Notes to Consolidated Financial Statements (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”), is a bank holding company (“BHC”) with its principal offices in Redding, California. 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). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, which have been derived from the unaudited interim consolidated financial statements and audited consolidated financial statements, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and the disclosures made are adequate to make the information not misleading.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with prevailing practices within the banking and securities industries. In preparing such consolidated financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the Balance Sheets and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses (“ALLL”), the valuation of goodwill and Other Real Estate Owned (“OREO”), and fair value measurements. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation. The results of reclassifications are not considered material and have no effect on previously reported net income or shareholders' equity. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2015 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2016 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Holding Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As of September 30, 2016 and December 31, 2015, the Company had one wholly-owned trust (“Trust”) formed in 2005 to issue trust preferred securities and related common securities. The Company has not consolidated the accounts of the Trust in its Consolidated Financial Statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”) ASC 810,
Consolidation
(“ASC 810”). As a result, the junior subordinated debentures issued by the Company to the Trust are reflected in our
Consolidated Balance Sheets
.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June of 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13
, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The amendments are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.
Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.
The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the provisions of the ASU to determine the potential impact the new standard will have on our consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
In March of 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09,
Compensation - Stock Compensation (Topic 718)
:
Improvements to Employee Share-Based Payment Accounting
. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impacts of this ASU on our consolidated financial statements.
In February of 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 812)
. This Update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842
is
that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial statements.
In May of 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, which creates Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The standard is effective for public entities for interim and annual periods beginning after December 15, 2017 as deferred by ASU No. 2015-14; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. We are currently evaluating the provisions of the ASU to determine the potential impact the new standard will have on our consolidated financial statements.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, excluding unvested restricted stock awards which do not have voting rights or share in dividends. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that subsequently shared in the earnings of the Holding Company. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following is a computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015.
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
(Amounts in thousands, except per share information)
|
|
September 30,
|
|
|
September 30,
|
|
Earnings Per Share
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,366
|
|
|
$
|
2,525
|
|
|
$
|
2,962
|
|
|
$
|
6,716
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
150
|
|
Net income available to common shareholders
|
|
$
|
2,366
|
|
|
$
|
2,475
|
|
|
$
|
2,962
|
|
|
$
|
6,566
|
|
Denominators:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
13,369
|
|
|
|
13,340
|
|
|
|
13,366
|
|
|
|
13,327
|
|
Potentially dilutive common shares
(1)
|
|
|
70
|
|
|
|
37
|
|
|
|
46
|
|
|
|
31
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
13,439
|
|
|
|
13,377
|
|
|
|
13,412
|
|
|
|
13,358
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.49
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.49
|
|
Anti-dilutive options not included in diluted earnings per share calculation
|
|
|
74
|
|
|
|
121
|
|
|
|
111
|
|
|
|
121
|
|
Anti-dilutive restricted shares not included in diluted earnings per share calculation
|
|
|
—
|
|
|
|
—
|
|
|
|
41
|
|
|
|
30
|
|
(1)
Represents the effects of the assumed exercise of stock options and vesting of non-participating restricted shares.
|
|
|
|
|
|
|
NOTE 4. SECURITIES
The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities as of September 30, 2016, and December 31, 2015.
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
(Amounts in thousands)
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
57,937
|
|
|
$
|
2,059
|
|
|
$
|
(44
|
)
|
|
$
|
59,952
|
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
53,907
|
|
|
|
369
|
|
|
|
(230
|
)
|
|
|
54,046
|
|
Corporate securities
|
|
|
16,190
|
|
|
|
238
|
|
|
|
(82
|
)
|
|
|
16,346
|
|
Commercial mortgage backed securities
|
|
|
16,291
|
|
|
|
24
|
|
|
|
(61
|
)
|
|
|
16,254
|
|
Other asset backed securities
|
|
|
9,826
|
|
|
|
87
|
|
|
|
(71
|
)
|
|
|
9,842
|
|
Total
|
|
$
|
154,151
|
|
|
$
|
2,777
|
|
|
$
|
(488
|
)
|
|
$
|
156,440
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
31,771
|
|
|
$
|
1,628
|
|
|
$
|
(11
|
)
|
|
$
|
33,388
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
(Amounts in thousands)
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Fair Value
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
$
|
3,886
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
3,943
|
|
Obligations of state and political subdivisions
|
|
|
59,332
|
|
|
|
1,811
|
|
|
|
(39
|
)
|
|
|
61,104
|
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
32,215
|
|
|
|
192
|
|
|
|
(270
|
)
|
|
|
32,137
|
|
Corporate securities
|
|
|
33,775
|
|
|
|
194
|
|
|
|
(191
|
)
|
|
|
33,778
|
|
Commercial mortgage backed securities
|
|
|
12,893
|
|
|
|
10
|
|
|
|
(134
|
)
|
|
|
12,769
|
|
Other asset backed securities
|
|
|
15,331
|
|
|
|
82
|
|
|
|
(114
|
)
|
|
|
15,299
|
|
Total
|
|
$
|
157,432
|
|
|
$
|
2,346
|
|
|
$
|
(748
|
)
|
|
$
|
159,030
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
35,899
|
|
|
$
|
966
|
|
|
$
|
(220
|
)
|
|
$
|
36,645
|
|
The following table presents the expected maturities of investment securities at September 30, 2016.
|
|
Available-For-Sale
|
|
|
Held-To-Maturity
|
|
(Amounts in thousands)
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Amounts maturing in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
4,946
|
|
|
$
|
4,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
One year through five years
|
|
|
62,910
|
|
|
|
63,417
|
|
|
|
4,575
|
|
|
|
4,830
|
|
Five years through ten years
|
|
|
33,575
|
|
|
|
34,693
|
|
|
|
13,435
|
|
|
|
14,087
|
|
After ten years
|
|
|
52,720
|
|
|
|
53,339
|
|
|
|
13,761
|
|
|
|
14,471
|
|
Total
|
|
$
|
154,151
|
|
|
$
|
156,440
|
|
|
$
|
31,771
|
|
|
$
|
33,388
|
|
The amortized cost and fair value of residential mortgage backed, collateralized mortgage obligations and commercial mortgage securities are presented by their expected average life, rather than contractual maturity, because the underlying loans may be repaid without prepayment penalties.
The following table presents the fair value of the securities held for pledging, segregated by purpose, as of September 30, 2016.
(Amounts in thousands)
|
|
Pledged
|
|
|
Available To Be
Pledged
|
|
|
Total Held For
Pledging Purposes
|
|
Public funds collateral
|
|
$
|
17,687
|
|
|
$
|
7,921
|
|
|
$
|
25,608
|
|
Federal Home Loan Bank of San Francisco borrowings
|
|
|
—
|
|
|
|
18,616
|
|
|
|
18,616
|
|
Total
|
|
$
|
17,687
|
|
|
$
|
26,537
|
|
|
$
|
44,224
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the cash proceeds from sales of securities and the associated gross realized gains and gross realized losses that have been included in earnings for the three and nine months ended September 30, 2016 and 2015.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Proceeds from sales of securities
|
|
$
|
12,310
|
|
|
$
|
25,340
|
|
|
$
|
46,699
|
|
|
$
|
61,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains on sales of securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
|
$
|
25
|
|
|
$
|
16
|
|
|
$
|
136
|
|
|
$
|
86
|
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
12
|
|
|
|
49
|
|
|
|
14
|
|
|
|
111
|
|
Corporate securities
|
|
|
29
|
|
|
|
52
|
|
|
|
105
|
|
|
|
134
|
|
Commercial mortgage backed securities
|
|
|
—
|
|
|
|
10
|
|
|
|
4
|
|
|
|
14
|
|
Other asset backed securities
|
|
|
10
|
|
|
|
50
|
|
|
|
31
|
|
|
|
142
|
|
Total gross realized gains on sales of securities
|
|
|
76
|
|
|
|
177
|
|
|
|
290
|
|
|
|
487
|
|
Gross realized losses on sales of securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(5
|
)
|
Obligations of state and political subdivisions
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
(64
|
)
|
|
|
(12
|
)
|
Corporate securities
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
—
|
|
Commercial mortgage backed securities
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
Other asset backed securities
|
|
|
—
|
|
|
|
(30
|
)
|
|
|
(3
|
)
|
|
|
(53
|
)
|
Total gross realized losses on sales of securities
|
|
|
(6
|
)
|
|
|
(40
|
)
|
|
|
(98
|
)
|
|
|
(74
|
)
|
Gain on investment securities, net
|
|
$
|
70
|
|
|
$
|
137
|
|
|
$
|
192
|
|
|
$
|
413
|
|
Investment securities that were in an unrealized loss position as of September 30, 2016 and December 31, 2015 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or underlying collateral.
|
|
As of September 30, 2016
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(Amounts in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
4,793
|
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,793
|
|
|
$
|
(44
|
)
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
18,276
|
|
|
|
(109
|
)
|
|
|
5,283
|
|
|
|
(121
|
)
|
|
|
23,559
|
|
|
|
(230
|
)
|
Corporate securities
|
|
|
5,014
|
|
|
|
(55
|
)
|
|
|
2,648
|
|
|
|
(27
|
)
|
|
|
7,662
|
|
|
|
(82
|
)
|
Commercial mortgage backed securities
|
|
|
8,155
|
|
|
|
(43
|
)
|
|
|
2,944
|
|
|
|
(18
|
)
|
|
|
11,099
|
|
|
|
(61
|
)
|
Other asset backed securities
|
|
|
2,222
|
|
|
|
(5
|
)
|
|
|
1,345
|
|
|
|
(66
|
)
|
|
|
3,567
|
|
|
|
(71
|
)
|
Total temporarily impaired securities
|
|
$
|
38,460
|
|
|
$
|
(256
|
)
|
|
$
|
12,220
|
|
|
$
|
(232
|
)
|
|
$
|
50,680
|
|
|
$
|
(488
|
)
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,433
|
|
|
$
|
(4
|
)
|
|
$
|
1,023
|
|
|
$
|
(7
|
)
|
|
$
|
2,456
|
|
|
$
|
(11
|
)
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
As of December 31, 2015
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(Amounts in thousands)
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
7,682
|
|
|
$
|
(39
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,682
|
|
|
$
|
(39
|
)
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
16,279
|
|
|
|
(210
|
)
|
|
|
4,931
|
|
|
|
(60
|
)
|
|
|
21,210
|
|
|
|
(270
|
)
|
Corporate securities
|
|
|
18,707
|
|
|
|
(191
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
18,707
|
|
|
|
(191
|
)
|
Commercial mortgage backed securities
|
|
|
7,557
|
|
|
|
(62
|
)
|
|
|
1,516
|
|
|
|
(72
|
)
|
|
|
9,073
|
|
|
|
(134
|
)
|
Other asset backed securities
|
|
|
4,734
|
|
|
|
(13
|
)
|
|
|
3,430
|
|
|
|
(101
|
)
|
|
|
8,164
|
|
|
|
(114
|
)
|
Total temporarily impaired securities
|
|
$
|
54,959
|
|
|
$
|
(515
|
)
|
|
$
|
9,877
|
|
|
$
|
(233
|
)
|
|
$
|
64,836
|
|
|
$
|
(748
|
)
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,513
|
|
|
$
|
(63
|
)
|
|
$
|
4,831
|
|
|
$
|
(157
|
)
|
|
$
|
6,344
|
|
|
$
|
(220
|
)
|
At September 30, 2016, 40 securities were in unrealized loss positions and at December 31, 2015, 59 securities were in unrealized loss positions.
