Quarterly Report (10-q)

Date : 11/02/2018 @ 3:39PM
Source : Edgar (US Regulatory)
Stock : Bank of Commerce Holdings (BOCH)
Quote : 10.485  -0.005 (-0.05%) @ 7:31PM

Quarterly Report (10-q)

 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

 

Commission file number 0-25135

 

Bank of Commerce Holdings

 

   

California

94-2823865

(State or jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

   

555 Capitol Mall, Suite 1255

95814

(Address of principal executive offices)

(Zip Code)

   

 

Registrant’s telephone number, including area code: (800) 421-2575

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer ☐

 

 

Accelerated filer ☒

 

 

Non-accelerated filer ☐

 

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

Yes ☐ No ☒

 

Outstanding shares of Common Stock, no par value, as of October 18, 2018: 16,333,502

 

 

 
 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets (Unaudited)

September 30, 2018 and December 31, 2017

   

September 30,

   

December 31,

 

(Amounts in thousands, except share information)

 

2018

   

2017

 

Assets:

               

Cash and due from banks

  $ 21,316     $ 17,979  

Interest-bearing deposits in other banks

    69,920       48,991  

Total cash and cash equivalents

    91,236       66,970  
                 

Securities available-for-sale, at fair value

    239,633       267,954  
                 

Loans, net of deferred fees and costs

    929,237       881,545  

Allowance for loan and lease losses

    (12,392 )     (11,925 )

Net loans

    916,845       869,620  
                 

Premises and equipment, net

    13,495       14,748  

Other real estate owned

    136       35  

Life insurance

    22,282       21,898  

Deferred tax asset, net

    8,084       6,505  

Goodwill and core deposit intangible, net

    1,864       2,030  

Other assets

    21,894       19,661  

Total assets

  $ 1,315,469     $ 1,269,421  
                 

Liabilities and shareholders' equity:

               

Liabilities:

               

Demand - noninterest-bearing

  $ 361,516     $ 305,650  

Demand - interest-bearing

    510,553       496,990  

Savings

    111,388       110,837  

Certificates of deposit

    161,304       189,255  

Total deposits

    1,144,761       1,102,732  
                 

Term debt:

               

Other borrowings

    14,396       17,096  

Less unamortized debt issuance costs

    (103 )     (138 )

Net term debt

    14,293       16,958  
                 

Junior subordinated debentures

    10,310       10,310  

Other liabilities

    13,136       12,157  

Total liabilities

    1,182,500       1,142,157  
                 

Commitments and contingencies (Note 7)

               

Shareholders' equity:

               

Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 16,329,902 as of September 30, 2018 and 16,271,563 as of December 31, 2017

    52,191       51,830  

Retained earnings

    84,857       75,700  

Accumulated other comprehensive loss, net of tax

    (4,079 )     (266 )

Total shareholders' equity

    132,969       127,264  

Total liabilities and shareholders' equity

  $ 1,315,469     $ 1,269,421  

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

For the three and nine months ended September 30, 2018 and 2017

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 

(Amounts in thousands, except per share information)

 

2018

   

2017

   

2018

   

2017

 

Interest income:

                               

Interest and fees on loans

  $ 11,568     $ 9,887     $ 33,461     $ 29,029  

Interest on taxable securities

    1,209       1,049       3,696       2,710  

Interest on tax-exempt securities

    400       551       1,276       1,615  

Interest on interest-bearing deposits in other banks

    254       278       518       548  

Total interest income

    13,431       11,765       38,951       33,902  

Interest expense:

                               

Interest on demand deposits

    276       196       712       528  

Interest on savings deposits

    73       52       196       146  

Interest on certificates of deposit

    465       567       1,448       1,641  

Interest on Federal Home Loan Bank of San Francisco borrowings

    121             435       3  

Interest on other borrowings

    265       292       825       880  

Interest on junior subordinated debentures

    104       74       283       211  

Total interest expense

    1,304       1,181       3,899       3,409  

Net interest income

    12,127       10,584       35,052       30,493  

Provision for loan and lease losses

                      500  

Net interest income after provision for loan and lease losses

    12,127       10,584       35,052       29,993  

Noninterest income:

