MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Risk Factors
This report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (“Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current beliefs and assumptions, and on information available to management as of the date of this document. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements may also include statements in which words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “considers” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” and other comparable words or phrases of a future- or forward-looking nature, are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. Except as specifically noted herein all references to the “Company” refer to Bank of Commerce Holdings, a California corporation, and its consolidated subsidiaries.
The following factors, among others, could cause our actual results to differ materially from those expressed in such forward-looking statements:
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The strength of the United States economy in general and the strength of the local economies in California in which we conduct operations;
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Difficulties in integrating Merchants Holding Company, a California corporation (“Merchants”) and Merchant’s bank subsidiary, The Merchants National Bank of Sacramento (“Merchants National Bank”);
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Our failure to realize all of the anticipated benefits of our pending merger;
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Our inability to successfully manage our growth or implement our growth strategy;
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The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve Board and tariffs imposed by the US government or foreign governments;
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Volatility in the capital or credit markets;
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Changes in the financial performance and/or condition of our borrowers;
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Our concentration in real estate lending;
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Our reliance on a third party originator to supply us with consumer loans;
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Developments and changes in laws and regulations, including the recent federal “Tax Cuts and Jobs Act”, “Economic Growth, Regulatory Relief, and Consumer Protection Act” and increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the California Department of Business Oversight;
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Changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation and other third parties;
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Changes in consumer spending, borrowing and savings habits;
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Deterioration in the reputation of banks and the financial services industry could adversely affect the Company's ability to obtain and retain customers;
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Changes in the level of our nonperforming assets and loan charge-offs;
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Deterioration in values of real estate in California and the United States generally, both residential and commercial;
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Possible other-than-temporary impairment of securities held by us;
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The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
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The willingness of customers to substitute competitors’ products and services for our products and services;
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Technological changes could expose us to new risks, including potential systems failures or fraud;
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The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters;
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The risks presented by public stock market volatility, which could adversely affect the market price of the Company's common stock and the ability to raise additional capital;
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Inability to attract deposits and other sources of liquidity at acceptable costs;
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Changes in the competitive environment among financial and bank holding companies and other financial service providers;
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Consolidation in the financial services industry in the Company's markets resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape and the influx of fintech companies competing for business;
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The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
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A natural disaster, such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic processes;
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A natural disaster outside California, could negatively impact our purchased loan portfolio or our third party loan servicers;
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Unauthorized computer access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems;
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Geopolitical conditions, including acts or threats of war or terrorism, actions taken by the United States or other governments in response to acts or threats of war or terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
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Our inability to manage the risks involved in the foregoing; and
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The effects of any reputational damage to the Company resulting from any of the foregoing.
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If our assumptions regarding one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this document and in the information incorporated by reference in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake any obligation to publicly correct, revise, or update any forward-looking statement if we later become aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties discussed in “RISK FACTORS” and in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.
For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 under the heading “Risk factors”.
The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The following sections discuss significant changes and trends in the financial condition, capital resources and liquidity of the Company from December 31, 2017 to September 30, 2018. Also discussed are significant trends and changes in the Company’s results of operations for the three and nine months ended September 30, 2018, compared to the same period in 2017. The consolidated financial statements and related notes appearing elsewhere in this report are unaudited. The following discussion and analysis is intended to provide greater detail of the Company's financial condition and results.
GENERAL
Bank of Commerce Holdings (“Holding Company,” “we,” or “us”) is a corporation organized under the laws of California and a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce (the “Bank”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce) and Bank of Commerce Mortgage (“BOCM”) (inactive). The Holding Company together with the bank and BOCM are the (“Company”). We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II, which was organized in connection with our prior issuance of trust-preferred securities. Our common stock is traded on the NASDAQ Global Market under the symbol “BOCH.”
We commenced banking operations in 1982 and we now operate nine full service facilities and three free standing remote ATMs in northern California. We also operate a full service “cyber office” as identified in our summary of deposits reporting filed with the FDIC. We provide a wide range of financial services and products for business and retail customers, which are competitive with those traditionally offered by banks of similar size in California.
On October 4, 2018, we entered into an Agreement and Plan of Merger with Merchants that we expect to close in the first quarter of 2019, subject to the satisfaction of customary closing conditions, including regulatory and shareholder approvals. Upon completion of the merger, we expect the combined company will have approximately $1.5 billion in assets, $1.3 billion in deposits, and operate 11 branch offices throughout northern California. See Note 10
Business Combination
in these
Notes to Consolidated Financial Statements
and our press release filed on form 8-k on October 5, 2018 announcing the signing of the definitive merger agreement for additional information.
Our principal executive office is located at 555 Capitol Mall Suite 1255, Sacramento, California 95814 and the telephone number is (800) 421-2575.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Financial highlights for the
third
quarter of
2018
compared to the same quarter a year ago:
Performance
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Net income of $4.0 million ($0.25 per share –diluted) was an increase of $1.1 million (40%) from $2.9 million ($0.18 per share – diluted) earned during the same period in the prior year.
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Net interest income increased $1.5 million (15%) to $12.1 million compared to $10.6 million for the same period in the prior year.
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Return on average assets improved to 1.23% compared to 0.93% for the same period in the prior year.
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Return on average equity improved to 12.16% compared to 9.01% for the same period in the prior year.
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Average loans totaled $930.9 million, an increase of $125.7 million (16%) compared to average loans for the same period in the prior year.
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Average earning assets totaled $1.2 billion, an increase of $83.6 million (7%) compared the same period in the prior year.
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Average deposits totaled $1.1 billion, an increase of $55.2 million (5%) compared the same period in the prior year.
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Average non-maturing deposits totaled $946.2 million, an increase of $96.0 million (11%) compared to the same period in the prior year.
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Average certificates of deposit totaled $163.3 million, a decrease of $40.7 million (20%) compared to the same period in the prior year.
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The Company’s efficiency ratio was 58.4% compared to 63.1% for the same period in the prior year.
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Book value per common share was $8.14 at September 30, 2018 compared to $7.89 at September 30, 2017.
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Tangible book value per common share was $8.03 at September 30, 2018 compared to $7.77 at September 30, 2017. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.
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Credit Quality
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Nonperforming assets at September 30, 2018 totaled $3.9 million or 0.29% of total assets, a decrease of $4.5 million (54%) compared to September 30, 2017.
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Net loan recoveries were $4 thousand in the third quarter of 2018 and for the same period in 2017.
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Acquisition
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Entered into a definitive merger agreement with Merchants, including approximately $218.0 million in assets headquartered in downtown Sacramento.
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During the third quarter of 2018, we expensed $42 thousand of acquisition costs.
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Financial highlights for the first
nine months of 2018 compared to the same period a year ago
:
Performance
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Net income of $10.9 million was an increase of $3.6 million (48%) from $7.3 million earned during the same period in the prior year. Earnings of $0.67 per share – diluted was an increase of $0.18 (37%) from $0.49 per share – diluted earned during the same period in the prior year and reflects the impact of 2,738,096 shares of common stock sold and issued in the second quarter of 2017.
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Net interest income increased $4.6 million (15%) to $35.1 million compared to $30.5 million for the same period in the prior year.
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Return on average assets improved to 1.14% compared to 0.83% for the same period in the prior year.
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Return on average equity improved to 11.29% compared to 8.80% for the same period in the prior year.
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Average loans totaled $912.6 million, an increase of $101.6 million (13%) compared to average loans for the same period in the prior year.
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Average earning assets totaled $1.2 billion, an increase of $100.3 million (9%) compared to average earning assets for the same period in the prior year.
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Average deposits totaled $1.1 billion, an increase of $50.1 million (5%) compared to average deposits for the same period in the prior year.
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Average non-maturing deposits totaled $906.5 million, an increase of $88.3 million (11%) compared to average non-maturing deposits for the same period in the prior year.
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Average certificates of deposit totaled $171.9 million, a decrease of $37.3 million (18%) compared to average certificates of deposit for the same period in the prior year.
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The Company’s efficiency ratio was 61.5% compared to 67.8% during the same period in the prior year.
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Nonperforming assets at September 30, 2018 totaled $3.9 million or 0.29% of total assets, a decrease of $2.0 million (45% annualized) since December 31, 2017.
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Book value per common share was $8.14 at September 30, 2018 compared to $7.82 at December 31, 2017.
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Tangible book value per common share was $8.03 at September 30, 2018 compared to $7.70 at December 31, 2017. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.
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Credit Quality
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Nonperforming assets at September 30, 2018 totaled $3.9 million or 0.29% of total assets, a decrease of $2.0 million (45% annualized) since December 31, 2017.