Other
-Than
-Temporary Impairment
At June 30, 2016, we held $3.2 million par value of AgriBank subordinated notes due July 15, 2019. On April 28, 2016 AgriBank announced that, on July 15, 2016 it would redeem all of the outstanding principal amount of these notes at 100% of the principal amount together with all accrued and unpaid interest. During the second quarter of 2016, we determined that the present value of the expected cash flows on our AgriBank investment was $546 thousand less than our amortized cost basis and recorded an other-than-temporary impairment for that amount. We did not recognize any additional, other-than-temporary impairment losses for the nine months ended September 30, 2016, or the year ended December 31, 2015.
NOTE 5. LOANS
Outstanding loan balances consisted of the following at September 30, 2016, and December 31, 2015.
(Amounts in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
Loan Portfolio
|
|
2016
|
|
|
2015
|
|
Commercial
|
|
$
|
136,235
|
|
|
$
|
132,805
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
48,365
|
|
|
|
28,319
|
|
Real estate - commercial non-owner occupied
|
|
|
281,977
|
|
|
|
243,374
|
|
Real estate - commercial owner occupied
|
|
|
160,474
|
|
|
|
156,299
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - Individual Tax Identification Number (“ITIN”)
|
|
|
46,458
|
|
|
|
49,106
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
10,770
|
|
|
|
11,390
|
|
Real estate - residential - equity lines
|
|
|
42,363
|
|
|
|
45,473
|
|
Consumer and other
|
|
|
52,377
|
|
|
|
49,873
|
|
Gross loans
|
|
|
779,019
|
|
|
|
716,639
|
|
Deferred fees and costs
|
|
|
1,155
|
|
|
|
870
|
|
Loans, net of deferred fees and costs
|
|
|
780,174
|
|
|
|
717,509
|
|
Allowance for loan and lease losses
|
|
|
(11,849
|
)
|
|
|
(11,180
|
)
|
Net loans
|
|
$
|
768,325
|
|
|
$
|
706,329
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Gross loan balances in the table above include net purchase discounts of $2.9 million and $2.3 million as of September 30, 2016
, and December 31, 2015, respectively.
Age analysis of gross loan balances for past due loans, segregated by class of loans, as of September 30, 2016, and December 31, 2015, was as follows.
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
(Amounts in thousands)
|
|
30-59
|
|
|
60-89
|
|
|
Than 90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment >
|
|
Past Due Loans at
|
|
Days Past
|
|
|
Days Past
|
|
|
Days Past
|
|
|
Total Past
|
|
|
|
|
|
|
|
|
|
|
90 Days and
|
|
September 30, 2016
|
|
Due
|
|
|
Due
|
|
|
Due
|
|
|
Due
|
|
|
Current
|
|
|
Total
|
|
|
Accruing
|
|
Commercial
|
|
$
|
299
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
299
|
|
|
$
|
135,936
|
|
|
$
|
136,235
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,365
|
|
|
|
48,365
|
|
|
|
—
|
|
Real estate - commercial non-owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
1,196
|
|
|
|
1,196
|
|
|
|
280,781
|
|
|
|
281,977
|
|
|
|
—
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
113
|
|
|
|
160,361
|
|
|
|
160,474
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
664
|
|
|
|
159
|
|
|
|
979
|
|
|
|
1,802
|
|
|
|
44,656
|
|
|
|
46,458
|
|
|
|
—
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
155
|
|
|
|
405
|
|
|
|
665
|
|
|
|
1,225
|
|
|
|
9,545
|
|
|
|
10,770
|
|
|
|
—
|
|
Real estate - residential - equity lines
|
|
|
181
|
|
|
|
35
|
|
|
|
—
|
|
|
|
216
|
|
|
|
42,147
|
|
|
|
42,363
|
|
|
|
—
|
|
Consumer and other
|
|
|
291
|
|
|
|
73
|
|
|
|
—
|
|
|
|
364
|
|
|
|
52,013
|
|
|
|
52,377
|
|
|
|
—
|
|
Total
|
|
$
|
1,590
|
|
|
$
|
672
|
|
|
$
|
2,953
|
|
|
$
|
5,215
|
|
|
$
|
773,804
|
|
|
$
|
779,019
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
(Amounts in thousands)
|
|
30-59
|
|
|
60-89
|
|
|
Than 90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment >
|
|
Past Due Loans at
|
|
Days Past
|
|
|
Days Past
|
|
|
Days Past
|
|
|
Total Past
|
|
|
|
|
|
|
|
|
|
|
90 Days and
|
|
December 31, 2015
|
|
Due
|
|
|
Due
|
|
|
Due
|
|
|
Due
|
|
|
Current
|
|
|
Total
|
|
|
Accruing
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
634
|
|
|
$
|
664
|
|
|
$
|
132,141
|
|
|
$
|
132,805
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,319
|
|
|
|
28,319
|
|
|
|
—
|
|
Real estate - commercial non-owner occupied
|
|
|
64
|
|
|
|
—
|
|
|
|
5,665
|
|
|
|
5,729
|
|
|
|
237,645
|
|
|
|
243,374
|
|
|
|
—
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
—
|
|
|
|
1,071
|
|
|
|
1,071
|
|
|
|
155,228
|
|
|
|
156,299
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
1,018
|
|
|
|
118
|
|
|
|
850
|
|
|
|
1,986
|
|
|
|
47,120
|
|
|
|
49,106
|
|
|
|
—
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
—
|
|
|
|
404
|
|
|
|
871
|
|
|
|
1,275
|
|
|
|
10,115
|
|
|
|
11,390
|
|
|
|
—
|
|
Real estate - residential - equity lines
|
|
|
137
|
|
|
|
97
|
|
|
|
—
|
|
|
|
234
|
|
|
|
45,239
|
|
|
|
45,473
|
|
|
|
—
|
|
Consumer and other
|
|
|
150
|
|
|
|
50
|
|
|
|
88
|
|
|
|
288
|
|
|
|
49,585
|
|
|
|
49,873
|
|
|
|
88
|
|
Total
|
|
$
|
1,369
|
|
|
$
|
699
|
|
|
$
|
9,179
|
|
|
$
|
11,247
|
|
|
$
|
705,392
|
|
|
$
|
716,639
|
|
|
$
|
88
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following tables summarize impaired loans by loan class as of September 30, 2016, and December 31, 2015.
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
(Amounts in thousands)
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
Impaired Loans
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,728
|
|
|
$
|
2,562
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
1,196
|
|
|
|
1,196
|
|
|
|
—
|
|
Real estate - commercial owner occupied
|
|
|
800
|
|
|
|
847
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
6,252
|
|
|
|
7,881
|
|
|
|
—
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,798
|
|
|
|
2,585
|
|
|
|
—
|
|
Real estate - residential - equity lines
|
|
|
1,085
|
|
|
|
1,411
|
|
|
|
—
|
|
Consumer and other
|
|
|
222
|
|
|
|
225
|
|
|
|
—
|
|
Total with no related allowance recorded
|
|
$
|
13,081
|
|
|
$
|
16,707
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
707
|
|
|
$
|
707
|
|
|
$
|
74
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
811
|
|
|
|
811
|
|
|
|
24
|
|
Real estate - commercial owner occupied
|
|
|
341
|
|
|
|
341
|
|
|
|
64
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
2,420
|
|
|
|
2,465
|
|
|
|
481
|
|
Real estate - residential - equity lines
|
|
|
543
|
|
|
|
543
|
|
|
|
271
|
|
Consumer and other
|
|
|
30
|
|
|
|
30
|
|
|
|
11
|
|
Total with an allowance recorded
|
|
$
|
4,852
|
|
|
$
|
4,897
|
|
|
$
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By loan class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,435
|
|
|
$
|
3,269
|
|
|
$
|
74
|
|
Commercial real estate
|
|
|
3,148
|
|
|
|
3,195
|
|
|
|
88
|
|
Residential real estate
|
|
|
12,098
|
|
|
|
14,885
|
|
|
|
752
|
|
Consumer and other
|
|
|
252
|
|
|
|
255
|
|
|
|
11
|
|
Total impaired loans
|
|
$
|
17,933
|
|
|
$
|
21,604
|
|
|
$
|
925
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
As of December 31, 2015
|
|
(Amounts in thousands)
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
Impaired Loans
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,282
|
|
|
$
|
1,519
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
5,488
|
|
|
|
6,226
|
|
|
|
—
|
|
Real estate - commercial owner occupied
|
|
|
1,071
|
|
|
|
1,794
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
7,063
|
|
|
|
8,662
|
|
|
|
—
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,775
|
|
|
|
2,775
|
|
|
|
—
|
|
Real estate - residential - equity lines
|
|
|
142
|
|
|
|
142
|
|
|
|
—
|
|
Consumer and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total with no related allowance recorded
|
|
$
|
16,821
|
|
|
$
|
21,118
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
761
|
|
|
$
|
820
|
|
|
$
|
122
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
824
|
|
|
|
824
|
|
|
|
35
|
|
Real estate - commercial owner occupied
|
|
|
350
|
|
|
|
350
|
|
|
|
62
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
2,044
|
|
|
|
2,089
|
|
|
|
321
|
|
Real estate - residential - equity lines
|
|
|
558
|
|
|
|
558
|
|
|
|
279
|
|
Consumer and other
|
|
|
32
|
|
|
|
32
|
|
|
|
13
|
|
Total with an allowance recorded
|
|
$
|
4,569
|
|
|
$
|
4,673
|
|
|
$
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By loan class:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,043
|
|
|
$
|
2,339
|
|
|
$
|
122
|
|
Commercial real estate
|
|
|
7,733
|
|
|
|
9,194
|
|
|
|
97
|
|
Residential real estate
|
|
|
11,582
|
|
|
|
14,226
|
|
|
|
600
|
|
Consumer and other
|
|
|
32
|
|
|
|
32
|
|
|
|
13
|
|
Total impaired loans
|
|
$
|
21,390
|
|
|
$
|
25,791
|
|
|
$
|
832
|
|
Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately $93 thousand and $127 thousand for the three months ended September 30, 2016 and 2015, respectively. We would have recognized additional interest income, net of tax, of approximately $249 thousand and $287 thousand for the nine months ended September 30, 2016 and 2015, respectively.