                               

Service charges on deposit accounts

    170       132       521       401  

ATM and point of sale fees

    282       273       848       827  

Fees on payroll and benefit processing

    159       147       474       485  

Life insurance

    128       134       384       915  

Gain on sale of investment securities, net

    1       38       41       139  

Federal Home Loan Bank of San Francisco dividends

    104       80       279       237  

(Loss) gain on sale of OREO

    (7 )     81       9       22  

Other income

    106       191       331       516  

Total noninterest income

    943       1,076       2,887       3,542  

Noninterest expense:

                               

Salaries and related benefits

    4,529       4,291       13,897       13,296  

Premises and equipment

    1,017       1,067       3,104       3,169  

Federal Deposit Insurance Corporation insurance premium

    94       78       283       230  

Data processing fees

    518       437       1,421       1,294  

Professional service fees

    336       276       995       1,119  

Telecommunications

    55       219       449       653  

Other expenses

    1,085       989       3,189       3,312  

Total noninterest expense

    7,634       7,357       23,338       23,073  

Income before provision for income taxes

    5,436       4,303       14,601       10,462  

Provision for income taxes

    1,404       1,427       3,710       3,125  

Net income

  $ 4,032     $ 2,876     $ 10,891     $ 7,337  
                                 

Earnings per share - basic

  $ 0.25     $ 0.18     $ 0.67     $ 0.49  

Weighted average shares - basic

    16,252       16,191       16,242       14,884  

Earnings per share - diluted

  $ 0.25     $ 0.18     $ 0.67     $ 0.49  

Weighted average shares - diluted

    16,342       16,288       16,327       14,984  

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and nine months ended September 30, 2018 and 2017

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 

(Amounts in thousands)

 

2018

   

2017

   

2018

   

2017

 

Net income

  $ 4,032     $ 2,876     $ 10,891     $ 7,337  
                                 

Available-for-sale securities:

                               

Unrealized (losses) gains arising during the period

    (906 )     (13 )     (5,297 )     2,114  

Income taxes

    268       5       1,566       (870 )

Change in unrealized (losses) gains, net of tax

    (638 )     (8 )     (3,731 )     1,244  
                                 

Reclassification adjustment for realized gains included in net income

    (1 )     (38 )     (41 )     (139 )

Income taxes

          14       11       56  

Realized gains, net of tax

    (1 )     (24 )     (30 )     (83 )
                                 

Net (decrease) increase in unrealized gains on available-for-sale securities

    (639 )     (32 )     (3,761 )     1,161  
                                 

Held-to-maturity securities:

                               

Amortization of held-to-maturity fair value adjustment

          (16 )           (52 )

Income taxes

          7             21  

Net change in fair value adjustment on held-to-maturity securities

          (9 )           (31 )
                                 

Other comprehensive (loss) income

    (639 )     (41 )     (3,761 )     1,130  

Comprehensive income – Bank of Commerce Holdings

  $ 3,393     $ 2,835     $ 7,130     $ 8,467  

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the twelve months ended December 31, 2017 and nine months ended September 30, 2018 (Unaudited)

 

 

                           

Accumulated

         
                           

Other

         
           

Common

           

Comprehensive

         
   

Common

   

Stock

   

Retained

   

(Loss) Income

         

(Amounts in thousands except per share information)

 

Shares

   

Amount

   

Earnings

   

Net of Tax

   

Total

 

Balance at January 1, 2017

    13,373     $ 24,547     $ 70,218     $ (659 )   $ 94,106  

Net income

                7,344             7,344  

Other comprehensive income, net of tax

                      393       393  

Comprehensive income

                            7,737  

Dividend on common stock ($0.12 per share)

                (1,862 )           (1,862 )