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Net loan recoveries were $467 thousand for the first nine months of 2018 compared with net charge-offs of $352 thousand for the same period in the prior year.
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 2 of the
Notes to the Consolidated Financial Statements
included in the Form 10-K for the year ended December 31, 2017 filed with the SEC on March 9, 2018. Some of these significant accounting policies are considered critical and require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC’s definition.
Valuation and Impairment of Investment Securities
At the time of purchase, we designate a security as held-to-maturity or available-for-sale, based on our investment objectives, operational needs and intent to hold. We do not engage in trading activity. Securities designated as held-to-maturity are carried at amortized cost. We have the ability and intent to hold these securities to maturity. Securities designated as available-for-sale may be sold to implement our asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as part of accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Gains or losses on sale of securities are based on the specific identification method. The market value and underlying rating of the security is monitored to identify changes in quality. During the fourth quarter of 2017, we reclassified the entire HTM securities portfolio to AFS. As a result of this transfer we are precluded from classifying any investment securities as held-to-maturity for two years from the date of the transfer.
Securities may be adjusted to reflect changes in valuation as a result of other-than-temporary declines in value. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed rate investments, from changes in interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends.
When an investment is other-than-temporarily impaired, we assess whether we intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If we intend to sell the security or if it is more likely than not that we will be required to sell security before recovery of the amortized cost basis, the entire amount of other-than-temporary impairment is recognized in earnings.
For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the investment’s amortized cost basis and the present value of its expected future cash flows.
The remaining differences between the investment’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. Significant judgment is required in the determination of whether other-than temporary impairment has occurred for an investment. We follow a consistent and systematic process for determining other-than-temporary impairment loss. We have designated the ALCO responsible for the other-than-temporary evaluation process.
The ALCO’s assessment of whether other-than-temporary impairment loss should be recognized incorporates both quantitative and qualitative information including, but not limited to: (1) the length of time and the extent of which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, (4) whether the debtor is current on interest and principal payments, and (5) general market conditions and industry or sector specific outlook. See Note 3
Securities
in the
Notes to Consolidated Financial Statements
in this document for further detail on other-than-temporary impairment and the securities portfolio.
Allowance for Loan and Lease Losses
The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In periodic evaluations of the adequacy of the allowance balance, management considers our past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors.
Management reviews the ALLL on a monthly basis and conducts a formal assessment of the adequacy of the ALLL on a quarterly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. Loans are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.
Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for unimpaired loan categories are based on analysis of historical losses adjusted for changing environmental factors applicable to each loan category. Allowances for changing environmental factors are management's best estimate of the probable impact these changes would have on the loan portfolio as a whole. See Note 4
Loans
in the
Notes to Consolidated Financial Statements
in this document for further detail on the ALLL and the loan portfolio.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach. We recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences that have been recognized in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets, management considers all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations.
In projecting future taxable income, management develops assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. We file consolidated federal and state income tax returns.
ASC 740-10-55 Income Taxes requires a two-step process that separates recognition from measurement of tax positions. We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. The measurement process is applied only after satisfying the recognition requirement and determines what amount of a tax position will be sustainable upon a potential examination or settlement. If upon measuring, the tax position produces a range of potential tax benefits, we may claim the highest tax benefit from that range as long as it is over 50% likely to be realized using a probability analysis. We believe that all of the tax positions we have taken, meet the more likely than not recognition threshold. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities, and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a nonrecurring basis, such as certain impaired loans held for investment, (“OREO”) and goodwill. These nonrecurring fair value adjustments typically involve write-downs of individual assets due to application of lower of cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, we use our best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements. Additional information on our use of fair value measurements and our related valuation methodologies is provided in Note 8
Fair Values
in the
Notes to Consolidated Financial Statements
incorporated in this document.
RECENT ACCOUNTING PRONOUNCEMENTS
ASU No. 2016-13
Description - In June of 2016, the FASB issued 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.
Methods and timing of adoption – 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.
Expected financial statement impact – We are currently evaluating the provisions of the ASU and have formed a committee for the purpose of developing a model that is compliant with the requirements under the ASU. The committee is also gathering pertinent data, consulting with outside professionals and evaluating our IT systems. Management expects to recognize a one–time cumulative effect adjustment to the allowance for loan and lease losses as of the first reporting period in which the new standard is effective. An estimate of the magnitude of the one-time adjustment or the overall impact of this standard has not yet been determined.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ASU No. 2016-02
Description - In February of 2016, the FASB issued 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.
Methods and timing of adoption – 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. In July of 2018, the FASB issued ASU No. 2018-11,
Leases (Topic 8
4
2)
. The standard contained improvements to ASU No. 2016-02 that permit presentation on a prospective basis.
Expected financial statement impact – We estimate the new leasing standard will be implemented on a prospective basis and result in a new lease asset and related lease liability of approximately $4.2 million related to our current operating leases.
SOURCES OF INCOME
We derive our income primarily from net interest income, which is the difference between the interest income we receive on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income is impacted by many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. In recent years, we originated higher volumes of longer term fixed rate loans. These loans, combined with the structure of our investment portfolio and our funding mix have caused the Company to be more liability sensitive, which could negatively impact earnings in a rapidly rising interest rate environment.
Net interest income reflects both the amount of earning assets we hold and our net interest margin, which is the difference between the yield we on our earning assets and the interest rate we pay to fund those assets. As a result, changes in either our net interest margin or the amount of earning assets we hold will affect our net interest income and earnings. Increases or decreases in interest rates could adversely affect our net interest margin. Although our asset yields and funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, and cause our net interest margin to expand or contract. Many of our assets are tied to prime rate, so they may adjust faster in response to changes in interest rates. As a result, when interest rates fall, the yield we earn on our assets may fall faster than our ability to reprice a large portion of our liabilities, causing our net interest margin to contract.
Changes in the slope of the yield curve, the spread between short-term and long-term interest rates, could also reduce our net interest margin. Normally, the yield curve is upward sloping, which means that short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.
We assess our interest rate risk by estimating the effect on our earnings under various simulated scenarios that differ based on assumptions including the direction, magnitude and speed of interest rate changes, and the slope of the yield curve.
There is always the risk that changes in interest rates could reduce our net interest income and earnings in material amounts, especially if actual conditions turn out to be materially different than simulated scenarios. For example, if interest rates rise or fall faster than we assumed or the slope of the yield curve changes, we may incur significant losses on debt securities we hold as investments. To reduce our interest rate risk, we may rebalance our investment and loan portfolios, refinance our debt and take other strategic actions, which may result in losses or expenses.
The following table summarizes as of September 30, 2018 when loans are projected to reprice by year and by rate index.
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Year 6
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Through
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Beyond
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(Amounts in thousands)
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Year 10
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Year 10
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Total
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Rate:
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Fixed
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$
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38,003
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|
|
$
|
38,357
|
|
|
$
|
55,840
|
|
|
$
|
30,395
|
|
|
$
|
55,642
|
|
|
$
|
122,938
|
|
|
$
|
14,875
|
|
|
$
|
356,050
|
|
Variable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
113,739
|
|
|
|
6,398
|
|
|
|
4,464
|
|
|
|
4,216
|
|
|
|
7,937
|
|
|
|
4,281
|
|
|
|
—
|
|
|
|
141,035
|
|
5 Year Treasury
|
|
|
45,350
|
|
|
|
22,058
|
|
|
|
50,833
|
|
|
|
62,378
|
|
|
|
93,673
|
|
|
|
41,740
|
|
|
|
—
|
|
|
|
316,032
|
|
7 Year Treasury
|
|
|
874
|
|
|
|
913
|
|
|
|
3,552
|
|
|
|
8,712
|
|
|
|
4,818
|
|
|
|
19,534
|
|
|
|
—
|
|
|
|
38,403
|
|
1 Year LIBOR
|
|
|
25,526
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,526
|
|
Other Indexs
|
|
|
5,884
|
|
|
|
5,316
|
|
|
|
4,917
|
|
|
|
1,832
|
|
|
|
6,394
|
|
|
|
22,356
|
|
|
|
1,775
|
|
|
|
48,474
|
|
Nonaccrual
|
|
|
1,210
|
|
|
|
331
|
|
|
|
304
|
|
|
|
276
|
|
|
|
268
|
|
|
|
934
|
|
|
|
394
|
|
|
|
3,717
|
|
Total
|
|
$
|
230,586
|
|
|
$
|
73,373
|
|
|
$
|
119,910
|
|
|
$
|
107,809
|
|
|
$
|
168,732
|
|
|
$
|
211,783
|
|
|
$
|
17,044
|
|
|
$
|
929,237
|
|
Sources of noninterest income include fees earned on deposit related services, ATM and point of sale fees, payroll and benefit processing fees, earnings on bank-owned life insurance, gain on sale of available-for-sale securities, and dividends on Federal Home Loan Bank of San Francisco stock.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Third Quarter of 2018 Compared With Third Quarter of 2017
Net income for the third quarter of 2018 increased $1.2 million compared to the third quarter of 2017. In the current quarter, net interest income was $1.5 million higher and the provision for income taxes was $23 thousand lower. These positive changes were offset by noninterest income that was $133 thousand lower, and noninterest expenses that were $277 thousand higher.