Nonaccrual loans, segregated by loan class, were as follows as of September 30, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
Nonaccrual Loans
|
|
2016
|
|
|
2015
|
|
Commercial
|
|
$
|
1,710
|
|
|
$
|
1,994
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
1,196
|
|
|
|
5,488
|
|
Real estate - commercial owner occupied
|
|
|
800
|
|
|
|
1,071
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
3,392
|
|
|
|
3,649
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,798
|
|
|
|
1,775
|
|
Real estate - residential - equity lines
|
|
|
942
|
|
|
|
—
|
|
Consumer and other
|
|
|
252
|
|
|
|
32
|
|
Total
|
|
$
|
10,090
|
|
|
$
|
14,009
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following tables summarize average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2016 and 2015.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
(Amounts in thousands)
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
Average Recorded Investment and Interest Income
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
Commercial
|
|
$
|
2,601
|
|
|
$
|
10
|
|
|
$
|
2,885
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
2,010
|
|
|
|
12
|
|
|
|
6,874
|
|
|
|
12
|
|
Real estate - commercial owner occupied
|
|
|
1,147
|
|
|
|
6
|
|
|
|
2,281
|
|
|
|
15
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
8,831
|
|
|
|
42
|
|
|
|
9,616
|
|
|
|
36
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,808
|
|
|
|
—
|
|
|
|
1,677
|
|
|
|
—
|
|
Real estate - residential - equity lines
|
|
|
1,661
|
|
|
|
7
|
|
|
|
742
|
|
|
|
6
|
|
Consumer and other
|
|
|
257
|
|
|
|
—
|
|
|
|
33
|
|
|
|
—
|
|
Total
|
|
$
|
18,315
|
|
|
$
|
77
|
|
|
$
|
24,108
|
|
|
$
|
69
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
(Amounts in thousands)
|
|
Recorded
|
|
|
Income
|
|
|
Recorded
|
|
|
Income
|
|
Average Recorded Investment and Interest Income
|
|
Investment
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
Commercial
|
|
$
|
2,551
|
|
|
$
|
14
|
|
|
$
|
3,919
|
|
|
$
|
22
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
2,015
|
|
|
|
35
|
|
|
|
7,767
|
|
|
|
37
|
|
Real estate - commercial owner occupied
|
|
|
1,333
|
|
|
|
19
|
|
|
|
2,286
|
|
|
|
52
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
9,037
|
|
|
|
124
|
|
|
|
9,819
|
|
|
|
102
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
1,774
|
|
|
|
—
|
|
|
|
1,790
|
|
|
|
—
|
|
Real estate - residential - equity lines
|
|
|
1,558
|
|
|
|
20
|
|
|
|
763
|
|
|
|
20
|
|
Consumer and other
|
|
|
133
|
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
Total
|
|
$
|
18,401
|
|
|
$
|
212
|
|
|
$
|
26,378
|
|
|
$
|
233
|
|
The impaired loans for which these interest income amounts were recognized primarily relate to accruing troubled debt restructured loans.
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.
At September 30, 2016 and December 31, 2015, impaired loans of $7.4 million and $6.9 million, respectively, were classified as performing restructured loans.
In order for a restructured loan to be on accrual status, the loan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. We had no obligation to lend additional funds on any restructured loans as of September 30, 2016 or December 31, 2015.
As of
September 30, 2016, we had $11.2 million in troubled debt restructurings compared to $15.9 million as of December 31, 2015. As of September 30, 2016, we had 119 loans that qualified as troubled debt restructurings, of which 110 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.43% of gross loans as of September 30, 2016, compared to 2.22% at December 31, 2015.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The types of modifications offered can generally be described in the following categories:
Rate
– A modification in which the interest rate is modified.
Maturity
– A modification in which the maturity date, timing of payments or frequency of payments is modified.
Payment deferral
– A modification in which a portion of the principal is deferred.
The following tables present the period end balances of newly restructured loans and the types of modifications that occurred during the three and nine months ended September 30, 2016 and 2015.
|
|
For the Three Months Ended
September 30, 2016
|
|
|
For the Three Months Ended
September 30, 2015
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate &
|
|
|
|
|
|
|
|
|
Troubled Debt Restructuring Modification Types
|
|
Maturity
|
|
|
Rate &
Maturity
|
|
|
Principal
Reduction
|
|
|
Total
|
|
|
Rate
|
|
|
Rate &
Maturity
|
|
|
Payment
Deferral
|
|
|
Payment
Deferral
|
|
|
Total
|
|
Commercial
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
82
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103
|
|
|
|
103
|
|
Total
|
|
$
|
139
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
$
|
221
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
148
|
|
|
|
For the Nine Months Ended
September 30, 2016
|
|
|
For the Nine Months Ended
September 30, 2015
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate &
|
|
|
|
|
|
|
|
|
Troubled Debt Restructuring Modification Types
|
|
Maturity
|
|
|
Rate &
Maturity
|
|
|
Principal
Reduction
|
|
|
Payment
Deferral
|
|
|
Total
|
|
|
Rate
|
|
|
Rate &
Maturity
|
|
|
Payment
Deferral
|
|
|
Payment
Deferral
|
|
|
Total
|
|
Commercial
|
|
$
|
139
|
|
|
$
|
951
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,090
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
734
|
|
|
$
|
779
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
—
|
|
|
|
—
|
|
|
|
82
|
|
|
|
118
|
|
|
|
200
|
|
|
|
115
|
|
|
|
—
|
|
|
|
266
|
|
|
|
206
|
|
|
|
587
|
|
Total
|
|
$
|
139
|
|
|
$
|
951
|
|
|
$
|
82
|
|
|
$
|
118
|
|
|
$
|
1,290
|
|
|
$
|
115
|
|
|
$
|
45
|
|
|
$
|
266
|
|
|
$
|
940
|
|
|
$
|
1,366
|
|
For the three and nine month periods ended September 30, 2016 and 2015, the tables below provide information regarding the number of loans where the contractual terms have been restructured in a manner, which grants a concession to a borrower experiencing financial difficulties.
|
|
For the Three Months Ended September 30, 2016
|
|
|
For the Three Months Ended September 30, 2015
|
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
(Amounts in thousands)
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
Troubled Debt Restructurings
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Commercial
|
|
|
1
|
|
|
$
|
135
|
|
|
$
|
147
|
|
|
|
1
|
|
|
$
|
49
|
|
|
$
|
49
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
1
|
|
|
|
97
|
|
|
|
82
|
|
|
|
2
|
|
|
|
225
|
|
|
|
193
|
|
Total
|
|
|
2
|
|
|
$
|
232
|
|
|
$
|
229
|
|
|
|
3
|
|
|
$
|
274
|
|
|
$
|
242
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
For the Nine Months Ended September 30, 2016
|
|
|
For the Nine Months Ended September 30, 2015
|
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
(Amounts in thousands)
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
Troubled Debt Restructurings
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Commercial
|
|
|
2
|
|
|
$
|
1,262
|
|
|
$
|
1,273
|
|
|
|
2
|
|
|
$
|
872
|
|
|
$
|
872
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
2
|
|
|
|
267
|
|
|
|
252
|
|
|
|
8
|
|
|
|
747
|
|
|
|
678
|
|
Total
|
|
|
4
|
|
|
$
|
1,529
|
|
|
$
|
1,525
|
|
|
|
10
|
|
|
$
|
1,619
|
|
|
$
|
1,550
|
|
There were no loans modified as troubled debt restructuring during the 12 month periods preceding September 30, 2016 and 2015, for which there was a payment default during the three and nine month periods ended September 30, 2016 and 2015.
We define a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed.
Performing and nonperforming loans, segregated by class of loans, were as follows at September 30, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
September 30, 2016
|
|
Performing and Nonperforming Loans
|
|
Performing
|
|
|
Nonperforming
|
|
|
Total
|
|
Commercial
|
|
$
|
134,525
|
|
|
$
|
1,710
|
|
|
$
|
136,235
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
48,365
|
|
|
|
—
|
|
|
|
48,365
|
|
Real estate - commercial non-owner occupied
|
|
|
280,781
|
|
|
|
1,196
|
|
|
|
281,977
|
|
Real estate - commercial owner occupied
|
|
|
159,674
|
|
|
|
800
|
|
|
|
160,474
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
43,066
|
|
|
|
3,392
|
|
|
|
46,458
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
8,972
|
|
|
|
1,798
|
|
|
|
10,770
|
|
Real estate - residential - equity lines
|
|
|
41,421
|
|
|
|
942
|
|
|
|
42,363
|
|
Consumer and other
|
|
|
52,125
|
|
|
|
252
|
|
|
|
52,377
|
|
Total
|
|
$
|
768,929
|
|
|
$
|
10,090
|
|
|
$
|
779,019
|
|
(Amounts in thousands)
|
|
December 31, 2015
|
|
Performing and Nonperforming Loans
|
|
Performing
|
|
|
Nonperforming
|
|
|
Total
|
|
Commercial
|
|
$
|
130,811
|
|
|
$
|
1,994
|
|
|
$
|
132,805
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
28,319
|
|
|
|
—
|
|
|
|
28,319
|
|
Real estate - commercial non-owner occupied
|
|
|
237,886
|
|
|
|
5,488
|
|
|
|
243,374
|
|
Real estate - commercial owner occupied
|
|
|
155,228
|
|
|
|
1,071
|
|
|
|
156,299
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
45,457
|
|
|
|
3,649
|
|
|
|
49,106
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
9,615
|
|
|
|
1,775
|
|
|
|
11,390
|
|
Real estate - residential - equity lines
|
|
|
45,473
|
|
|
|
—
|
|
|
|
45,473
|
|
Consumer and other
|
|
|
49,753
|
|
|
|
120
|
|
|
|
49,873
|
|
Total
|
|
$
|
702,542
|
|
|
$
|
14,097
|
|
|
$
|
716,639
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
In conjunction with evaluating the performing versus nonperforming nature of our loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (rating) for each loan class:
Pass Grade: A Pass loan is a strong credit with no existing or known weaknesses that may require management’s close attention. Some pass loans require short term enhanced monitoring to determine when the credit relationship would merit either an upgrade or a downgrade. Loans classified as Pass Grade specifically demonstrate:
|
●
|
Strong Cash Flows – borrower’s cash flows must meet or exceed our minimum debt service coverage ratio.
|
|
●
|
Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin.
|
|
●
|
Qualitative Factors – in addition to meeting our minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a Pass Grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character.
|
Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral.
Watch Grade: The credit is acceptable but the borrower has experienced a temporary setback or adverse information has been received, and may exhibit one or more of the characteristics shown in the list below. This risk grade could apply to credits on a temporary basis pending a full review. Credits with this risk grade will require more handling time and increased management. The list below contains characteristics of this risk grade, but individually do not automatically cause the loan to be assigned a Watch Grade.
|
●
|
The primary source of repayment may be weakening causing greater reliance on the secondary source of repayment or
|
|
●
|
The primary source of repayment is adequate, but the secondary source of repayment is insufficient
|
|
●
|
In-depth financial analysis would compare to the lower quartile in two or more of the major components of the Risk Management Association Annual Statement Studies
|
|
●
|
Volatile or deteriorating collateral
|
|
●
|
Management decisions may be called into question
|
|
●
|
Delinquencies in bank credits or other financial/trade creditors
|
|
●
|
Frequent overdrafts
|
|
●
|
Significant change in management/ownership
|
Special Mention Grade: Credits in this grade are potentially weak and deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the credit. Special Mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. The list below exhibits the characteristics of this grade, but individually do not automatically cause the borrower to be assigned a grade of Special Mention:
|
●
|
Inadequate or incomplete loan documentation or perfection of collateral, or any other deviation from prudent lending practices
|
|
●
|
Credit is structured in a manner in which the timing of the repayment source does not match the payment schedule or maturity, materially jeopardizing repayment
|
|
●
|
Current economic or market conditions exist which may affect the borrower's ability to perform or affect the Bank's collateral position
|
|
●
|
Adverse trends in the borrower's operations or continued deterioration in the borrower’s financial condition that has not yet reached a point where the retirement of debt is jeopardized. A credit in this grade should have favorable prospects of the deteriorating financial trends reversing within a reasonable timeframe.
|
|
●
|
The borrower is less than cooperative or unable to produce current and adequate financial information
|
Substandard Grade: A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be graded as impaired.