Stock issued pursuant to public offering, net of underwriting discounts and expenses of $1.7 million

    2,738       26,778                   26,778  

Stock compensation grants

    4       41                   41  

Common stock issued under employee plans

    30                          

Stock options exercised

    52       245                   245  

Compensation expense associated with stock options

          23                   23  

Compensation expense associated with restricted stock, net of cash paid when directly withholding shares for tax withholding purposes

          196                   196  

Balance at December 31, 2017 (1)

    16,197     $ 51,830     $ 75,700     $ (266 )   $ 127,264  

(1) Excludes 74 unvested restricted shares

                                 

 

 

                           

Accumulated

         
                           

Other

         
           

Common

           

Comprehensive

         
   

Common

   

Stock

   

Retained

   

(Loss)

         

(Amounts in thousands except per share information)

 

Shares

   

Amount

   

Earnings

   

Net of Tax

   

Total

 

Balance at January 1, 2018

    16,197     $ 51,830     $ 75,700     $ (266 )   $ 127,264  

Net income

                10,891             10,891  

Reclassification of accumulated other comprehensive income due to tax rate change

                52       (52 )      

Other comprehensive loss, net of tax

                      (3,761 )     (3,761 )

Comprehensive income

                            7,130  

Dividend on common stock ($0.11 per share)

                (1,786 )           (1,786 )

Stock compensation grants

    5       45                   45  

Common stock issued under employee plans

    23                          

Stock options exercised

    34       197                   197  

Compensation expense associated with stock options

          8                   8  

Compensation expense associated with restricted stock, net of cash paid when directly withholding shares for tax withholding purposes

          111                   111  

Balance at September 30, 2018 (1)

    16,259     $ 52,191     $ 84,857     $ (4,079 )   $ 132,969  

(1) Excludes 71 unvested restricted shares

 

 

See accompanying notes to consolidated financial statements.

 

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2018 and September 30, 2017

   

For the Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2018

   

2017

 

Cash flows from operating activities:

               

Net income

  $ 10,891     $ 7,337  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for loan and lease losses

          500  

Provision for depreciation and amortization

    1,361       1,555  

Amortization of core deposit intangible

    166       166  

Amortization of debt issuance costs

    35       34  

Compensation expense associated with stock options

    8       18  

Compensation expense associated with restricted stock

    214       124  

Tax benefits from vesting of restricted stock

    (43 )     (47 )

Net gain on sale or call of securities

    (41 )     (139 )

Amortization of investment premiums and accretion of discounts, net

    1,448       1,502  

Amortization of held-to-maturity fair value adjustments

          (52 )

(Gain) loss on disposal of fixed assets

    (5 )     1  

Write-down of other real estate owned

          52  

Increase in cash surrender value of life insurance

    (384 )     (413 )

Life insurance death benefit

          (502 )

Increase in deferred compensation and salary continuation plans

          38  

Increase in deferred loan fees and costs

    (47 )     (446 )

Decrease in other assets

    658       865  

Increase (decrease) in other liabilities

    937       (330 )

Net cash provided by operating activities

    15,198       10,263  
                 

Cash flows from investing activities:

               

Proceeds from maturities and payments of available-for-sale securities

    23,932       16,560  

Proceeds from sale of available-for-sale securities

    27,567       47,892  

Purchases of available-for-sale securities

    (31,293 )     (121,616 )

Proceeds from maturities and payments of held-to-maturity securities

          679  

Investment in qualified affordable housing partnerships

    (32 )     (18 )

Net purchase of Federal Home Loan Bank of San Francisco stock

    (1,355 )     (72 )

Loan originations, net of principal repayments

    (54,014 )     (27,189 )

Net repayment on loan pools

    6,696       5,228  

Purchase of premises and equipment

    (281 )     (369 )

Proceeds from the sale of other real estate owned

    48       1,067  

Proceeds from life insurance policy

          2,249  

Net cash used in investing activities

    (28,732 )     (75,589 )

 

See accompanying notes to consolidated financial statements.