First Nine Months of 2018 Compared with First Nine Months of 2017
Net income for the first nine months of 2018 increased $3.6 million compared to the first nine months of 2017. In the current year, net interest income was $4.6 million higher and provision for loan and lease losses was $500 thousand lower. These positive changes were offset by noninterest income that was $655 thousand lower, noninterest expense was $265 thousand higher and a provision for income taxes that was $585 thousand higher.
Return on Average Assets and Average Total Equity
The following table presents the returns on average assets and average total equity for the three and nine months ended September 30, 2018 and 2017. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the
Consolidated Statements of Income
incorporated in this document.
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Return on average assets
|
|
|
1.23
|
%
|
|
|
0.93
|
%
|
|
|
1.14
|
%
|
|
|
0.83
|
%
|
Return on average total equity
|
|
|
12.16
|
%
|
|
|
9.01
|
%
|
|
|
11.29
|
%
|
|
|
8.80
|
%
|
NET INTEREST INCOME AND NET INTEREST MARGIN
For the three months ended September 30, 2018 compared to the same period a year ago, net interest income increased $1.5 million.
Interest income for the third quarter of 2018 increased $1.7 million or 14% to $13.4 million:
|
●
|
Interest and fees on loans increased $1.7 million due to a $125.7 million increase in average loan balances and a six basis point increase in the average yield on the loan portfolio.
|
|
●
|
Interest on investment securities increased $9 thousand due to a 10 basis point increase in average yield on the securities portfolio partially offset by an $8.2 million decrease in average securities balances.
|
|
●
|
Interest on interest-bearing deposits due from banks decreased $24 thousand due to a $33.9 million decrease in average interest-bearing deposit balances, partially offset by a 69 basis point increase in average yield.
|
Interest expense for the third quarter of 2018 increased $123 thousand or 10% to $1.3 million:
|
●
|
Interest expense on interest bearing deposits decreased $1 thousand. Average interest-bearing demand and savings deposit balances increased $55.3 million, while average certificate of deposit balances decreased $40.7 million. The average rate paid on interest-bearing deposits decreased one basis point.
|
|
●
|
Interest expense on other interest bearing liabilities increased $124 thousand due to increased borrowing from the Federal Home Loan Bank of San Francisco.
|
For the nine months ended September 30, 2018 compared to the same period a year ago, net interest income increased $4.6 million.
Interest income for the nine months ended September 30, 2018 increased $5.0 million or 15% to $39.0 million.
|
●
|
Interest and fees on loans increased $4.4 million due to a $101.6 million increase in average loan balances and an 11 basis point increase in the average yield on the loan portfolio.
|
|
●
|
Interest on investment securities increased $647 thousand due to a six basis point increase in average yield and a $28.0 million increase in average securities balances.
|
|
●
|
Interest on interest-bearing deposits due from banks decreased $30 thousand due to a $29.3 million decrease in average balance partially offset by a 75 basis point increase average yields.
|
Interest expense for the nine months ended September 30, 2018 increased $490 thousand or 14% to $3.9 million.
|
●
|
Interest expense on deposits increased $41 thousand as average interest-bearing demand and savings deposit balances increased $48.5 million, while average certificate of deposit balances declined $37.3 million. The average rate paid on interest-bearing deposits was unchanged.
|
|
●
|
Interest expense on other interest bearing liabilities increased $449 thousand. Federal Home Loan Bank of San Francisco borrowings averaged $30.0 million compared to an average balance of $403 thousand in the prior year.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average Balances, Interest Income/Expense and Yields/Rates Paid
The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2018 and 2017.
|
|
Three Months Ended September 30, 2018
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
(2)
|
|
$
|
930,863
|
|
|
$
|
11,568
|
|
|
|
4.93
|
%
|
|
$
|
805,144
|
|
|
$
|
9,887
|
|
|
|
4.87
|
%
|
Taxable securities
|
|
|
199,883
|
|
|
|
1,209
|
|
|
|
2.40
|
%
|
|
|
179,362
|
|
|
|
1,049
|
|
|
|
2.32
|
%
|
Tax-exempt securities
|
|
|
48,561
|
|
|
|
400
|
|
|
|
3.27
|
%
|
|
|
77,303
|
|
|
|
551
|
|
|
|
2.83
|
%
|
Interest-bearing deposits in other banks
|
|
|
50,397
|
|
|
|
254
|
|
|
|
2.00
|
%
|
|
|
84,323
|
|
|
|
278
|
|
|
|
1.31
|
%
|
Average interest-earning assets
|
|
|
1,229,704
|
|
|
|
13,431
|
|
|
|
4.33
|
%
|
|
|
1,146,132
|
|
|
|
11,765
|
|
|
|
4.07
|
%
|
Cash and due from banks
|
|
|
21,834
|
|
|
|
|
|
|
|
|
|
|
|
19,143
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
13,768
|
|
|
|
|
|
|
|
|
|
|
|
15,362
|
|
|
|
|
|
|
|
|
|
Goodwill and core deposit intangible, net
|
|
|
1,888
|
|
|
|
|
|
|
|
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
33,084
|
|
|
|
|
|
|
|
|
|
|
|
38,154
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
1,300,278
|
|
|
|
|
|
|
|
|
|
|
$
|
1,220,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
494,906
|
|
|
|
276
|
|
|
|
0.22
|
%
|
|
$
|
436,614
|
|
|
|
196
|
|
|
|
0.18
|
%
|
Savings deposits
|
|
|
107,349
|
|
|
|
73
|
|
|
|
0.27
|
%
|
|
|
110,305
|
|
|
|
52
|
|
|
|
0.19
|
%
|
Certificates of deposit
|
|
|
163,302
|
|
|
|
465
|
|
|
|
1.13
|
%
|
|
|
204,044
|
|
|
|
567
|
|
|
|
1.10
|
%
|
Federal Home Loan Bank of San Francisco borrowings
|
|
|
22,283
|
|
|
|
121
|
|
|
|
2.15
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
Other borrowings
|
|
|
14,681
|
|
|
|
265
|
|
|
|
7.16
|
%
|
|
|
17,804
|
|
|
|
292
|
|
|
|
6.51
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
104
|
|
|
|
4.00
|
%
|
|
|
10,310
|
|
|
|
74
|
|
|
|
2.85
|
%
|
Average interest-bearing liabilities
|
|
|
812,831
|
|
|
|
1,304
|
|
|
|
0.64
|
%
|
|
|
779,077
|
|
|
|
1,181
|
|
|
|
0.60
|
%
|
Noninterest-bearing demand
|
|
|
343,948
|
|
|
|
|
|
|
|
|
|
|
|
303,314
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
11,935
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
131,499
|
|
|
|
|
|
|
|
|
|
|
|
126,574
|
|
|
|
|
|
|
|
|
|
Average liabilities and shareholders’ equity
|
|
$
|
1,300,278
|
|
|
|
|
|
|
|
|
|
|
$
|
1,220,900
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
(4)
|
|
|
|
|
|
$
|
12,127
|
|
|
|
3.91
|
%
|
|
|
|
|
|
$
|
10,584
|
|
|
|
3.66
|
%
|
Tax equivalent net interest income and net interest margin
(3)
|
|
|
|
|
|
$
|
12,233
|
|
|
|
3.95
|
%
|
|
|
|
|
|
$
|
10,868
|
|
|
|
3.76
|
%
|
(1)
Interest income on loans includes deferred fees and costs of approximately $75 thousand and $95 thousand for the three months ended September 30, 2018 and 2017, respectively.
|
(2)
Net loans includes average nonaccrual loans of $3.8 million and $8.6 million for the three months ended September 30, 2018 and 2017, respectively.
|
(3)
Tax-exempt income has been adjusted to a tax equivalent basis at a 21% for 2018 and at a 34% tax rate for 2017. The amount of such adjustments was an addition to recorded income of approximately $106 thousand and $284 thousand for the three months ended September 30, 2018 and 2017.