The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade:
|
●
|
Sustained or substantial deteriorating financial trends,
|
|
●
|
Unresolved management problems,
|
|
●
|
Collateral is insufficient to repay debt; collateral is not sufficiently supported by independent sources, such as asset-based financial audits, appraisals, or equipment evaluations,
|
|
●
|
Improper perfection of lien position, which is not readily correctable,
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
●
|
Unanticipated and severe decline in market values,
|
|
●
|
High reliance on secondary source of repayment,
|
|
●
|
Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the borrower’s capacity to repay the debt,
|
|
●
|
Fraud committed by the borrower,
|
|
●
|
IRS liens that take precedence,
|
|
●
|
Forfeiture statutes for assets involved in criminal activities,
|
|
●
|
Protracted repayment terms outside of policy that are for longer than the same type of credit in our portfolio,
|
|
●
|
Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the collateral pledged, if any.
|
Doubtful Grade: A Doubtful loan has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to:
|
●
|
Acquisition or liquidation procedures,
|
|
●
|
Perfecting liens on additional collateral,
|
Generally, a Doubtful Grade does not remain outstanding for a period greater than six months. After six months, the pending events should have either occurred or not occurred. The credit grade should have improved or the principal balance charged against the ALLL.
The following tables summarize internal risk ratings by loan class as of September 30, 2016 and December 31, 2015.
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Pass
|
|
|
Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
$
|
113,413
|
|
|
$
|
10,871
|
|
|
$
|
7,850
|
|
|
$
|
4,101
|
|
|
$
|
—
|
|
|
$
|
136,235
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
47,834
|
|
|
|
531
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,365
|
|
Real estate - commercial non-owner occupied
|
|
|
276,775
|
|
|
|
880
|
|
|
|
1,336
|
|
|
|
2,986
|
|
|
|
—
|
|
|
|
281,977
|
|
Real estate - commercial owner occupied
|
|
|
152,098
|
|
|
|
6,555
|
|
|
|
499
|
|
|
|
1,322
|
|
|
|
—
|
|
|
|
160,474
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
39,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,309
|
|
|
|
—
|
|
|
|
46,458
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
8,459
|
|
|
|
514
|
|
|
|
—
|
|
|
|
1,797
|
|
|
|
—
|
|
|
|
10,770
|
|
Real estate - residential - equity lines
|
|
|
39,170
|
|
|
|
1,578
|
|
|
|
43
|
|
|
|
1,572
|
|
|
|
—
|
|
|
|
42,363
|
|
Consumer and other
|
|
|
52,079
|
|
|
|
3
|
|
|
|
—
|
|
|
|
295
|
|
|
|
—
|
|
|
|
52,377
|
|
Total
|
|
$
|
728,977
|
|
|
$
|
20,932
|
|
|
$
|
9,728
|
|
|
$
|
19,382
|
|
|
$
|
—
|
|
|
$
|
779,019
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Pass
|
|
|
Watch
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
$
|
108,696
|
|
|
$
|
10,240
|
|
|
$
|
9,587
|
|
|
$
|
4,282
|
|
|
$
|
—
|
|
|
$
|
132,805
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
28,291
|
|
|
|
28
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,319
|
|
Real estate - commercial non-owner occupied
|
|
|
234,177
|
|
|
|
917
|
|
|
|
1,588
|
|
|
|
6,692
|
|
|
|
—
|
|
|
|
243,374
|
|
Real estate - commercial owner occupied
|
|
|
149,327
|
|
|
|
3,864
|
|
|
|
1,687
|
|
|
|
1,421
|
|
|
|
—
|
|
|
|
156,299
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
41,480
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,626
|
|
|
|
—
|
|
|
|
49,106
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
9,041
|
|
|
|
—
|
|
|
|
575
|
|
|
|
1,774
|
|
|
|
—
|
|
|
|
11,390
|
|
Real estate - residential - equity lines
|
|
|
41,149
|
|
|
|
1,760
|
|
|
|
1,682
|
|
|
|
882
|
|
|
|
—
|
|
|
|
45,473
|
|
Consumer and other
|
|
|
49,551
|
|
|
|
—
|
|
|
|
256
|
|
|
|
66
|
|
|
|
—
|
|
|
|
49,873
|
|
Total
|
|
$
|
661,712
|
|
|
$
|
16,809
|
|
|
$
|
15,375
|
|
|
$
|
22,743
|
|
|
$
|
—
|
|
|
$
|
716,639
|
|
The following tables summarize the ALLL by portfolio for the three and nine months ended September 30, 2016 and 2015.
|
|
For the Three Months Ended September 30, 2016
|
|
(Amounts in thousands)
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL by Portfolio
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
2,591
|
|
|
$
|
6,029
|
|
|
$
|
1,871
|
|
|
$
|
763
|
|
|
$
|
610
|
|
|
$
|
11,864
|
|
Charge offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(130
|
)
|
|
|
(227
|
)
|
|
|
—
|
|
|
|
(357
|
)
|
Recoveries
|
|
|
305
|
|
|
|
—
|
|
|
|
18
|
|
|
|
19
|
|
|
|
—
|
|
|
|
342
|
|
Provision
|
|
|
(491
|
)
|
|
|
512
|
|
|
|
45
|
|
|
|
171
|
|
|
|
(237
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
2,405
|
|
|
$
|
6,541
|
|
|
$
|
1,804
|
|
|
$
|
726
|
|
|
$
|
373
|
|
|
$
|
11,849
|
|
|
|
For the Three Months Ended September 30, 2015
|
|
(Amounts in thousands)
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL by Portfolio
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
3,389
|
|
|
$
|
5,447
|
|
|
$
|
1,480
|
|
|
$
|
583
|
|
|
$
|
503
|
|
|
$
|
11,402
|
|
Charge offs
|
|
|
—
|
|
|
|
(289
|
)
|
|
|
(309
|
)
|
|
|
(181
|
)
|
|
|
—
|
|
|
|
(779
|
)
|
Recoveries
|
|
|
121
|
|
|
|
1
|
|
|
|
139
|
|
|
|
7
|
|
|
|
—
|
|
|
|
268
|
|
Provision
|
|
|
(91
|
)
|
|
|
64
|
|
|
|
(45
|
)
|
|
|
194
|
|
|
|
(122
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
3,419
|
|
|
$
|
5,223
|
|
|
$
|
1,265
|
|
|
$
|
603
|
|
|
$
|
381
|
|
|
$
|
10,891
|
|
|
|
For the Nine Months Ended September 30, 2016
|
|
(Amounts in thousands)
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL by Portfolio
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
2,493
|
|
|
$
|
5,784
|
|
|
$
|
1,577
|
|
|
$
|
770
|
|
|
$
|
556
|
|
|
$
|
11,180
|
|
Charge offs
|
|
|
(1,106
|
)
|
|
|
(37
|
)
|
|
|
(680
|
)
|
|
|
(575
|
)
|
|
|
—
|
|
|
|
(2,398
|
)
|
Recoveries
|
|
|
383
|
|
|
|
2,481
|
|
|
|
104
|
|
|
|
99
|
|
|
|
—
|
|
|
|
3,067
|
|
Provision
|
|
|
635
|
|
|
|
(1,687
|
)
|
|
|
803
|
|
|
|
432
|
|
|
|
(183
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
2,405
|
|
|
$
|
6,541
|
|
|
$
|
1,804
|
|
|
$
|
726
|
|
|
$
|
373
|
|
|
$
|
11,849
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
For the Nine Months Ended September 30, 2015
|
|
(Amounts in thousands)
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL by Portfolio
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Beginning balance
|
|
$
|
3,503
|
|
|
$
|
4,875
|
|
|
$
|
1,671
|
|
|
$
|
449
|
|
|
$
|
322
|
|
|
$
|
10,820
|
|
Charge offs
|
|
|
(406
|
)
|
|
|
(428
|
)
|
|
|
(450
|
)
|
|
|
(385
|
)
|
|
|
—
|
|
|
|
(1,669
|
)
|
Recoveries
|
|
|
869
|
|
|
|
669
|
|
|
|
202
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,740
|
|
Provision
|
|
|
(547
|
)
|
|
|
107
|
|
|
|
(158
|
)
|
|
|
539
|
|
|
|
59
|
|
|
|
—
|
|
Ending balance
|
|
$
|
3,419
|
|
|
$
|
5,223
|
|
|
$
|
1,265
|
|
|
$
|
603
|
|
|
$
|
381
|
|
|
$
|
10,891
|
|
The following tables summarize the ALLL and the recorded investment in loans and leases as of September 30, 2016 and December 31, 2015.
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
ALLL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
74
|
|
|
$
|
88
|
|
|
$
|
752
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
925
|
|
Collectively evaluated for impairment
|
|
|
2,331
|
|
|
|
6,453
|
|
|
|
1,052
|
|
|
|
715
|
|
|
|
373
|
|
|
|
10,924
|
|
Total
|
|
$
|
2,405
|
|
|
$
|
6,541
|
|
|
$
|
1,804
|
|
|
$
|
726
|
|
|
$
|
373
|
|
|
$
|
11,849
|
|
Gross loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,435
|
|
|
$
|
3,148
|
|
|
$
|
12,098
|
|
|
$
|
252
|
|
|
$
|
—
|
|
|
$
|
17,933
|
|
Collectively evaluated for impairment
|
|
|
133,800
|
|
|
|
487,668
|
|
|
|
87,493
|
|
|
|
52,125
|
|
|
|
—
|
|
|
|
761,086
|
|
Total gross loans
|
|
$
|
136,235
|
|
|
$
|
490,816
|
|
|
$
|
99,591
|
|
|
$
|
52,377
|
|
|
$
|
—
|
|
|
$
|
779,019
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Commercial
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
ALLL:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
122
|
|
|
$
|
97
|
|
|
$
|
600
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
832
|
|
Collectively evaluated for impairment
|
|
|
2,371
|
|
|
|
5,687
|
|
|
|
977
|
|
|
|
757
|
|
|
|
556
|
|
|
|
10,348
|
|
Total
|
|
$
|
2,493
|
|
|
$
|
5,784
|
|
|
$
|
1,577
|
|
|
$
|
770
|
|
|
$
|
556
|
|
|
$
|
11,180
|
|
Gross loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,043
|
|
|
$
|
7,733
|
|
|
$
|
11,582
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
21,390
|
|
Collectively evaluated for impairment
|
|
|
130,762
|
|
|
|
420,259
|
|
|
|
94,387
|
|
|
|
49,841
|
|
|
|
—
|
|
|
|
695,249
|
|
Total gross loans
|
|
$
|
132,805
|
|
|
$
|
427,992
|
|
|
$
|
105,969
|
|
|
$
|
49,873
|
|
|
$
|
—
|
|
|
$
|
716,639
|
|
The ALLL totaled $11.8 million or 1.52% of total gross loans at September 30, 2016 and $11.2 million or 1.56% at December 31, 2015. As of September 30, 2016 and December 31, 2015, we had $222.1 million and $230.6 million in commitments to extend credit, respectively. The reserve for unfunded commitments recorded in
Other Liabilities
in the
Consolidated Balance Sheets
at September 30, 2016 and December 31, 2015 was $695 thousand.