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

 

   

For the Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2018

   

2017

 

Cash flows from financing activities:

               

Net increase in demand deposits and savings accounts

  $ 69,980     $ 72,966  

Net decrease in certificates of deposit

    (27,951 )     (14,847 )

Advances on term debt

    230,160       30,259  

Repayment of term debt

    (232,860 )     (31,476 )

Proceeds from stock options exercised

    197       245  

Net proceeds from issuance of common stock

          26,778  

Cash paid when directly withholding shares for tax-withholding purposes

    (103 )     (85 )

Cash dividends paid on common stock

    (1,623 )     (1,290 )

Net cash provided by financing activities

    37,800       82,550  
                 

Net increase in cash and cash equivalents

    24,266       17,224  

Cash and cash equivalents at beginning of year

    66,970       68,407  

Cash and cash equivalents at end of period

  $ 91,236     $ 85,631  

 

See accompanying notes to consolidated financial statements.

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the nine months ended September 30, 2018 and September 30, 2017

 

   

For the Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2018

   

2017

 

Supplemental disclosures of cash flow activity:

               

Cash paid during the period for:

               

Income taxes

  $ 2,725     $ 2,521  

Interest

  $ 3,735     $ 3,233  

Supplemental disclosures of non cash investing activities:

               

Transfer of loans to other real estate owned

  $ 140     $ 946  
                 

Unrealized (loss) gain on investment securities available-for-sale

  $ (5,338 )   $ 1,975  

Changes in net deferred tax asset related to changes in unrealized loss (gain) on investment securities available-for-sale

    1,577       (814 )

Changes in accumulated other comprehensive income due to changes in unrealized (loss) gain on investment securities available-for-sale

  $ (3,761 )   $ 1,161  
                 

Accretion of held-to-maturity investment securities from other comprehensive income to interest income

  $     $ (52 )

Changes in deferred tax related to accretion of held-to-maturity investment securities

          21  

Changes in accumulated other comprehensive income due to accretion of held-to-maturity investment securities

  $     $ (31 )
                 

Reclassification of accumulated other comprehensive income due to tax rate change

  $ 52     $  
                 

Supplemental disclosures of non cash financing activities:

               

Stock issued under employee plans

  $ 45     $ 41  

Cash dividend declared on common shares and payable after period-end

  $ 650     $ 486  

 

See accompanying notes to consolidated financial statements .

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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 Sacramento, 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) and for Bank of Commerce Mortgage (inactive). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 are derived from the unaudited interim consolidated financial statements and audited consolidated financial statements and 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. 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 valuation of investments and impairments of securities, the determination of the allowance for loan and lease losses (“ALLL”), income taxes, 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 2017 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2018 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, 2018 and December 31, 2017, 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 .

 

Application of new accounting guidance

ASU No. 2014-09

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 was initially effective for the Company's reporting period beginning on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date , which defers the effective date by one year. For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption. The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations , ASU 2016-10, Identifying Performance Obligations and Licensing , ASU 2016-12, Narrow-Scope Improvements and Practical Expedients , and ASU 2016-20, Technical Corrections and Improvements to Topic 606 . We adopted the standard on January 1, 2018, using the modified retrospective method, which resulted in no adjustment or significant impact to the timing of revenue recognition.

 

Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy the performance obligations. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

 

Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. For revenue sources that are within the scope of Topic 606, we fully satisfy our performance obligations and recognize revenue in the period it is earned as services are rendered. Transaction prices are typically fixed; charged on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with our customers.

 

All of our revenue from contracts with customers in the scope of ASC 606 is recognized in Non-Interest Income. Sources of revenue from contracts with customers that are in the scope of ASC 606 include the following:

 

 

Service Charges on Deposit accounts - We earn monthly account fees and transaction-based fees from our customers for services rendered on deposit accounts. Fees charged to deposit accounts on a monthly basis are recognized as the performance obligation is satisfied at the end of the service period.