|
(4)
Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
|
(5)
Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
|
Balance
|
|
|
Interest
(1)
|
|
|
Yield/ Rate
(5)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
(2)
|
|
$
|
912,648
|
|
|
$
|
33,461
|
|
|
|
4.90
|
%
|
|
$
|
811,080
|
|
|
$
|
29,029
|
|
|
|
4.79
|
%
|
Taxable securities
|
|
|
203,791
|
|
|
|
3,696
|
|
|
|
2.42
|
%
|
|
|
153,702
|
|
|
|
2,710
|
|
|
|
2.36
|
%
|
Tax-exempt securities
|
|
|
52,844
|
|
|
|
1,276
|
|
|
|
3.23
|
%
|
|
|
74,932
|
|
|
|
1,615
|
|
|
|
2.88
|
%
|
Interest-bearing deposits in other banks
|
|
|
37,515
|
|
|
|
518
|
|
|
|
1.85
|
%
|
|
|
66,818
|
|
|
|
548
|
|
|
|
1.10
|
%
|
Average interest-earning assets
|
|
|
1,206,798
|
|
|
|
38,951
|
|
|
|
4.32
|
%
|
|
|
1,106,532
|
|
|
|
33,902
|
|
|
|
4.10
|
%
|
Cash and due from banks
|
|
|
19,801
|
|
|
|
|
|
|
|
|
|
|
|
17,802
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
14,161
|
|
|
|
|
|
|
|
|
|
|
|
15,776
|
|
|
|
|
|
|
|
|
|
Goodwill and core deposit intangible, net
|
|
|
1,943
|
|
|
|
|
|
|
|
|
|
|
|
2,164
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
32,666
|
|
|
|
|
|
|
|
|
|
|
|
37,876
|
|
|
|
|
|
|
|
|
|
Average total assets
|
|
$
|
1,275,369
|
|
|
|
|
|
|
|
|
|
|
$
|
1,180,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
477,755
|
|
|
|
712
|
|
|
|
0.20
|
%
|
|
$
|
426,365
|
|
|
|
528
|
|
|
|
0.17
|
%
|
Savings deposits
|
|
|
108,382
|
|
|
|
196
|
|
|
|
0.24
|
%
|
|
|
111,258
|
|
|
|
146
|
|
|
|
0.18
|
%
|
Certificates of deposit
|
|
|
171,941
|
|
|
|
1,448
|
|
|
|
1.13
|
%
|
|
|
209,275
|
|
|
|
1,641
|
|
|
|
1.05
|
%
|
Federal Home Loan Bank of San Francisco borrowings
|
|
|
30,037
|
|
|
|
435
|
|
|
|
1.94
|
%
|
|
|
403
|
|
|
|
3
|
|
|
|
1.00
|
%
|
Other borrowings
|
|
|
15,601
|
|
|
|
825
|
|
|
|
7.07
|
%
|
|
|
18,241
|
|
|
|
880
|
|
|
|
6.45
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
283
|
|
|
|
3.67
|
%
|
|
|
10,310
|
|
|
|
211
|
|
|
|
2.74
|
%
|
Average interest-bearing liabilities
|
|
|
814,026
|
|
|
|
3,899
|
|
|
|
0.64
|
%
|
|
|
775,852
|
|
|
|
3,409
|
|
|
|
0.59
|
%
|
Noninterest-bearing demand
|
|
|
320,316
|
|
|
|
|
|
|
|
|
|
|
|
280,559
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,094
|
|
|
|
|
|
|
|
|
|
|
|
12,206
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
128,933
|
|
|
|
|
|
|
|
|
|
|
|
111,533
|
|
|
|
|
|
|
|
|
|
Average liabilities and shareholders’ equity
|
|
$
|
1,275,369
|
|
|
|
|
|
|
|
|
|
|
$
|
1,180,150
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin
(4)
|
|
|
|
|
|
$
|
35,052
|
|
|
|
3.88
|
%
|
|
|
|
|
|
$
|
30,493
|
|
|
|
3.68
|
%
|
Tax equivalent net interest income and net interest margin
(3)
|
|
|
|
|
|
$
|
35,391
|
|
|
|
3.92
|
%
|
|
|
|
|
|
$
|
31,325
|
|
|
|
3.78
|
%
|
(1)
Interest income on loans includes deferred fees and costs of approximately $356 thousand and $423 thousand for the nine months ended September 30, 2018 and 2017, respectively.
|
(2)
Net loans includes average nonaccrual loans of $4.3 million and $9.7 million for the nine months ended September 30, 2018 and 2017, respectively.
|
(3)
Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate for 2018 and at a 34% tax rate for 2017. The amount of such adjustments was an addition to recorded income of approximately $339 thousand and $832 thousand for the nine months ended September 30, 2018 and 2017, respectively.
|
(4)
Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
|
(5)
Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Analysis of Changes in Net Interest Income
The following tables set forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume variance) and changes in average rates (rate variance) for the three and nine months ended September 30, 2018 and 2017. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.
|
|
Three Months Ended September 30, 2018 Over
Three Months Ended September 30, 2017
|
|
(Amounts in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Net Change
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,561
|
|
|
$
|
120
|
|
|
$
|
1,681
|
|
Taxable securities
|
|
|
123
|
|
|
|
37
|
|
|
|
160
|
|
Tax-exempt securities
(1)
|
|
|
(301
|
)
|
|
|
(28
|
)
|
|
|
(329
|
)
|
Interest-bearing deposits in other banks
|
|
|
(111
|
)
|
|
|
87
|
|
|
|
(24
|
)
|
Total increase
|
|
|
1,272
|
|
|
|
216
|
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
28
|
|
|
|
52
|
|
|
|
80
|
|
Savings deposits
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
21
|
|
Certificates of deposit
|
|
|
(116
|
)
|
|
|
14
|
|
|
|
(102
|
)
|
Federal Home Loan Bank of San Francisco borrowings
|
|
|
121
|
|
|
|
—
|
|
|
|
121
|
|
Other borrowings
|
|
|
(63
|
)
|
|
|
36
|
|
|
|
(27
|
)
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
30
|
|
|
|
30
|
|
Total (decrease) increase
|
|
|
(31
|
)
|
|
|
154
|
|
|
|
123
|
|
Net increase
|
|
$
|
1,303
|
|
|
$
|
62
|
|
|
$
|
1,365
|
|
(1)
Tax-exempt income has been adjusted to tax equivalent basis at a 21% tax rate for 2018 and 34% for 2017.
|
|
|
Nine Months Ended September 30, 2018 Over
Nine Months Ended September 30, 2017
|
|
(Amounts in thousands)
|
|
Volume
|
|
|
Rate
|
|
|
Net Change
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
3,709
|
|
|
$
|
723
|
|
|
$
|
4,432
|
|
Taxable securities
|
|
|
906
|
|
|
|
80
|
|
|
|
986
|
|
Tax-exempt securities
(1)
|
|
|
(683
|
)
|
|
|
(149
|
)
|
|
|
(832
|
)
|
Interest-bearing deposits in other banks
|
|
|
(241
|
)
|
|
|
211
|
|
|
|
(30
|
)
|
Total increase
|
|
|
3,691
|
|
|
|
865
|
|
|
|
4,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
68
|
|
|
|
116
|
|
|
|
184
|
|
Savings deposits
|
|
|
(4
|
)
|
|
|
54
|
|
|
|
50
|
|
Certificates of deposit
|
|
|
(330
|
)
|
|
|
137
|
|
|
|
(193
|
)
|
Federal Home Loan Bank of San Francisco borrowings
|
|
|
427
|
|
|
|
5
|
|
|
|
432
|
|
Other borrowings
|
|
|
(164
|
)
|
|
|
109
|
|
|
|
(55
|
)
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
72
|
|
|
|
72
|
|
Total (decrease) increase
|
|
|
(3
|
)
|
|
|
493
|
|
|
|
490
|
|
Net increase (decrease)
|
|
$
|
3,694
|
|
|
$
|
372
|
|
|
$
|
4,066
|
|
(1)
Tax-exempt income has been adjusted to tax equivalent basis at a 21% tax rate for 2018 and 34% for 2017.