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. Our ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450
Contingencies
and ASC Topic 310
Receivables.
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 past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a monthly 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 rated 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.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.
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 have had on the loan portfolio as a whole.
We believe that the ALLL was adequate as of September 30, 2016. 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. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.
As of September 30, 2016, approximately 76% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. Deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.
All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. For collateral dependent loans, this can be accomplished by charging off the impaired portion of the loan based on the underlying value of the collateral. For non-collateral dependent loans, we establish a specific component within the ALLL based on the present value of the future cash flows. If we determine the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged off against the ALLL. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.
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 rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2016, the unallocated allowance amount represented 3% 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.
We have lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. We review and approve these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.
The following is a brief summary, by loan type, of management’s evaluation of the general risk characteristics and underwriting standards:
Commercial Loans
– Commercial loans are underwritten after evaluating the borrower’s financial ability to maintain profitability including future expansion objectives. In addition, the borrower’s qualitative qualities are evaluated, such as management skills and experience, ethical traits, and overall business acumen. Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may deviate from initial projections, and the value of collateral securing these loans may vary.
Most commercial loans are generally secured by the assets being financed and other business assets such as accounts receivable or inventory. Management may also incorporate a personal guarantee; however, some short term loans may be extended on an unsecured basis. Repayment of commercial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial Real Estate (“CRE”) Loans
– CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions.
The properties securing the CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce our exposure to adverse economic events that affect any single industry. We monitor and evaluate CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Generally, CRE loans to developers and builders that are secured by non-owner occupied properties require the borrower to have had an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is secured. These loans are closely monitored by on-site inspections, and are considered to have higher inherent risks than other CRE loans due to their ultimate repayment sensitivity to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long term financing.
Consumer Loans
– Our consumer loan originations are generally limited to home equity loans with nominal originations in unsecured personal loans. The portfolio also includes unsecured consumer home improvement loans and residential solar panel loans secured by UCC filings. We are highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.
We maintain an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provides the foundation for the three major components of the ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.
Our loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans. In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge offs or recoveries, among other relevant credit risk factors. We periodically review and update our historical loss ratios based on net charge off experience for each loan and lease class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.
General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of our loan portfolio.
NOTE 6. OTHER REAL ESTATE OWNED
At September 30, 2016, and December 31, 2015, the recorded investment in OREO was $793 thousand and $1.4 million, respectively. During the nine months ended September 30, 2016, we transferred two foreclosed properties in the amount of $110 thousand to OREO and we sold eight properties with a balance of $664 thousand for a net loss of $119 thousand. During the nine months ended September 30, 2016, we recognized a write-down in OREO for three properties totaling $76 thousand. The September 30, 2016 OREO balance consists of two 1-4 family residential real estate property in the amount of $110 thousand, two nonfarm nonresidential properties in the amount of $558 thousand and one undeveloped commercial property in the amount of $126 thousand. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure is $1.2 million.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 7. INTANGIBLES
In March of 2016, as part of our branch acquisition, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. The acquired core deposit base provides value as a source of below market rate funds and the realization of cost savings is a fundamental rationale for assuming these deposit liabilities. The cost savings is defined as the difference between the cost of funds on our new deposits (i.e., interest and net maintenance costs) and the cost of an equal amount of funds from an alternative source having a similar term as the new deposit base. Our core deposit intangible was recorded at fair value which was derived by using the income approach and represents the present value of the cost savings over the projected term of our new deposit base.
The core deposit intangible is being amortized on a straight-line basis over the estimated useful life of the deposits, which is eight years, with no expected residual value. For tax purposes, the core deposit intangible will be amortized over 15 years.
As of September 30, 2016, we have recorded the following amounts related to the core deposit intangible.
(Amounts in thousands)
|
|
September 30,
|
|
Intangibles
|
|
2016
|
|
Gross carrying amount
|
|
$
|
1,772
|
|
Accumulated amortization
|
|
|
(130
|
)
|
Core deposit intangibles, net
|
|
$
|
1,642
|
|
The following table sets forth, as of September 30, 2016, the total estimated future amortization of intangible assets:
(Amounts in thousands)
|
|
|
|
|
For the year ended December 31,
|
|
Amount
|
|
2016
|
|
$
|
56
|
|
2017
|
|
|
221
|
|
2018
|
|
|
221
|
|
2019
|
|
|
221
|
|
2020
|
|
|
221
|
|
2021
|
|
|
221
|
|
2022 and thereafter
|
|
|
481
|
|
Total
|
|
$
|
1,642
|
|
Goodwill is calculated as the amount of cash paid in excess of the fair value of the net assets acquired in the transaction. Goodwill is not amortized, but is annually reviewed for impairment. For tax purposes, the goodwill will be amortized over 15 years. See Note
16
Branch Acquisition
in the
Notes to Consolidated Financial Statements
in this document for further detail on the branch acquisition.
NOTE 8. QUALIFIED AFFORDABLE HOUSING PARTNERSHIP INVESTMENTS
Our investment in Qualified Affordable Housing Partnerships that generate Low Income Housing Tax Credits (“LIHTC”) and deductible operating losses was $4.3 million at September 30, 2016. These investments are recorded in other assets with a corresponding funding obligation of $495 thousand recorded in
Other Liabilities
in our
Consolidated Balance Sheets
. We have invested in four separate LIHTC partnerships, which provide the Company with CRA credit. Additionally, the investments in LIHTC partnerships provide us with tax credits and with operating loss tax benefits over an approximately 18 year period. None of the original investments will be repaid. The tax credits and the operating loss tax benefits that are generated by each of the properties are expected to exceed the total value of the investments we made and provide returns on the investments of between 4% and 7%. The investments in LIHTC partnerships are being accounted for using the proportional amortization method, under which we amortize the initial cost of an investment in proportion to the amount of the tax credits and other tax benefits received, and recognize the net investment performance in the
Consolidated Statements of Operations
as a component of income tax expense.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at September 30, 2016 and December 31, 2015. In addition, the table reflects the tax credits and tax benefits, amortization of the investment and the net impact to our income tax provision for the nine months ended September 30, 2016 and the year ended December 31, 2015.
(Amounts in thousands)
|
|
Original
|
|
|
Current
|
|
|
Unfunded
|
|
|
Tax Credits
|
|
|
Amortization
|
|
|
Net
|
|
Qualified Affordable Housing Partnerships at
|
|
Investment
|
|
|
Recorded
|
|
|
Liability
|
|
|
and
|
|
|
of
|
|
|
Income Tax
|
|
September 30, 2016
|
|
Value
|
|
|
Investment
|
|
|
Obligation
|
|
|
Benefits
(1)
|
|
|
Investments
(2)
|
|
|
Benefit
|
|
Raymond James California Housing Opportunities Fund II
|
|
$
|
2,000
|
|
|
$
|
1,418
|
|
|
$
|
51
|
|
|
$
|
171
|
|
|
$
|
136
|
|
|
$
|
35
|
|
WNC Institutional Tax Credit Fund 38, L.P.
|
|
|
1,000
|
|
|
|
719
|
|
|
|
77
|
|
|
|
105
|
|
|
|
78
|
|
|
|
27
|
|
Merritt Community Capital Corporation Fund XV, L.P.
|
|
|
2,500
|
|
|
|
1,648
|
|
|
|
367
|
|
|
|
206
|
|
|
|
171
|
|
|
|
35
|
|
California Affordable Housing Fund
|
|
|
2,454
|
|
|
|
490
|
|
|
|
—
|
|
|
|
155
|
|
|
|
155
|
|
|
|
—
|
|
Total - investments in qualified affordable housing partnerships
|
|
$
|
7,954
|
|
|
$
|
4,275
|
|
|
$
|
495
|
|
|
$
|
637
|
|
|
$
|
540
|
|
|
$
|
97
|
|
(Amounts in thousands)
|
|
Original
|
|
|
Current
|
|
|
Unfunded
|
|
|
Tax Credits
|
|
|
Amortization
|
|
|
Net
|
|
Qualified Affordable Housing Partnerships at
|
|
Investment
|
|
|
Recorded
|
|
|
Liability
|
|
|
and
|
|
|
of
|
|
|
Income Tax
|
|
December 31, 2015
|
|
Value
|
|
|
Investment
|
|
|
Obligation
|
|
|
Benefits
(1)
|
|
|
Investments
(2)
|
|
|
Benefit
|
|
Raymond James California Housing Opportunities Fund II
|
|
$
|
2,000
|
|
|
$
|
1,553
|
|
|
$
|
406
|
|
|
$
|
226
|
|
|
$
|
184
|
|
|
$
|
42
|
|
WNC Institutional Tax Credit Fund 38, L.P.
|
|
|
1,000
|
|
|
|
797
|
|
|
|
166
|
|
|
|
126
|
|
|
|
93
|
|
|
|
33
|
|
Merritt Community Capital Corporation Fund XV, L.P.
|
|
|
2,500
|
|
|
|
1,820
|
|
|
|
610
|
|
|
|
278
|
|
|
|
230
|
|
|
|
48
|
|
California Affordable Housing Fund
|
|
|
2,454
|
|
|
|
645
|
|
|
|
—
|
|
|
|
207
|
|
|
|
207
|
|
|
|
—
|
|
Total - investments in qualified affordable housing partnerships
|
|
$
|
7,954
|
|
|
$
|
4,815
|
|
|
$
|
1,182
|
|
|
$
|
837
|
|
|
$
|
714
|
|
|
$
|
123
|
|
(1)
|
The amounts reflected in this column represent both the tax credits, and estimated tax benefits generated by operating losses.
|
(2)
|
This amount reduces the tax credits and benefits.
|
The following table presents our generated tax credits and tax benefits from investments in qualified affordable housing partnerships for the three and nine months ended September 30, 2016 and 2015.
|
|
For the Three Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
(Amounts in thousands)
|
|
Generated
|
|
|
Tax Benefits From
|
|
|
Generated
|
|
|
Tax Benefits from
|
|
Qualified Affordable Housing Partnerships
|
|
Tax Credits
|
|
|
Taxable Losses
|
|
|
Tax Credits
|
|
|
Taxable Losses
|
|
Raymond James California Housing Opportunities Fund II
|
|
$
|
45
|
|
|
$
|
12
|
|
|
$
|
43
|
|
|
$
|
13
|
|
WNC Institutional Tax Credit Fund 38, L.P.