 

Transaction-based fees are based on specific services provided to our customer. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

 

ATM and Point of Sale fees – We earn fees when debit cards we issued are used in transactions through card processing networks. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ account. The fees are recognized monthly.

 

Fees on Payroll and benefit processing – We earn fees by processing payroll and benefit payments for our business customers. The performance obligation is satisfied and the fees are recognized as each transaction is processed charged to the customer account.

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

ASU No. 2016-01

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. We adopted the standard on January 1, 2018. Adoption of the standard resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 8 – Fair Values for further information regarding the valuation of these loans.

 

 

ASU No. 2018-02

 

In February 2018, FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) . The amendments in this update allow a reclassification from retained earnings to accumulated other comprehensive income for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period. The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We elected the early adoption of ASU 2018-02 as of January 1, 2018 and reclassified $52 thousand from accumulated other comprehensive income to retained earnings.

 

 

 

NOTE 2. COMMON STOCK OUTSTANDING AND EARNINGS PER SHARE

 

On May 10, 2017, the Company announced the closing of its underwritten public offering, at the public offering price of $10.50 per share. The total number of shares of common stock sold by the Company was 2,738,096. Net proceeds raised in the offering, after underwriting discounts and expenses of the offering, were $26.8 million.

 

Basic earnings per share excludes dilution and is computed by dividing net income 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, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

   

For the Three Months Ended

   

For the Nine Months Ended

 

(Amounts in thousands, except per share information)

 

September 30,

   

September 30,

 

Earnings Per Share

 

2018

   

2017

   

2018

   

2017

 

Numerators:

                               

Net income

  $ 4,032     $ 2,876     $ 10,891     $ 7,337  

Denominators:

                               

Weighted average number of common shares outstanding - basic (1)

    16,252       16,191       16,242       14,884  

Effect of potentially dilutive common shares (2)

    90       97       85       100  

Weighted average number of common shares outstanding - diluted

    16,342       16,288       16,327       14,984  

Earnings per common share:

                               

Basic

  $ 0.25     $ 0.18     $ 0.67     $ 0.49  

Diluted

  $ 0.25     $ 0.18     $ 0.67     $ 0.49  

Anti-dilutive options not included in diluted earnings per share calculation

          70             74  

Anti-dilutive restricted shares not included in diluted earnings per share calculation

          42             43  

(1) Excludes unvested restricted shares because they do not have dividend or voting rights

(2) Represents the effects of the assumed exercise of stock options and vesting of non-participating restricted shares.

 

 

 

NOTE 3. SECURITIES

 

The following tables present the amortized costs, unrealized gains, unrealized losses and estimated fair values of our investment securities as of September 30, 2018, and December 31, 2017.

 

   

As of September 30, 2018

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 

(Amounts in thousands)

 

Cost

   

Gain

   

Loss

   

Fair Value

 

Available-for-sale securities:

                               

U.S. government & agencies

  $ 36,057     $ 111     $ (512 )   $ 35,656  

Obligations of state and political subdivisions

    51,468       1,003       (909 )     51,562  

Residential mortgage-backed securities and collateralized mortgage obligations

    128,703       6       (4,600 )     124,109  

Corporate securities

    4,042       5       (73 )     3,974  

Commercial mortgage-backed securities

    24,990       9       (832 )     24,167  

Other asset-backed securities

    164       1             165  

Total

  $ 245,424     $ 1,135     $ (6,926 )   $ 239,633  

 

 

   

As of December 31, 2017

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 

(Amounts in thousands)

 

Cost

   

Gain

   

Loss

   

Fair Value

 

Available-for-sale securities:

                               

U.S. government & agencies

  $ 40,319     $ 196     $ (146 )   $ 40,369  

Obligations of state and political subdivisions

    77,412       1,910       (478 )     78,844  

Residential mortgage-backed securities and collateralized mortgage obligations

    116,062       69       (1,539 )     114,592  

Corporate securities

    5,079       18       (105 )     4,992  

Commercial mortgage-backed securities

    26,995       24       (378 )     26,641  

Other asset-backed securities

    2,540       4       (28 )     2,516  

Total

  $ 268,407     $ 2,221     $ (2,674 )   $ 267,954  

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

The following table presents the expected maturities of investment securities at September 30, 2018.