|
PROVISION FOR LOAN AND LEASE LOSSES
As a result of improved asset quality and net loan loss recoveries, no provision for loan and lease losses was necessary during the nine months ended September 30, 2018. We recorded a $500 thousand provision for loan and lease losses during the nine months ended September 30, 2017. See Note 4
Loans
in the
Notes to Consolidated Financial Statements
for further discussion.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME
The following table presents the key components of noninterest income for the three and nine months ended September 30, 2018 and 2017.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
(Amounts in thousands)
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
Percent
|
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
Percent
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
170
|
|
|
$
|
132
|
|
|
$
|
38
|
|
|
|
29
|
%
|
|
$
|
521
|
|
|
$
|
401
|
|
|
$
|
120
|
|
|
|
30
|
%
|
ATM and point of sale
|
|
|
282
|
|
|
|
273
|
|
|
|
9
|
|
|
|
3
|
%
|
|
|
848
|
|
|
|
827
|
|
|
|
21
|
|
|
|
3
|
%
|
Payroll and benefit processing fees
|
|
|
159
|
|
|
|
147
|
|
|
|
12
|
|
|
|
8
|
%
|
|
|
474
|
|
|
|
485
|
|
|
|
(11
|
)
|
|
|
(2
|
)%
|
Life insurance
|
|
|
128
|
|
|
|
134
|
|
|
|
(6
|
)
|
|
|
(4
|
)%
|
|
|
384
|
|
|
|
915
|
|
|
|
(531
|
)
|
|
|
(58
|
)%
|
Gain on investment securities, net
|
|
|
1
|
|
|
|
38
|
|
|
|
(37
|
)
|
|
|
(97
|
)%
|
|
|
41
|
|
|
|
139
|
|
|
|
(98
|
)
|
|
|
(71
|
)%
|
Federal Home Loan Bank of San Francisco dividends
|
|
|
104
|
|
|
|
80
|
|
|
|
24
|
|
|
|
30
|
%
|
|
|
279
|
|
|
|
237
|
|
|
|
42
|
|
|
|
18
|
%
|
(Loss) gain on sale of OREO
|
|
|
(7
|
)
|
|
|
81
|
|
|
|
(88
|
)
|
|
|
(109
|
)%
|
|
|
9
|
|
|
|
22
|
|
|
|
(13
|
)
|
|
|
(59
|
)%
|
Other
|
|
|
106
|
|
|
|
191
|
|
|
|
(85
|
)
|
|
|
(45
|
)%
|
|
|
331
|
|
|
|
516
|
|
|
|
(185
|
)
|
|
|
(36
|
)%
|
Total noninterest income
|
|
$
|
943
|
|
|
$
|
1,076
|
|
|
$
|
(133
|
)
|
|
|
(12
|
)%
|
|
$
|
2,887
|
|
|
$
|
3,542
|
|
|
$
|
(655
|
)
|
|
|
(18
|
)%
|
Noninterest income for the three months ended September 30, 2018 decreased $133 thousand compared to the third quarter for 2017, a variance not concentrated in any one item. Noninterest income for the nine months ended September 30, 2018 decreased $655 thousand compared to the first nine months of 2017. During the first quarter of 2017, we recognized income from life insurance death benefit proceeds of $502 thousand.
NONINTEREST EXPENSE
The following table presents the key components of noninterest expense for the three and nine months ended September 30, 2018 and 2017.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
(Amounts in thousands)
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
Percent
|
|
|
2018
|
|
|
2017
|
|
|
Amount
|
|
|
Percent
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries & related benefits
|
|
$
|
4,529
|
|
|
$
|
4,291
|
|
|
$
|
238
|
|
|
|
6
|
%
|
|
$
|
13,897
|
|
|
$
|
13,296
|
|
|
$
|
601
|
|
|
|
5
|
%
|
Premises & equipment
|
|
|
1,017
|
|
|
|
1,067
|
|
|
|
(50
|
)
|
|
|
(5
|
)%
|
|
|
3,104
|
|
|
|
3,169
|
|
|
|
(65
|
)
|
|
|
(2
|
)%
|
Federal Deposit Insurance Corporation insurance premium
|
|
|
94
|
|
|
|
78
|
|
|
|
16
|
|
|
|
21
|
%
|
|
|
283
|
|
|
|
230
|
|
|
|
53
|
|
|
|
23
|
%
|
Data processing fees
|
|
|
518
|
|
|
|
437
|
|
|
|
81
|
|
|
|
19
|
%
|
|
|
1,421
|
|
|
|
1,294
|
|
|
|
127
|
|
|
|
10
|
%
|
Professional service fees
|
|
|
336
|
|
|
|
276
|
|
|
|
60
|
|
|
|
22
|
%
|
|
|
995
|
|
|
|
1,119
|
|
|
|
(124
|
)
|
|
|
(11
|
)%
|
Telecommunications
|
|
|
55
|
|
|
|
219
|
|
|
|
(164
|
)
|
|
|
(75
|
)%
|
|
|
449
|
|
|
|
653
|
|
|
|
(204
|
)
|
|
|
(31
|
)%
|
Other
|
|
|
1,085
|
|
|
|
989
|
|
|
|
96
|
|
|
|
10
|
%
|
|
|
3,189
|
|
|
|
3,312
|
|
|
|
(123
|
)
|
|
|
(4
|
)%
|
Total noninterest expense
|
|
$
|
7,634
|
|
|
$
|
7,357
|
|
|
$
|
277
|
|
|
|
4
|
%
|
|
$
|
23,338
|
|
|
$
|
23,073
|
|
|
$
|
265
|
|
|
|
1
|
%
|
Noninterest expense for the three months ended September 30, 2018 increased $277 thousand compared to the same period a year previous. Noninterest expense for the nine months ended September 30, 2018 increased $265 thousand compared to the same period a year previous. The variance for both periods reflects increased compensation costs in our Sacramento market offset by reduced reliance on professional consultants and reductions in various other nonrecurring expenses. We received refunds from a Telecommunication vendor totaling $97 thousand during the third quarter of 2018.
INCOME TAXES
Our provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to our income before taxes. The following table reflects our tax provision and the related effective tax rate for the periods indicated.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
(Amounts in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
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
|
|
Effective tax rate
|
|
|
25.8
|
%
|
|
|
33.2
|
%
|
|
|
25.4
|
%
|
|
|
29.9
|
%
|
For the three months ended September 30, 2018, our income tax provision of $1.4 million on pre-tax income of $5.4 million was an effective tax rate of 25.8%. The current quarter effective tax rate reflects the benefits of the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%. This compares with a provision for income taxes for the third quarter of the prior year of $1.4 million on pre-tax income of $4.3 million, which was an effective tax rate of 33.2%.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine months ended September 30, 2018, our income tax provision of $3.7 million on pre-tax income of $14.6 million was an effective tax rate of 25.4%. The effective tax rate for the nine months ended September 30, 2017, of 29.9% included life insurance death benefits of $502 thousand, which were not subject to income tax. If the death benefits were excluded from pretax income, the effective tax rate would have been 31.4%. The lower effective tax rate in 2018 again reflects the benefits of the Tax Cuts and Jobs Act of 2017.
Cost Segregation Study and Tangible Property Review
We have initiated a cost segregation study and a tangible property review, which will shorten the depreciable lives of certain assets and accelerate the tax depreciation deduction on our 2017 federal income tax return. We expect to record the expense of approximately $293 thousand and a benefit to our 2018 book provision for income taxes exceeding that amount in the fourth quarter of 2018 upon completion of these projects.
Amended Tax Returns
In September of 2016, we filed amended federal and state tax returns for tax years 2011, 2012, 2013, and 2014. The amendments were filed to properly recognize tax events in years 2011 and 2013 that were improperly recognized in years 2011 through 2014. The IRS rejected the 2011 amended tax return citing the statute for assessment had expired. Accordingly, in early 2017, $988 thousand of taxes due to the taxing authorities pursuant to the 2011 amended federal tax return was returned to us. However, we have continued to recognize 100% of the tax liability relating to our 2011 amended federal tax return because of our belief that under the concept of equitable recoupment our tax position would be sustained upon reexamination by the IRS or through the litigation process. This has created an uncertain tax position.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2018, we had total consolidated assets of $1.3 billion, gross loans of $927.5 million, allowance for loan and lease losses (“ALLL”) of $12.4 million, total deposits of $1.1 billion, and shareholders’ equity of $133.0 million.
As of September 30, 2018, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $21.3 million. We also held interest-bearing deposits in the amount of $69.9 million.
Available-for-sale investment securities totaled $239.6 million at September 30, 2018, compared to $268.0 million at December 31, 2017. Our investment portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations.
During the first nine months of 2018, we purchased 18 securities with a par value of $30.5 million and weighted average yield of 3.30% and sold 40 securities with a par value of $27.1 million and weighted average yield of 2.45%. The sales activity on available-for-sale securities resulted in $41 thousand in net realized gains for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, we also received $23.9 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.