|
|
|
28
|
|
|
|
7
|
|
|
|
25
|
|
|
|
7
|
|
Merritt Community Capital Corporation Fund XV, L.P.
|
|
|
55
|
|
|
|
14
|
|
|
|
54
|
|
|
|
15
|
|
California Affordable Housing Fund
|
|
|
40
|
|
|
|
12
|
|
|
|
40
|
|
|
|
12
|
|
Total
|
|
$
|
168
|
|
|
$
|
45
|
|
|
$
|
162
|
|
|
$
|
47
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
(Amounts in thousands)
|
|
Generated
|
|
|
Tax Benefits From
|
|
|
Generated
|
|
|
Tax Benefits from
|
|
Qualified Affordable Housing Partnerships
|
|
Tax Credits
|
|
|
Taxable Losses
|
|
|
Tax Credits
|
|
|
Taxable Losses
|
|
Raymond James California Housing Opportunities Fund II
|
|
$
|
134
|
|
|
$
|
37
|
|
|
$
|
130
|
|
|
$
|
39
|
|
WNC Institutional Tax Credit Fund 38, L.P.
|
|
|
84
|
|
|
|
21
|
|
|
|
74
|
|
|
|
21
|
|
Merritt Community Capital Corporation Fund XV, L.P.
|
|
|
164
|
|
|
|
42
|
|
|
|
163
|
|
|
|
45
|
|
California Affordable Housing Fund
|
|
|
119
|
|
|
|
36
|
|
|
|
119
|
|
|
|
37
|
|
Total
|
|
$
|
501
|
|
|
$
|
136
|
|
|
$
|
486
|
|
|
$
|
142
|
|
The tax credits and benefits were partially offset by the amortization of the principal investment balances of $180 thousand and $540 thousand for the three and nine months ended September 30, 2016 respectively, compared to $181 thousand and $542 thousand for the comparable periods of 2015.
The following table reflects the anticipated net income tax benefit at September 30, 2016 that is expected to be recognized over the remaining life of the investments.
(Amounts in thousands)
|
|
Raymond James
|
|
|
WNC Institutional
|
|
|
Merritt Community
|
|
|
California
|
|
|
Total Net
|
|
Qualified Affordable
|
|
California Housing
|
|
|
Tax Credit
|
|
|
Capital Corporation
|
|
|
Affordable Housing
|
|
|
Income Tax
|
|
Housing
Partnerships
|
|
Opportunities Fund II
|
|
|
Fund 38, L.P.
|
|
|
Fund XV, L.P
|
|
|
Fund
|
|
|
Benefit
|
|
Anticipated net income tax benefit less amortization of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
11
|
|
|
$
|
9
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
32
|
|
2017
|
|
|
46
|
|
|
|
35
|
|
|
|
45
|
|
|
|
1
|
|
|
|
127
|
|
2018
|
|
|
45
|
|
|
|
34
|
|
|
|
44
|
|
|
|
—
|
|
|
|
123
|
|
2019
|
|
|
45
|
|
|
|
30
|
|
|
|
44
|
|
|
|
—
|
|
|
|
119
|
|
2020 and thereafter
|
|
|
218
|
|
|
|
128
|
|
|
|
194
|
|
|
|
1
|
|
|
|
541
|
|
Total
|
|
$
|
365
|
|
|
$
|
236
|
|
|
$
|
339
|
|
|
$
|
2
|
|
|
$
|
942
|
|
NOTE 9. FEDERAL FUNDS PURCHASED AND LINES OF CREDIT
At September 30, 2016 and December 31, 2015, we had no outstanding federal funds purchased balances. At September 30, 2016 and December 31, 2015, we had outstanding borrowings with the Federal Home Loan Bank of San Francisco of $-0- and $75.0 million, respectively. At September 30, 2016, the Bank had available lines of credit with the Federal Home Loan Bank of San Francisco totaling $312.9 million and with the Federal Reserve Bank totaling $26.7 million. These lines of credit are subject to maintenance of required capital ratios and minimum collateral requirements, namely pledged loans and securities.
The Bank had nonbinding federal funds line of credit agreements with three financial institutions totaling $40.0 million at September 30, 2016. The lines of credit had interest rates ranging from 0.64% to 1.34% at September 30, 2016. Availability of the lines is subject to federal funds balances available for loan, continued borrower eligibility and are reviewed and renewed periodically throughout the year. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 10. TERM DEBT
Term debt at September 30, 2016 and December 31, 2015 consisted of the following.
(Amounts in thousands)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Federal Home Loan Bank of San Francisco borrowings
|
|
$
|
—
|
|
|
$
|
75,000
|
|
Senior debt
|
|
|
9,167
|
|
|
|
9,917
|
|
Unamortized debt issuance costs
|
|
|
(12
|
)
|
|
|
(15
|
)
|
Subordinated debt
|
|
|
10,000
|
|
|
|
10,000
|
|
Unamortized debt issuance costs
|
|
|
(181
|
)
|
|
|
(208
|
)
|
Capital lease
|
|
|
150
|
|
|
|
—
|
|
Net term debt
|
|
$
|
19,124
|
|
|
$
|
94,694
|
|
Future contractual maturities of term debt at September 30, 2016 are as follows.
(Amounts in thousands)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
Senior debt
|
|
$
|
167
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
6,000
|
|
|
$
|
—
|
|
|
$
|
9,167
|
|
Subordinated debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Capital lease
|
|
|
10
|
|
|
|
41
|
|
|
|
44
|
|
|
|
46
|
|
|
|
9
|
|
|
|
—
|
|
|
|
150
|
|
Total future maturities
|
|
$
|
177
|
|
|
$
|
1,041
|
|
|
$
|
1,044
|
|
|
$
|
1,046
|
|
|
$
|
6,009
|
|
|
$
|
10,000
|
|
|
$
|
19,317
|
|
Federal Home Loan Bank of San Francisco Borrowings
The maximum amount outstanding from the Federal Home Loan Bank of San Francisco under term advances at any month end during the nine months ended September 30, 2016 and the year ended December 31, 2015 was $80.0 million and $120.0 million, respectively. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2016 and the year ended December 31, 2015 was $24.0 million and $87.6 million, respectively. During the three months ended March 31, 2016, all outstanding Federal Home Loan Bank of San Francisco term advances were repaid. The weighted average interest rates on the borrowings outstanding at December 31, 2015, was 0.33%.
The Federal Home Loan Bank of San Francisco line of credit is secured by an investment in Federal Home Loan Bank of San Francisco stock, certain real estate mortgage loans which have been specifically pledged to the Federal Home Loan Bank of San Francisco pursuant to collateral requirements, and pledged securities held in the Bank’s investment securities portfolio. As of September 30, 2016, the Bank was required to hold an investment in Federal Home Loan Bank of San Francisco stock of $4.5 million. Furthermore, we have pledged $365.6 million of our commercial and real estate mortgage loans for the line of credit with the Federal Home Loan Bank of San Francisco. As of September 30, 2016 we held $18.6 million in securities with the Federal Home Loan Bank of San Francisco for pledging purposes. All of the securities held for pledging purposes with the Federal Home Loan Bank of San Francisco were unused as collateral as of September 30, 2016.
Senior Debt
In December of 2015, the Holding Company, entered into a senior debt loan agreement to borrow $10.0 million from another financial institution. The loan is payable in monthly installments of $83 thousand principal, plus accrued and unpaid interest, commencing on January 1, 2016 and continuing to and including December 10, 2020. The loan may be prepaid in whole or in part at any time without any prepayment penalty. The principal amount of the loan bears interest at a variable rate, resetting monthly that is equal to the sum of the current three month LIBOR plus 400 basis points. In December of 2015, the Holding Company incurred senior debt issuance costs of $15 thousand, which are being amortized over the life of the loan as additional interest expense. The loan is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce.
Subordinated Debt
In December of 2015, the Holding Company issued $10.0 million in aggregate principal amount of fixed to floating rate subordinated notes due in 2025. The subordinated debt initially bears interest at 6.88% per annum for a five-year term, payable semi-annually. Thereafter, interest on the subordinated debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points, payable quarterly until the maturity date. In December of 2015, the Holding Company incurred subordinated debt issuance costs of $210 thousand, which are being amortized over the initial five year term as additional interest expense.
The subordinated debt is subordinate and junior in right of payment to the prior payment in full of all existing and future claims of creditors and depositors of the Holding Company and its subsidiaries, whether now outstanding or subsequently created. The subordinated debt ranks equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the subordinated debt. The subordinated debt ranks senior to all future junior subordinated debt obligations, preferred stock and common stock of the Holding Company. The subordinated debt is recorded as term debt on the Holding Company’s Balance Sheet; however, for regulatory purposes, it is treated as Tier 2 capital by the Holding Company.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The subordinated debt will mature on December 10, 2025 but may be prepaid at the Holding Company’s option and with regulatory approval at any time on or after five years after the Closing Date or at any time upon certain events, such as a change in the regulatory capital treatment of the subordinated debt or the interest on the subordinated debt is no longer deductible by the Holding Company for United States federal income tax purposes.
Capital Lease
As part of the acquisition of branches from Bank of America, the Bank entered into a capital lease with Bank of America for one of the branch locations. The total obligation under the lease agreement was $172 thousand payable over a four-year period in monthly installments of principal and interest at a 6.0% annual interest rate. The fair value of the capital lease obligation was determined using a discounted cash flow based on the contractual interest rate of the lease agreement. The fair value of the leased asset is included in premises and equipment and the lease liability is included with term debt obligations. Amortization of the leased asset is included with the provision for depreciation and amortization as part of our premises and equipment expense in our
Consolidated Statements of Operations
.
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.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Lease Commitments –
We lease eight sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based on predetermined escalation schedules. Substantially all of the leases include the option to extend the lease term one or more times following expiration of the initial term. We have one capital lease as of September 30, 2016. See Note 10
Term Debt
in the
Notes to Consolidated Financial Statements
in this document for further detail on the Capital Lease.
The following table sets forth rent expense and rent income for the three and nine months ended September 30, 2016 and 2015.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(Amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Rent income
|
|
$
|
23
|
|
|
$
|
7
|
|
|
$
|
43
|
|
|
$
|
13
|
|
Rent expense
|
|
|
211
|
|
|
|
142
|
|
|
|
506
|
|
|
|
426
|
|
Net rent expense
|
|
$
|
188
|
|
|
$
|
135
|
|
|
$
|
463
|
|
|
$
|
413
|
|
The following table sets forth, as of September 30, 2016, the future minimum lease payments under non-cancelable operating leases.
(Amounts in thousands)
|
|
|
|
|
Amounts due in:
|
|
|
|
|
2016
|
|
$
|
177
|
|
2017
|
|
|
645
|
|
2018
|
|
|
530
|
|
2019
|
|
|
502
|
|
2020
|
|
|
515
|
|
Thereafter
|
|
|
1,487
|
|
Total
|
|
$
|
3,856
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Financial Instruments with Off-Balance Sheet Risk
Our consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of our business and involve elements of credit, liquidity, and interest rate risk.