 

 

   

Available-For-Sale

 

(Amounts in thousands)

 

Amortized Cost

   

Fair Value

 

Amounts maturing in:

               

One year or less

  $ 1,550     $ 1,554  

After one year through five years

    79,378       77,506  

After five years through ten years

    91,285       88,761  

After ten years

    73,211       71,812  

Total

  $ 245,424     $ 239,633  

 

 

The amortized cost and fair value of residential mortgage-backed securities, 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.

 

At September 30, 2018 and December 31, 2017 securities with a fair value of $70.1 million and $62.6 million, respectively, were pledged as collateral to secure public fund deposits, Federal Home Loan Bank of San Francisco borrowings and for other purposes as required by law.

 

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, 2018 and 2017.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(Amounts in thousands)

 

2018

   

2017

   

2018

   

2017

 

Proceeds from sales of securities

  $ 7,062     $ 20,640     $ 27,567     $ 47,892  
                                 

Gross realized gains on sales of securities:

                               

Obligations of state and political subdivisions

  $ 104     $ 31     $ 260     $ 112  

Residential mortgage-backed securities and collateralized mortgage obligations

          16             53  

Corporate securities

          20             30  

Commercial mortgage-backed securities

          3             3  

Total gross realized gains on sales of securities

    104       70       260       198  
                                 

Gross realized losses on sales of securities:

                               

U.S. government & agencies

    (43 )           (43 )      

Obligations of state and political subdivisions

    (1 )     (10 )     (72 )     (10 )

Residential mortgage-backed securities and collateralized mortgage obligations

    (40 )     (22 )     (40 )     (46 )

Corporate securities

                      (3 )

Commercial mortgage-backed securities

    (19 )           (19 )      

Other asset-backed securities

                (45 )      

Total gross realized losses on sales of securities

    (103 )     (32 )     (219 )     (59 )

Gain on investment securities, net

  $ 1     $ 38     $ 41     $ 139  

 

 

Investment securities that were in an unrealized loss position as of September 30, 2018 and December 31, 2017 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.

 

   

As of September 30, 2018

 
   

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:

                                               

U.S. government & agencies

  $ 16,501     $ (225 )   $ 9,060     $ (287 )   $ 25,561     $ (512 )

Obligations of states and political subdivisions

    10,394       (257 )     13,126       (652 )     23,520       (909 )

Residential mortgage-backed securities and collateralized mortgage obligations

    43,278       (1,250 )     72,572       (3,350 )     115,850       (4,600 )

Corporate securities

                2,953       (73 )     2,953       (73 )

Commercial mortgage-backed securities

    5,215       (159 )     17,313       (673 )     22,528       (832 )

Total temporarily impaired securities

  $ 75,388     $ (1,891 )   $ 115,024     $ (5,035 )   $ 190,412     $ (6,926 )

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

   

As of December 31, 2017

 
   

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:

                                               

U.S. government & agencies

  $ 18,140     $ (102 )   $ 2,131     $ (44 )   $ 20,271     $ (146 )

Obligations of states and political subdivisions

    15,030       (255 )     8,368       (223 )     23,398       (478 )

Residential mortgage-backed securities and collateralized mortgage obligations

    75,323       (827 )     31,036       (712 )     106,359       (1,539 )

Corporate securities

                2,934       (105 )     2,934       (105 )

Commercial mortgage-backed securities

    11,162       (151 )     10,026       (227 )     21,188       (378 )

Other asset-backed securities

    2,167       (28 )                 2,167       (28 )

Total temporarily impaired securities

  $ 121,822     $ (1,363 )   $ 54,495     $ (1,311 )   $ 176,317     $ (2,674 )

 

 