At September 30, 2018, our net unrealized losses on available-for-sale investment securities were $5.8 million compared to net unrealized losses of $452 thousand at December 31, 2017. The unrealized losses arising during the nine months ended September 30, 2018 were driven by significant changes in market interest rates and no investments were considered other-than-temporarily impaired.
We recorded gross loan balances of $927.5 million at September 30, 2018, compared to $879.8 million at December 31, 2017 an increase of $47.6 million. The increase in gross loans compared to December 31, 2017 was organic and did not rely on loan pool purchases.
The ALLL at September 30, 2018 increased $467 thousand to $12.4 million compared to $11.9 million at December 31, 2017. At September 30, 2018, relying on our ALLL methodology, which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, we believe the ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could result in additional charges to the provision for loan and lease losses.
Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, decreased by $2.1 million to $3.7 million, or 0.40% of gross loans, as of September 30, 2018, compared to $5.8 million, or 0.66% of gross loans as of December 31, 2017. The decrease in nonperforming loans was primarily due to repayments totaling $1.2 million from one commercial loan and one commercial real estate loan.
Past due loans as of September 30, 2018 decreased $1.0 million to $1.3 million, compared to $2.3 million as of December 31, 2017. The decrease in past due loans was primarily due to the sale of two residential real estate loans for $290 thousand and the transfer of five residential real estate loans to OREO. We believe that risk grading for past due loans appropriately reflects the risk associated with the past due loans. See Note 4
Loans
in the
Notes to Consolidated Financial Statements
in this document for further detail on the ALLL and the loan portfolio.
Premises and equipment totaled $13.5 million at September 30, 2018 a decrease of $1.2 million compared to $14.7 million at December 31, 2017.
Our OREO balance at September 30, 2018 was $136 thousand compared to $35 thousand at December 31, 2017. For the nine months ended September 30, 2018, we transferred five foreclosed properties in the amount of $140 thousand to OREO. During the nine months ended September 30, 2018, we sold two properties with a balance of $48 thousand for a net gain of $9 thousand.
Bank-owned life insurance increased $384 thousand during the nine months ended September 30, 2018 to $22.3 million compared to $21.9 million at December 31, 2017.
Other assets, which include the Bank’s investment qualified zone academy bonds, Federal Home Loan Bank of San Francisco stock and low-income housing tax credit partnerships totaled $21.9 million at September 30, 2018 compared to $19.7 million at December 31, 2017.
Total deposits at September 30, 2018, increased $42.0 million or 5% annualized to $1.1 billion compared to December 31, 2017.
|
●
|
Total non-maturing deposits increased $121.2 million or 14% compared to the same date a year ago and increased $70.0 million or 10% annualized compared to December 31, 2017.
|
|
●
|
Certificates of deposit decreased $39.2 million or 20% compared to the same date a year ago and decreased $28.0 million or 20% annualized compared to December 31, 2017.
|
Other liabilities which include the Bank’s income tax liabilities, supplemental executive retirement plan and funding obligation for investments in qualified affordable housing partnerships increased $900 thousand to $13.1 million as of September 30, 2018 compared to $12.2 million at December 31, 2017.
Investment Securities
The composition of our investment securities portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.
The investment securities portfolio also:
|
●
|
Partially mitigates interest rate risk;
|
|
●
|
Diversifies the credit risk inherent in the loan portfolio;
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
●
|
Provides a vehicle for the investment of excess liquidity;
|
|
●
|
Provides a source of liquidity when pledged as collateral for lines of credit;
|
|
●
|
Is used as collateral for certain public funds.
|
The carrying value of our available-for-sale investment securities totaled $239.6 million at September 30, 2018, compared to $268.0 million at December 31, 2017. The following table presents information at carrying value of the investment securities portfolio by classification and major type as of September 30, 2018 and December 31, 2017.
|
|
September 30,
|
|
|
December 31,
|
|
(Amounts in thousands)
|
|
2018
|
|
|
2017
|
|
Available-for-sale securities:
(1)
|
|
|
|
|
|
|
|
|
U.S. government & agencies
|
|
$
|
35,656
|
|
|
$
|
40,369
|
|
Obligations of state and political subdivisions
|
|
|
51,562
|
|
|
|
78,844
|
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
|
|
124,109
|
|
|
|
114,592
|
|
Corporate securities
|
|
|
3,974
|
|
|
|
4,992
|
|
Commercial mortgage-backed securities
|
|
|
24,167
|
|
|
|
26,641
|
|
Other asset-backed securities
|
|
|
165
|
|
|
|
2,516
|
|
Total
|
|
$
|
239,633
|
|
|
$
|
267,954
|
|
(1)
Available-for-sale securities are reported at fair value.
|
The following table presents information at amortized cost, regarding the maturity structure and average yield of the investment portfolio at September 30, 2018.
|
|
Maturing
|
|
|
Maturing Over One
|
|
|
Maturing Over Five
|
|
|
Maturing
|
|
|
|
|
|
|
|
|
|
|
|
Within One Year
|
|
|
Through Five Years
|
|
|
Through Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
(Amounts in thousands)
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Available-for-sale securities:
(1)
|
|
U.S. government & agencies
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
5,532
|
|
|
|
3.10
|
%
|
|
$
|
30,525
|
|
|
|
2.82
|
%
|
|
$
|
36,057
|
|
|
|
2.86
|
%
|
Obligations of state and political subdivisions
|
|
|
33
|
|
|
|
5.62
|
%
|
|
|
12,377
|
|
|
|
3.37
|
%
|
|
|
21,109
|
|
|
|
3.43
|
%
|
|
|
17,949
|
|
|
|
2.99
|
%
|
|
|
51,468
|
|
|
|
3.26
|
%
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
|
|
501
|
|
|
|
3.80
|
%
|
|
|
64,975
|
|
|
|
2.58
|
%
|
|
|
58,958
|
|
|
|
2.93
|
%
|
|
|
4,269
|
|
|
|
3.68
|
%
|
|
|
128,703
|
|
|
|
2.78
|
%
|
Corporate securities
|
|
|
1,016
|
|
|
|
3.39
|
%
|
|
|
2,026
|
|
|
|
4.09
|
%
|
|
|
1,000
|
|
|
|
2.15
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
4,042
|
|
|
|
3.43
|
%
|
Commercial mortgage-backed securities
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
4,686
|
|
|
|
2.24
|
%
|
|
|
20,304
|
|
|
|
2.55
|
%
|
|
|
24,990
|
|
|
|
2.49
|
%
|
Other asset-backed securities
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
164
|
|
|
|
4.42
|
%
|
|
|
164
|
|
|
|
4.42
|
%
|
Total
|
|
$
|
1,550
|
|
|
|
3.55
|
%
|
|
$
|
79,378
|
|
|
|
2.74
|
%
|
|
$
|
91,285
|
|
|
|
3.01
|
%
|
|
$
|
73,211
|
|
|
|
2.84
|
%
|
|
$
|
245,424
|
|
|
|
2.88
|
%
|
(1)
The maturities for the collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
|
Loan Portfolio
Loan Concentrations
Historically, we have concentrated our loan origination activities primarily within El Dorado, Placer, Sacramento, and Shasta counties in California. In recent years, our loan origination activity has expanded to include other portions of California and northern Nevada and we have purchased loans from third party originators made to borrowers who are located throughout the United States. We manage our credit risk through various diversifications of our loan portfolio, the application of sound underwriting policies and procedures, and ongoing credit monitoring practices. Generally, the loans are secured by real estate or other assets. Repayment is expected from the borrower’s cash flows or cash flows from real estate investments.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the composition of the loan portfolio as of September 30, 2018 and December 31, 2017.
(Amounts in thousands)
|
|
September 30,
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Loan Portfolio
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
Commercial
|
|
$
|
132,091
|
|
|
|
14
|
%
|
|
$
|
142,405
|
|
|
|
16
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
20,496
|
|
|
|
2
|
|
|
|
15,902
|
|
|
|
2
|
|
Real estate - commercial non-owner occupied
|
|
|
431,246
|
|
|
|
47
|
|
|
|
377,668
|
|
|
|
43
|
|
Real estate - commercial owner occupied
|
|
|
195,608
|
|
|
|
21
|
|
|
|
192,023
|
|
|
|
22
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
38,353
|
|
|
|
4
|
|
|
|
41,188
|
|
|
|
5
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
33,473
|
|
|
|
4
|
|
|
|
30,377
|
|
|
|
3
|
|
Real estate - residential - equity lines
|
|
|
28,713
|
|
|
|
3
|
|
|
|
30,347
|
|
|
|
3
|
|
Consumer and other
|
|
|
47,500
|
|
|
|
5
|
|
|
|
49,925
|
|
|
|
6
|
|
Gross loans
|
|
|
927,480
|
|
|
|
100
|
%
|
|
|
879,835
|
|
|
|
100
|
%
|
Deferred loan 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
|
|
|
|
|
|
The following table sets forth the maturity and fixed or variable rate distribution of our loan portfolio as of September 30, 2018.
