Requirement
|
|
|
Requirement
|
|
Holding Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio
|
|
$
|
89,045
|
|
|
|
9.69
|
%
|
|
|
n/a
|
|
|
|
4.50
|
%
|
Tier 1 capital ratio
|
|
$
|
99,012
|
|
|
|
10.77
|
%
|
|
|
n/a
|
|
|
|
6.00
|
%
|
Total capital ratio
|
|
$
|
120,514
|
|
|
|
13.11
|
%
|
|
|
n/a
|
|
|
|
8.00
|
%
|
Tier 1 leverage ratio
|
|
$
|
99,012
|
|
|
|
9.34
|
%
|
|
|
n/a
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio
|
|
$
|
117,929
|
|
|
|
12.80
|
%
|
|
|
6.50
|
%
|
|
|
4.50
|
%
|
Tier 1 capital ratio
|
|
$
|
117,929
|
|
|
|
12.80
|
%
|
|
|
8.00
|
%
|
|
|
6.00
|
%
|
Total capital ratio
|
|
$
|
129,458
|
|
|
|
14.05
|
%
|
|
|
10.00
|
%
|
|
|
8.00
|
%
|
Tier 1 leverage ratio
|
|
$
|
117,929
|
|
|
|
11.14
|
%
|
|
|
5.00
|
%
|
|
|
4.00
|
%
|
Total shareholders’ equity at June 30, 2016 was $92.5 million, compared to shareholder’s equity of $90.5 million reported at December 31, 2015.
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 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 will be 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.
Cash Dividends and Payout Ratios per Common Share
During the six months ended June 30, 2016 and the year ended December 31, 2015, we declared a quarterly cash dividend 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, expected growth, and the overall payout ratio. We expect that 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, 2016 and 2015.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Dividends declared per common share
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
Dividend payout ratio
|
|
|
28
|
%
|
|
|
17
|
%
|
|
|
135
|
%
|
|
|
20
|
%
|
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 12,
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 12,
C
ommitme
nts and Contingencies,
in the
Notes to Consolidated Financial Statements
incorporated in this document.