At September 30, 2018 and December 31, 2017, the number of securities that were in an unrealized loss position was 174 and 138, respectively. 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 the underlying collateral. Our Investment Policy requires that at the time of purchase, securities are rated A3/A- or higher by Moody’s, S&P and Fitch rating agencies. Management monitors the published credit ratings of our investment portfolio for material rating or outlook changes. For all private-label securities collateralized by mortgages, management also monitors the credit characteristics of the underlying mortgages to identify potential credit losses, if any, in the portfolio. Because the decline in fair value is not due to credit quality concerns, and because we have no plans to sell the securities before the recovery of their amortized cost, and we believe the Bank has the ability to hold the securities to maturity these investments are not considered other-than-temporarily impaired.

 

The following table presents the characteristics of our securities that are in unrealized loss positions at September 30, 2018 and December 31, 2017.

 

 

 

 

     
     
   

Characteristics of securities in unrealized loss positions at

Available-for-sale securities:

 

September 30, 2018 and December 31, 2017

U.S. government & agencies

 

Direct obligations of the U.S. Government or obligations guaranteed by U.S. Government agencies.

Obligations of states and political subdivisions

 

General obligation issuances or revenue securities secured by revenues from specific sources issued by municipalities and political subdivisions located within the U.S.

Residential mortgage-backed securities and collateralized mortgage obligations

 

Obligations of U.S. government sponsored entities or non-governmental entities collateralized by high quality mortgages on residential properties. Issuances by non-governmental entities usually include good credit enhancements. Of the residential mortgage-backed securities and collateralized mortgage obligations that we owned at September 30, 2018 and December 31, 2017, 61% and 56% were issued or guaranteed by U.S. government sponsored entities, respectively.

Corporate securities

 

Debt obligations generally issued or guaranteed by large U.S. corporate institutions.

Commercial mortgage-backed securities

 

Obligations of U.S. government sponsored entities or non-governmental entities collateralized by high quality mortgages on commercial properties. Issuances by non-governmental entities usually include good credit enhancements. Of the commercial mortgage-backed securities that we owned at September 30, 2018 and December 31, 2017, 90% were issued or guaranteed by U.S. government sponsored entities.

Other asset-backed securities

 

Obligations secured by high quality loans with good credit enhancements issued by non-governmental issuers.

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

NOTE 4. LOANS

 

Outstanding loan balances consisted of the following at September 30, 2018, and December 31, 2017.

 

(Amounts in thousands)

 

September 30,

   

December 31,

 

Loan Portfolio

 

2018

   

2017

 

Commercial

  $ 132,091     $ 142,405  

Commercial real estate:

               

Real estate - construction and land development

    20,496       15,902  

Real estate - commercial non-owner occupied

    431,246       377,668  

Real estate - commercial owner occupied

    195,608       192,023  

Residential real estate:

               

Real estate - residential - Individual Tax Identification Number (“ITIN”)

    38,353       41,188  

Real estate - residential - 1-4 family mortgage

    33,473       30,377  

Real estate - residential - equity lines

    28,713       30,347  

Consumer and other

    47,500       49,925  

Gross loans

    927,480       879,835  

Deferred fees and costs

    1,757       1,710  

Loans, net of deferred fees and costs

    929,237       881,545  

Allowance for loan and lease losses

    (12,392 )     (11,925 )

Net loans

  $ 916,845     $ 869,620  

 

 

Certain loans are pledged as collateral with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank. Pledged loans totaled $441.4 million and $420.0 million at September 30, 2018 and December 31, 2017, respectively.

 

When we purchase loans, they are typically purchased at a discount to enhance yield and compensate for credit risk. Gross loan balances in the table above include net purchase discounts of $2.6 million and $2.8 million as of September 30, 2018, and December 31, 2017.