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
|
|
Within One
|
|
|
Through
|
|
|
After Five
|
|
|
|
|
|
(Amounts in thousands)
|
|
Year
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
Commercial
|
|
$
|
35,572
|
|
|
$
|
54,096
|
|
|
$
|
43,316
|
|
|
$
|
132,984
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
4,817
|
|
|
|
3,763
|
|
|
|
11,865
|
|
|
|
20,445
|
|
Real estate - commercial non-owner occupied
|
|
|
5,659
|
|
|
|
116,911
|
|
|
|
308,090
|
|
|
|
430,660
|
|
Real estate - commercial owner occupied
|
|
|
10,862
|
|
|
|
19,769
|
|
|
|
164,044
|
|
|
|
196,675
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
—
|
|
|
|
—
|
|
|
|
38,353
|
|
|
|
38,353
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
495
|
|
|
|
2,247
|
|
|
|
30,804
|
|
|
|
33,546
|
|
Real estate - residential - equity lines
|
|
|
39
|
|
|
|
2,659
|
|
|
|
26,350
|
|
|
|
29,048
|
|
Consumer and other
|
|
|
282
|
|
|
|
45,863
|
|
|
|
1,381
|
|
|
|
47,526
|
|
Loans, net of deferred fees and costs
|
|
$
|
57,726
|
|
|
$
|
245,308
|
|
|
$
|
626,203
|
|
|
$
|
929,237
|
|
Loans with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rates
|
|
$
|
38,003
|
|
|
$
|
180,234
|
|
|
$
|
137,813
|
|
|
$
|
356,050
|
|
Variable rates
|
|
|
19,723
|
|
|
|
65,074
|
|
|
|
488,390
|
|
|
|
573,187
|
|
Loans, net of deferred fees and costs
|
|
$
|
57,726
|
|
|
$
|
245,308
|
|
|
$
|
626,203
|
|
|
$
|
929,237
|
|
Loans with unique characteristics
We own a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans are geographically disbursed throughout the United States and are made to legal United States residents who do not possess a social security number. The ITIN loan portfolio is serviced by a third party. The majority of the ITIN loans are variable rate loans and may have an increased default risk in a rising rate environment. Worsening economic conditions in the United States may cause us to suffer higher default rates on our ITIN loans and reduce the value of the assets that we hold as collateral. In addition, if we become responsible for servicing of these ITIN loans, we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which would adversely affect our noninterest expense.
Purchased Loans
In addition to loans we have originated, the loan portfolio includes purchased loan pools and purchased participations. Purchased loans are recorded at their fair value at the acquisition date. Additional information regarding the individual purchased loan pools can be found in Note 9
Purchase of Financial Assets
in the
Notes to Consolidated Financial Statements
in this document.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the recorded investment in purchased loans at September 30, 2018 and December 31, 2017.
(Amounts in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Loan Type
|
|
Balance
|
|
|
% of Gross Loan
Portfolio
|
|
|
Balance
|
|
|
% of Gross Loan
Portfolio
|
|
Commercial
|
|
$
|
79
|
|
|
|
—
|
%
|
|
$
|
108
|
|
|
|
—
|
%
|
Commercial real estate
|
|
|
29,396
|
|
|
|
3
|
%
|
|
|
30,195
|
|
|
|
3
|
%
|
Residential real estate
|
|
|
52,888
|
|
|
|
6
|
%
|
|
|
56,735
|
|
|
|
6
|
%
|
Consumer and other
|
|
|
45,815
|
|
|
|
5
|
%
|
|
|
47,836
|
|
|
|
5
|
%
|
Total purchased loans
|
|
$
|
128,178
|
|
|
|
14
|
%
|
|
$
|
134,874
|
|
|
|
14
|
%
|
During the second quarter of 2018 we terminated an agreement to purchase a maximum par value of $50.0 million in unsecured consumer home improvement loans from a third party originator. Our agreement requires us to continue purchasing loans for six months following the notice of termination.
Asset Quality
Nonperforming Assets
Our loan portfolio is heavily concentrated in real estate, and a significant portion of our borrowers’ ability to repay their loans is dependent upon the professional services, commercial real estate market and the residential real estate development industry sectors. Loans secured by real estate or other assets primarily located in California are expected to be repaid from cash flows of the borrower or proceeds from the sale of collateral. As such, our dependence on real estate secured loans could increase the risk of loss in our loan portfolio in a market of declining real estate values. Furthermore, declining real estate values would negatively impact holdings of OREO.
We manage asset quality and mitigate credit risk through the application of policies designed to promote sound underwriting and loan monitoring practices. Our Loan Committee is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for loan and lease losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable incurred losses. The amount of provision charge is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of loan portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of these factors is performed through an analysis of the adequacy of the ALLL. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the ALLL, and to determine the adequacy of the allowance, are conducted on a monthly basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan portfolio, prevailing economic conditions and other factors.
A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when we identify a loan as impaired, we measure the loan for potential impairment using discount cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor our Exclusionary List of appraisers and brokers. In most cases, appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.
Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by our Chief Credit Officer. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, we do not believe there are significant time lapses for the recognition of additional provision for loan and lease loss or charge-offs from the date they become known.
Loans are classified as nonaccrual when collection of principal or interest is doubtful; generally these are loans that are past due as to maturity or payment of principal or interest by 90 days or more, unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for nonaccrual status. Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear certain.
Upon acquisition of real estate collateral, typically through the foreclosure process, we promptly begin to market the property for sale. If we do not receive offers or indications of interest within a reasonable timeframe, we will review market conditions to assess the pricing level that would enable us to sell the property. At the time of foreclosure, OREO is recorded at fair value less costs to sell (“cost”), which becomes the property’s new basis. Unless a current appraisal is available, an appraisal will be ordered prior to a loan migrating to OREO. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, management periodically performs valuations and the property is carried at the lower of the cost or fair value less expected selling costs. We obtain updated appraisals on OREO property every six to twelve months. Valuation adjustments recorded in a period are primarily based on (1) updated appraisals received during the period, or (2) management’s authorization to reduce the selling price of the property during the period.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes our nonperforming assets as of September 30, 2018 and December 31, 2017.
(Amounts in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
Nonperforming Assets
|
|
2018
|
|
|
2017
|
|
Commercial
|
|
$
|
899
|
|
|
$
|
1,603
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
600
|
|
Total commercial real estate
|
|
|
—
|
|
|
|
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
|
|
Total residential real estate
|
|
|
2,794
|
|
|
|
3,560
|
|
Consumer and other
|
|
|
24
|
|
|
|
36
|
|
Total nonaccrual loans
|
|
|
3,717
|
|
|
|
5,799
|
|
90 days past due and still accruing
|
|
|
—
|
|
|
|
—
|
|
Total nonperforming loans
|
|
|
3,717
|
|
|
|
5,799
|
|
Other real estate owned
|
|
|
136
|
|
|
|
35
|
|
Total nonperforming assets
|
|
$
|
3,853
|
|
|
$
|
5,834
|
|
Nonperforming loans to gross loans
|
|
|
0.40
|
%
|
|
|
0.66
|
%
|
Nonperforming assets to total assets
|
|
|
0.29
|
%
|
|
|
0.46
|
%
|
We regularly perform thorough reviews of the commercial real estate portfolio, including semi-annual stress testing. These reviews are performed on both our nonowner and owner occupied credits. These reviews are completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects. Stress testing is performed to determine the effect of risings, interest rates and rising vacancy rates on the portfolio. Based on our analysis, we believe we are effectively managing the risks in this portfolio. There can be no assurance that declines in economic conditions, such as potential increases in retail or office vacancy rates, will not exceed the projected assumptions utilized in stress testing resulting in additional nonperforming loans in the future.
Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired, as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent troubled debt restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement to the loans carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.
As of September 30, 2018, we had $9.7 million in troubled debt restructurings compared to $10.9 million as of December 31, 2017. As of September 30, 2018, we had 107 restructured loans that qualified as troubled debt restructurings, of which all loans were performing according to their restructured terms. Troubled debt restructurings represented 1.05% of gross loans as of September 30, 2018, compared to 1.24% at December 31, 2017.