The following table presents a summary of our commitments and contingent liabilities at September 30, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Commitments to extend credit
|
|
$
|
216,817
|
|
|
$
|
224,757
|
|
Standby letters of credit
|
|
|
1,967
|
|
|
|
2,477
|
|
Affordable housing grants
|
|
|
3,344
|
|
|
|
3,356
|
|
Total commitments
|
|
$
|
222,128
|
|
|
$
|
230,590
|
|
In the normal course of business, we are party to financial instruments with off-balance sheet credit risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve elements of credit and interest rate risk similar to the amounts recognized in the
Consolidated Balance Sheets
. The contract or notional amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments.
We hold cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. We were not required to perform on any financial guarantees for the nine months ended September 30, 2016, and the year ended December 31, 2015. At September 30, 2016 approximately $1.9 million of standby letters of credit expire within one year, and $99 thousand expire thereafter.
The reserve for unfunded commitments, which is included in
Other Liabilities
on the
Consolidated Balance Sheets
, was $695 thousand at September 30, 2016 and $695 thousand at December 31, 2015 The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic conditions. During the nine months ended September 30, 2016, we made no additional provision to the reserve for unfunded commitments. When necessary, the provision expense is recorded in other noninterest expense in the
Consolidated Statements of Operations.
Legal Proceedings
– We are involved in various pending and threatened legal actions arising in the ordinary course of business. We maintain reserves for losses from legal actions, which are both probable and estimable. In our opinion, the disposition of claims currently pending will not have a material adverse effect on our financial position or results of operations.
Concentrations of Credit Risk
– We grant real estate construction, commercial, and installment loans to customers throughout northern California. In our judgment, a concentration exists in real estate related loans, which represented approximately 76% and 74% of our gross loan portfolio at September 30, 2016 and December 31, 2015, respectively.
Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in our principal market areas in particular, could have an adverse impact on the repayment of these loans. Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.
We recognize the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to other depository institutions in aggregate or to any single correspondent, we have established general standards for selecting correspondent banks as well as internal limits for allowable exposure to other depository institutions in aggregate or to any single correspondent. In addition, we have an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.
NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents activity in accumulated other comprehensive income for the nine months ended September 30, 2016.
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Accumulated Other
|
|
|
|
Gains on
|
|
|
(Losses) Gains on
|
|
|
Comprehensive
|
|
(Amounts in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
(Loss) Income
|
|
Accumulated other comprehensive income (loss) as of December 31, 2015
|
|
$
|
1,142
|
|
|
$
|
(1,396
|
)
|
|
$
|
(254
|
)
|
Comprehensive income three months ended March 31, 2016
|
|
|
50
|
|
|
|
1,396
|
|
|
|
1,446
|
|
Comprehensive income three months ended June 30, 2016
|
|
|
519
|
|
|
|
—
|
|
|
|
519
|
|
Comprehensive loss three months ended September 30, 2016
|
|
|
(222
|
)
|
|
|
—
|
|
|
|
(222
|
)
|
Accumulated other comprehensive income as of September 30, 2016
|
|
$
|
1,489
|
|
|
$
|
—
|
|
|
$
|
1,489
|
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents activity in accumulated other comprehensive income for the nine months ended September 30, 2015.
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Accumulated Other
|
|
|
|
Gains on
|
|
|
Losses on
|
|
|
Comprehensive
|
|
(Amounts in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
(Loss) Income
|
|
Accumulated other comprehensive income (loss) as of December 31, 2014
|
|
$
|
1,810
|
|
|
$
|
(1,897
|
)
|
|
$
|
(87
|
)
|
Comprehensive income three months ended March 31, 2015
|
|
|
292
|
|
|
|
(21
|
)
|
|
|
271
|
|
Comprehensive (loss) three months ended June 30, 2015
|
|
|
(967
|
)
|
|
|
100
|
|
|
|
(867
|
)
|
Comprehensive income three months ended September 30, 2015
|
|
|
43
|
|
|
|
(28
|
)
|
|
|
15
|
|
Accumulated other comprehensive (loss) as of September 30, 2015
|
|
$
|
1,178
|
|
|
$
|
(1,846
|
)
|
|
$
|
(668
|
)
|
Accumulated other comprehensive income is reported net of related tax effects. Detailed information on the tax effects of the individual components of comprehensive income are presented in the
Consolidated Statements of Comprehensive Income
.
NOTE 13. DERIVATIVES
During March of 2016, we paid off the $75.0 million Federal Home Loan Bank of San Francisco borrowing (the “hedged instrument”) and terminated all of our interest rate swaps (active and forward starting). Prior to the time of termination, a $2.3 million unrealized pretax loss on swaps was carried in
Other Liabilities
in our
Consolidated Balance Sheets.
At termination, we immediately reclassified the loss to noninterest expense.
Prior to March of 2016, 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 the 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 cash flows of the related underlying exposures. Any ineffective portion of the changes in cash flow of the instruments is recognized immediately into earnings.
ASC 815-10,
Derivatives and Hedging
(“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the
Consolidated Balance Sheets
. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument, except any ineffective portion, 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 recorded in accumulated other comprehensive income are recognized immediately in earnings.
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.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
We Pay
Fixed
|
|
|
We Receive
Variable
(1)
|
|
|
Notional Amount
|
|
Effective Date
|
|
Maturity Date
|
Interest rate swap
|
|
|
2.64
|
%
|
|
|
0.33
|
%
|
|
$
|
75,000
|
|
August 3, 2015
|
|
August 1, 2016
|
Forward starting interest rate swap
|
|
|
3.22
|
%
|
|
Variable
|
|
|
$
|
75,000
|
|
August 1, 2016
|
|
August 1, 2017
|
(1)
Rate floats to three month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.
|
The following table individually lists the active and forward starting interest rate swap derivatives that were in a liability (loss) position, and the fair value of such derivatives at September 30, 2016, and December 31, 2015. There were no interest rate swap derivatives that were in an asset (gain) position at September 30, 2016, or at December 31, 2015.
|
|
|
|
Liability Derivatives
|
|
(Amounts in thousands)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Description
|
|
Balance Sheet Location
|
|
2016
|
|
|
2015
|
|
Interest rate swap
|
|
Cash flow hedge
|
|
$
|
—
|
|
|
$
|
869
|
|
Forward starting interest rate swap
|
|
Cash flow hedge
|
|
|
—
|
|
|
|
1,500
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
2,369
|
|
The following table summarizes the losses recorded during the three and nine months ended September 30, 2016 and 2015, and their locations within the
Consolidated Statements of Operations
.
(Amounts in thousands)
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Description
|
|
Consolidated Statement of
Operations Location
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest rate swap
(1)
|
|
Interest on term debt
|
|
$
|
—
|
|
|
$
|
410
|
|
|
$
|
396
|
|
|
$
|
997
|
|
Forward starting interest rate swap - terminated
(2)
|
|
Other noninterest expense
|
|
|
—
|
|
|
|
—
|
|
|
|
2,325
|
|
|
|
—
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
410
|
|
|
$
|
2,721
|
|
|
$
|
997
|
|
(1)
Losses represent tax effected amounts reclassified from accumulated other comprehensive income pertaining to net settlements recorded during the period on active interest rate swaps.
(2)
Losses represent tax effected amounts reclassified from accumulated other comprehensive income pertaining to the terminated active and forward starting interest rate swaps.
The following table summarizes the loss, net of tax, on all derivative instruments (active and forward starting) designated as cash flow hedges that were reclassified from accumulated other comprehensive income into earnings during the three and nine months ended September 30, 2016 and 2015.
(Amounts in thousands)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Description
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
241
|
|
|
$
|
1,601
|
|
|
$
|
591
|
|
The following table summarizes the derivatives that have a right of offset at December 31, 2015.
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset In The
Consolidated Balance Sheets
|
|
|
|
|
|
(Amounts in thousands)
|
|
Gross Amounts of
Recognized Assets /
(Liabilities)
|
|
|
Gross Amounts
Offset In
The Consolidated
Balance Sheets
|
|
|
Net Amounts of Assets / (Liabilities)
Included In The Consolidated
Balance Sheets
|
|
|
Collateral
Posted
|
|
|
Net Amount
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(2,369
|
)
|
|
$
|
—
|
|
|
$
|
(2,369
|
)
|
|
$
|
4,008
|
|
|
$
|
1,639
|
|
Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the contract. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties fail to perform under the terms of those contracts. Assuming no recoveries of underlying collateral, credit risk is measured by the market value of the derivative financial instrument.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The contracts with the derivative counterparties contain a provision where if we fail to maintain our status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Similarly, we could be required to settle our obligations under certain of our agreements if specific regulatory events occur, such as if we were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.
We were required to post collateral against the obligations of $2.4 million at December 31, 2015. Accordingly, we pledged three mortgage backed securities with an aggregate par value of $3.8 million and an aggregate fair value of $4.0 million. In March of 2016, upon the termination of all of our interest rate swaps the securities were returned to us.
NOTE 14. FAIR VALUES
The following table presents estimated fair values of our financial instruments as of September 30, 2016 and December 31, 2015, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets. The table indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value.
Non-financial assets and non-financial liabilities defined by the FASB ASC 820, Fair Value Measurement, such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the table. In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of FASB ASC 825, Financial Instruments, such as bank-owned life insurance policies.
(Amounts in thousands)
|
|
Carrying
|
|
|
Fair Value Measurements Using
|
|
September 30, 2016
|
|
Amounts
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
85,130
|
|
|
$
|
85,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
$
|
156,440
|
|
|
$
|
—
|
|
|
$
|
156,440
|
|
|
$
|
—
|
|
Securities held-to-maturity
|
|
$
|
31,771
|
|
|
$
|
—
|
|
|
$
|
33,388
|
|
|
$
|
—
|
|
Net loans
|
|
$
|
768,325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
775,640
|
|
Federal Home Loan Bank of San Francisco stock
|
|
$
|
4,465
|
|
|
$
|
4,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
975,493
|
|
|
$
|
—
|
|
|
$
|
976,983
|
|
|
$
|
—
|
|
Term debt
|
|
$
|
19,124
|
|
|
$
|
—
|
|
|
$
|
19,124
|
|
|
$
|
—
|
|
Junior subordinated debenture
|
|
$
|
10,310
|
|
|
$
|
—
|
|
|
$
|
8,751
|
|
|
$
|
—
|
|
(Amounts in thousands)
|
|
Carrying
|
|
|
Fair Value Measurements Using
|
|
December 31, 2015
|
|
Amounts
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,192
|
|
|
$
|
51,192
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities available-for-sale
|
|
$
|
159,030
|
|
|
$
|
—
|
|
|
$
|
159,030
|
|
|
$
|
—
|
|
Securities held-to-maturity
|
|
$
|
35,899
|
|
|
$
|
—
|
|
|
$
|
36,645
|
|
|
$
|
—
|
|
Net loans
|
|
$
|
706,329
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
711,528
|
|
Federal Home Loan Bank of San Francisco stock
|
|
$
|
4,465
|
|
|
$
|
4,465
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
803,735
|
|
|
$
|
—
|
|
|
$
|
804,490
|
|
|
$
|
—
|
|
Term debt
|
|
$
|
94,694
|
|
|
$
|
—
|
|
|
$
|
94,694
|
|
|
$
|
—
|
|
Junior subordinated debenture
|
|
$
|
10,310
|
|
|
$
|
—
|
|
|
$
|
5,402
|
|
|
$
|
—
|
|
Derivatives
|
|
$
|
2,369
|
|
|
$
|
—
|
|
|
$
|
2,369
|
|
|
$
|
—
|
|
Fair Value Hierarchy
Level 1
valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2
valuations utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 valuations include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Level 3
valuations are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
We maximize the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value:
Cash and cash equivalents
– The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a reasonable estimate of fair value because of the relatively short term between the origination of the instrument and its expected realization. Therefore, we believe the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.