 

Past Due Loans

 

An age analysis of past due loans (gross), segregated by class, as of September 30, 2018, and December 31, 2017, 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, 2018

 

Due

   

Due

   

Due

   

Due

   

Current

   

Total

   

Accruing

 

Commercial

  $     $     $     $     $ 132,091     $ 132,091     $  

Commercial real estate:

                                                       

Real estate - construction and land development

                            20,496       20,496        

Real estate - commercial non-owner occupied

                            431,246       431,246        

Real estate - commercial owner occupied

                            195,608       195,608        

Residential real estate:

                                                       

Real estate - residential - ITIN

    412       76       260       748       37,605       38,353        

Real estate - residential - 1-4 family mortgage

          179             179       33,294       33,473        

Real estate - residential - equity lines

    120                   120       28,593       28,713        

Consumer and other

    197       37             234       47,266       47,500        

Total

  $ 729     $ 292     $ 260     $ 1,281     $ 926,199     $ 927,480     $  

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

                   

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, 2017

 

Due

   

Due

   

Due

   

Due

   

Current

   

Total

   

Accruing

 

Commercial

  $     $     $     $     $ 142,405     $ 142,405     $  

Commercial real estate:

                                                       

Real estate - construction and land development

                            15,902       15,902        

Real estate - commercial non-owner occupied

                            377,668       377,668        

Real estate - commercial owner occupied

    142                   142       191,881       192,023        

Residential real estate:

                                                       

Real estate - residential - ITIN

    555       122       462       1,139       40,049       41,188        

Real estate - residential - 1-4 family mortgage

    290       173             463       29,914       30,377        

Real estate - residential - equity lines

    141                   141       30,206       30,347        

Consumer and other

    281       123             404       49,521       49,925        

Total

  $ 1,409     $ 418     $ 462     $ 2,289     $ 877,546     $ 879,835     $  

 

 

Nonaccrual Loans

 

Nonaccrual loans, segregated by loan class, were as follows as of September 30, 2018 and December 31, 2017.

 

 

(Amounts in thousands)

 

September 30,

   

December 31,

 

Nonaccrual Loans

 

2018

   

2017

 

Commercial

  $ 899     $ 1,603  

Commercial real estate:

               

Real estate - commercial owner occupied

          600  

Residential real estate:

               

Real estate - residential - ITIN

    2,571       2,909  

Real estate - residential - 1-4 family mortgage

    179       606  

Real estate - residential - equity lines

    44       45  

Consumer and other

    24       36  

Total

  $ 3,717     $ 5,799  

 

 

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately $40 thousand and $75 thousand for the three months ended September 30, 2018 and 2017, respectively. We would have recognized additional interest income, net of tax, of approximately $121 thousand and $222 thousand for the nine months ended September 30, 2018 and 2017, respectively.

 

 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Impaired Loans

 

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. The following tables summarize impaired loans by loan class as of September 30, 2018, and December 31, 2017.

 

   

As of September 30, 2018

 
           

Unpaid

         

(Amounts in thousands)

 

Recorded

   

Principal

   

Related

 

Impaired Loans

 

Investment

   

Balance

   

Allowance

 

With no related allowance recorded:

                       

Commercial

  $ 59     $ 76     $  

Residential real estate:

                       

Real estate - residential - ITIN

    6,451       7,973        

Real estate - residential - 1-4 family mortgage

    179       220        

Real estate - residential - equity lines

    44       48        

Total with no related allowance recorded

  $ 6,733     $ 8,317     $  
                         

With an allowance recorded:

                       

Commercial

  $ 2,131     $ 2,236     $ 635  

Commercial real estate:

                       

Real estate - commercial non-owner occupied

    797       797       208  

Residential real estate:

                       

Real estate - residential - ITIN

    655       692       83  

Real estate - residential - equity lines

    367       367       184  

Consumer and other

    24       24       8  

Total with an allowance recorded

  $ 3,974     $ 4,116     $ 1,118  
                         

By loan class:

                       

Commercial

  $ 2,190     $ 2,312     $ 635  

Commercial real estate

    797       797       208  

Residential real estate

    7,696       9,300       267  

Consumer and other

    24