Securities
– Investment securities fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices or matrix pricing, which is a mathematical technique, used widely by the industry that relies on the securities relationship to other benchmark securities, and are classified as Level 2.
Net Loans
– For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on specific risk adjusted spreads to the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The ALLL is considered to be a reasonable estimate of loan discount for credit quality concerns. Given that there are commercial loans with specific terms that are not readily available; we believe the fair value of loans is derived from Level 3 inputs.
Federal Home Loan Bank of San Francisco stock
– The carrying value of Federal Home Loan Bank of San Francisco stock approximates fair value as the shares can only be redeemed by the issuing institution at par. We measure the fair value of Federal Home Loan Bank of San Francisco stock using Level 1 inputs.
Deposits
– We measure fair value of maturing deposits using Level 2 inputs. The fair values of deposits were derived by discounting their expected future cash flows based on the Federal Home Loan Bank of San Francisco yield curves, and maturities. We obtained Federal Home Loan Bank of San Francisco yield curve rates as of the measurement date, and believe these inputs fall under Level 2 of the fair value hierarchy. Deposits with no defined maturities, the fair values are the amounts payable on demand at the respective reporting date.
Term Debt
– For variable rate term debt, the carrying value approximates fair value. The fair value of fixed rate term debt is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debt would be issued with similar credit ratings as ours and similar remaining maturities. We measure the fair value of term debt using Level 2 inputs.
Junior subordinated debenture
– The fair value of the subordinated debenture is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debentures would be issued with similar credit ratings as ours and similar remaining maturities. At September 30, 2016, future cash flows were discounted at 3.44%. We measure the fair value of subordinated debentures using Level 2 inputs.
Commitments
– Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower’s credit quality has declined, we record a reserve for these unfunded commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is not material. As such, no disclosures are made on the fair value of commitments.
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans and certain other assets including OREO or goodwill. These nonrecurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual assets.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents information about our assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of September 30, 2016 and December 31, 2015.
(Amounts in thousands)
|
|
Fair Value at September 30, 2016
|
|
Recurring Basis
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
59,952
|
|
|
|
—
|
|
|
|
59,952
|
|
|
|
—
|
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
54,046
|
|
|
|
—
|
|
|
|
54,046
|
|
|
|
—
|
|
Corporate securities
|
|
|
16,346
|
|
|
|
—
|
|
|
|
16,346
|
|
|
|
—
|
|
Commercial mortgage backed securities
|
|
|
16,254
|
|
|
|
—
|
|
|
|
16,254
|
|
|
|
—
|
|
Other investment securities (1)
|
|
|
9,842
|
|
|
|
—
|
|
|
|
9,842
|
|
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
156,440
|
|
|
$
|
—
|
|
|
$
|
156,440
|
|
|
$
|
—
|
|
(1)
Principally consists of residential mortgage backed securities issued by both by governmental and nongovernmental agencies, and SBA pool securities.
|
(Amounts in thousands)
|
|
Fair Value at December 31, 2015
|
|
Recurring Basis
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
3,943
|
|
|
$
|
—
|
|
|
$
|
3,943
|
|
|
$
|
—
|
|
Obligations of states and political subdivisions
|
|
|
61,104
|
|
|
|
—
|
|
|
|
61,104
|
|
|
|
—
|
|
Residential mortgage backed securities and collateralized mortgage obligations
|
|
|
32,137
|
|
|
|
—
|
|
|
|
32,137
|
|
|
|
—
|
|
Corporate securities
|
|
|
33,778
|
|
|
|
—
|
|
|
|
33,778
|
|
|
|
—
|
|
Commercial mortgage backed securities
|
|
|
12,769
|
|
|
|
—
|
|
|
|
12,769
|
|
|
|
—
|
|
Other investment securities (1)
|
|
|
15,299
|
|
|
|
—
|
|
|
|
15,299
|
|
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
159,030
|
|
|
$
|
—
|
|
|
$
|
159,030
|
|
|
$
|
—
|
|
Derivatives – interest rate swaps
|
|
$
|
2,369
|
|
|
$
|
—
|
|
|
$
|
2,369
|
|
|
$
|
—
|
|
Total liabilities measured at fair value
|
|
$
|
2,369
|
|
|
$
|
—
|
|
|
$
|
2,369
|
|
|
$
|
—
|
|
(1)
Principally consists of residential mortgage backed securities issued by both by governmental and nongovernmental agencies, and SBA pool securities.
|
|
Recurring Items
Debt Securities
– The available-for-sale securities amount in the recurring fair value table above represents securities that have been adjusted to their fair values. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things. We have determined that the source of these fair values falls within Level 2 of the fair value hierarchy.
Forward starting interest rate swaps
– The valuation of our interest rate swaps was obtained from third party pricing services. The fair values of the interest rate swaps were determined by using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis was based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the source of these derivatives’ fair values falls within Level 2 of the fair value hierarchy.
Transfers Between Fair Value Hierarchy Levels
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the nine months ended September 30, 2016 or the year ended December 31, 2015.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following tables present information about our assets and liabilities at September 30, 2016 and December 31, 2015 measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period.
The amounts disclosed below present the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair values as of the date reported upon.
(Amounts in thousands)
|
|
Fair Value at September 30, 2016
|
|
Nonrecurring basis
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Collateral dependent impaired loans
|
|
$
|
1,686
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,686
|
|
Other real estate owned
|
|
|
207
|
|
|
|
—
|
|
|
|
—
|
|
|
|
207
|
|
Total assets measured at fair value
|
|
$
|
1,893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,893
|
|
(Amounts in thousands)
|
|
Fair Value at December 31, 2015
|
|
Nonrecurring basis
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Collateral dependent impaired loans
|
|
$
|
707
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
707
|
|
Other real estate owned
|
|
|
743
|
|
|
|
—
|
|
|
|
—
|
|
|
|
743
|
|
Total assets measured at fair value
|
|
$
|
1,450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,450
|
|
The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2016 and 2015 for assets that are included on the balance sheet at period end.
(Amounts in thousands)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Fair value adjustments
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Collateral dependent impaired loans
|
|
$
|
15
|
|
|
$
|
199
|
|
|
$
|
1,068
|
|
|
$
|
744
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
|
|
108
|
|
Total
|
|
$
|
15
|
|
|
$
|
199
|
|
|
$
|
1,139
|
|
|
$
|
852
|
|
During the nine months ended September 30, 2016, collateral dependent impaired loans with a carrying amount of $2.8 million outstanding at period end were written down to their fair value of $1.7 million, resulting in a $1.1 million adjustment to the ALLL.
During the nine months ended September 30, 2016, two OREO properties with an aggregate carrying value of $278 thousand outstanding at period end were written down to their fair value of $207 thousand, resulting in a $71 thousand adjustment to the ALLL.
The loan amounts above represent impaired, collateral dependent loans that have been adjusted to fair value during the respective reporting period. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL.
The loss represents charge offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged off is zero. When the fair value of the collateral is based on a current appraised value, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan as nonrecurring Level 3.
The OREO amount above represents impaired real estate that has been adjusted to fair value during the respective reporting period. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The determination of fair value is based on recent appraisals of the foreclosed properties, which take into account recent sales prices adjusted for unobservable inputs, such as opinions provided by local real estate brokers and other real estate experts. OREO fair values are adjusted for estimated selling costs between 8% and 15%. We record OREO as a nonrecurring Level 3.
Limitations
– Fair value estimates are made at a specific point in time, based on relevant market information and other information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Fair value estimates are based on current on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities, and property, plant and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
NOTE 15. PURCHASE OF FINANCIAL ASSETS
On May 12, 2014, we agreed to purchase $40.0 million of unsecured consumer home improvement loans. The loans were purchased without recourse or servicing rights. During 2015, we agreed to purchase an additional $10.0 million increasing the maximum par value to $50.0 million. For the period from May 12, 2014 through September 30, 2016, we have paid aggregate cash totaling $90.9 million, and received aggregate cash repayments of $43.3 million for $47.6 million in net loans outstanding. We initially measured the acquired loan portfolio at a fair equal to the price paid to acquire the portfolio as the difference between the par value and cash purchase price represents the fair value adjustment.
NOTE 16. BRANCH ACQUISITION
On March 11, 2016, we completed the purchase of five Bank of America branches located in northern California. 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, primarily cash and premises. The Bank assumed $149.2 million in liabilities, primarily deposits.
The transaction provided a new source of low cost core deposits and allowed us to execute our plan to reconfigure our Balance Sheet. 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.
The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The Bank engaged third party specialists to assist in valuing certain assets, including the real estate and the core deposit intangible that resulted from the acquisition.
The contribution of the acquired operations of the five former Bank of America offices was immaterial. Therefore, disclosure of supplemental pro forma financial information, especially prior period comparison is deemed neither practical nor meaningful. Additionally, the acquired operation was not considered a “significant business combination” as defined by the Securities and Exchange Commission.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
During the second quarter of 2016, we received the final settlement statement from Bank of America which resulted in an immaterial adjustment to the total goodwill of $52 thousand. The following table provides an assessment of the consideration transferred, assets purchased, and the liabilities assumed.
|
|
|
|
|
|
Fair Value and
|
|
|
|
|
|
|
|
As Recorded by
|
|
|
Other Merger
|
|
|
|
|
|
|
|
Bank of
|
|
|
Related
|
|
|
As Recorded by
|
|
(Amounts in thousands)
|
|
America
|
|
|
Adjustments
|
|
|
the Company
|
|
Consideration paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
|
|
|
|
|
|
|
|
$
|
6,656
|
|
Total consideration
|
|
|
|
|
|
|
|
|
|
$
|
6,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
149,067
|
|
|
$
|
—
|
|
|
$
|
149,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
1,835
|
|
|
|
2,355
|
|
|
|
4,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
201
|
|
|
|
—
|
|
|
|
201
|
|
Core deposit intangibles
|
|
|
—
|
|
|
|
1,772
|
|
|
|
1,772
|
|
Total assets acquired
|
|
$
|
151,103
|
|
|
$
|
4,127
|
|
|
$
|
155,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
149,047
|
|
|
$
|
—
|
|
|
$
|
149,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
20
|
|
|
|
172
|
|
|
|
192
|
|
Total liabilities assumed
|
|
$
|
149,067
|
|
|
$
|
172
|
|
|
$
|
149,239
|
|
Net identifiable assets acquired over liabilities assumed
|
|
$
|
2,036
|
|
|
$
|
3,955
|
|
|
$
|
5,991
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
665
|
|
BANK
OF COMMERCE HOLDINGS & SUBSIDIARIES