Impaired loans of $7.0 million and $7.3 million were classified as accruing troubled debt restructurings at September 30, 2018 and December 31, 2017, respectively. 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. As of September 30, 2018 and December 31, 2017, we had one restructured commercial line of credit in nonaccrual status that had $455 thousand and $33 thousand in available credit, respectively.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of September 30, 2018 and December 31, 2017.
(Amounts in thousands)
|
|
September 30,
|
|
|
December 31,
|
|
Troubled Debt Restructurings
|
|
2018
|
|
|
2017
|
|
Accruing troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,291
|
|
|
$
|
1,551
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
797
|
|
|
|
803
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
4,535
|
|
|
|
4,614
|
|
Real estate - residential - equity lines
|
|
|
367
|
|
|
|
380
|
|
Total accruing troubled debt restructurings
|
|
$
|
6,990
|
|
|
$
|
7,348
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing troubled debt restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
807
|
|
|
$
|
863
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
1,889
|
|
|
|
2,396
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
—
|
|
|
|
296
|
|
Consumer and other
|
|
|
24
|
|
|
|
26
|
|
Total nonaccruing troubled debt restructurings
|
|
$
|
2,720
|
|
|
$
|
3,581
|
|
Total troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,098
|
|
|
$
|
2,414
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Real estate - commercial non-owner occupied
|
|
|
797
|
|
|
|
803
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
6,424
|
|
|
|
7,010
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
—
|
|
|
|
296
|
|
Real estate - residential - equity lines
|
|
|
367
|
|
|
|
380
|
|
Consumer and other
|
|
|
24
|
|
|
|
26
|
|
Total troubled debt restructurings
|
|
$
|
9,710
|
|
|
$
|
10,929
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings to gross loans outstanding at period end
|
|
|
1.05
|
%
|
|
|
1.24
|
%
|
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
The ALLL at September 30, 2018 increased $467 thousand to $12.4 million compared to $11.9 million at December 31, 2017. As a result of improved asset quality and net loan recoveries, no provision for loan and lease losses was deemed necessary during the nine months ended September 30, 2018. During the year ended December 31, 2017, we recorded a $950 thousand provision for loan and lease losses.
We recorded net loan loss recoveries of $467 thousand for the nine months ended September 30, 2018 compared to net loan charge-offs of $569 thousand for the year ended December 31, 2017. Recoveries of $1.4 million during the nine months ended September 30, 2018 occurred primarily from two commercial loans partially offset by charge-offs of $646 thousand primarily from purchased consumer loans. Our ALLL as a percentage of gross loans was 1.34% and 1.36% as of September 30, 2018 and December 31, 2017, respectively.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the ALLL roll forward for the nine months ended September 30, 2018, twelve months ended December 31, 2017 and the nine months ended September 30, 2017. This table also includes impaired loan information at September 30, 2018, December 31, 2017 and September 30, 2017.
|
|
For The Nine Months
Ended
|
|
|
For The Twelve Months Ended
|
|
|
For The Nine Months
Ended
|
|
(Amounts in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
September 30, 2017
|
|
Beginning balance ALLL
|
|
$
|
11,925
|
|
|
$
|
11,544
|
|
|
$
|
11,544
|
|
Provision for loan and lease loss charged to expense
|
|
|
—
|
|
|
|
950
|
|
|
|
500
|
|
Loans charged off
|
|
|
(969
|
)
|
|
|
(1,502
|
)
|
|
|
(1,051
|
)
|
Loan and lease loss recoveries
|
|
|
1,436
|
|
|
|
933
|
|
|
|
699
|
|
Ending balance ALLL
|
|
$
|
12,392
|
|
|
$
|
11,925
|
|
|
$
|
11,692
|
|
|
|
At September 30, 2018
|
|
|
At December 31, 2017
|
|
|
At September 30, 2017
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
899
|
|
|
$
|
1,603
|
|
|
$
|
2,309
|
|
Real estate - commercial owner occupied
|
|
|
—
|
|
|
|
600
|
|
|
|
617
|
|
Real estate - residential - ITIN
|
|
|
2,571
|
|
|
|
2,909
|
|
|
|
3,201
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
179
|
|
|
|
606
|
|
|
|
626
|
|
Real estate - residential - equity lines
|
|
|
44
|
|
|
|
45
|
|
|
|
815
|
|
Consumer and other
|
|
|
24
|
|
|
|
36
|
|
|
|
37
|
|
Total nonaccrual loans
|
|
|
3,717
|
|
|
|
5,799
|
|
|
|
7,605
|
|
Accruing troubled-debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,291
|
|
|
|
1,551
|
|
|
|
671
|
|
Real estate - commercial non-owner occupied
|
|
|
797
|
|
|
|
803
|
|
|
|
805
|
|
Real estate - residential - ITIN
|
|
|
4,535
|
|
|
|
4,614
|
|
|
|
4,655
|
|
Real estate - residential - equity lines
|
|
|
367
|
|
|
|
380
|
|
|
|
441
|
|
Total accruing restructured loans
|
|
|
6,990
|
|
|
|
7,348
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other accruing impaired loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total impaired loans
|
|
$
|
10,707
|
|
|
$
|
13,147
|
|
|
$
|
14,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans outstanding
|
|
$
|
927,480
|
|
|
$
|
879,835
|
|
|
$
|
824,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of ALLL to gross loans outstanding
|
|
|
1.34
|
%
|
|
|
1.36
|
%
|
|
|
1.42
|
%
|
Nonaccrual loans to gross loans outstanding
|
|
|
0.40
|
%
|
|
|
0.66
|
%
|
|
|
0.92
|
%
|
As of September 30, 2018, impaired loans totaled $10.7 million, of which $3.7 million were in nonaccrual status. Of the total impaired loans, $7.1 million or 107 were ITIN loans with an average balance of approximately $66 thousand. The remaining impaired loans consist of six commercial loans, one commercial real estate loan, one residential mortgage, eight home equity loans and one consumer loan.
At September 30, 2018, impaired loans had a corresponding specific allowance of $1.1 million. The specific allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.
The following table sets forth the allocation of the ALLL as of September 30, 2018 and December 31, 2017.
(Amounts in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
ALLL
|
|
Amount
|
|
|
% Loan Category
|
|
|
Amount
|
|
|
% Loan Category
|
|
Commercial
|
|
$
|
2,229
|
|
|
|
18
|
%
|
|
$
|
2,397
|
|
|
|
20
|
%
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction and land development
|
|
|
97
|
|
|
|
1
|
|
|
|
82
|
|
|
|
1
|
|
Real estate - commercial non-owner occupied
|
|
|
5,363
|
|
|
|
43
|
|
|
|
4,698
|
|
|
|
40
|
|
Real estate - commercial owner occupied
|
|
|
1,747
|
|
|
|
14
|
|
|
|
1,734
|
|
|
|
15
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential - ITIN
|
|
|
687
|
|
|
|
6
|
|
|
|
602
|
|
|
|
5
|
|
Real estate - residential - 1-4 family mortgage
|
|
|
162
|
|
|
|
1
|
|
|
|
151
|
|
|
|
1
|
|
Real estate - residential - equity lines
|
|
|
363
|
|
|
|
3
|
|
|
|
416
|
|
|
|
3
|
|
Consumer and other
|
|
|
1,287
|
|
|
|
10
|
|
|
|
1,435
|
|
|
|
12
|
|
Unallocated
|
|
|
457
|
|
|
|
4
|
|
|
|
410
|
|
|
|
3
|
|
Total ALLL
|
|
$
|
12,392
|
|
|
|
100
|
%
|
|
$
|
11,925
|
|
|
|
100
|
%
|
The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk grading-based component, or in the specific reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2018 and December 31, 2017, the unallocated allowance amount represents 4% and 3%, respectively. While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Natural Disasters
Wildfires
We have extended credit to borrowers in California where devastating fires have recently caused widespread destruction, especially in the Redding area.
As of September 30, 2018, we have loans with balances totaling $301 thousand that are secured by real estate damaged by the recent fires. We believe that these properties are adequately insured and we do not expect to experience losses on these loans.
In addition, we have extended credit totaling $2.7 million to borrowers whose homes or businesses are not collateral for our loan but were in the fire area. This may impact our borrower’s ability to repay our loans.
Hurricanes
Many of the loans that we have acquired from third party originators were made to borrowers who are located throughout the United States, other than in California. Some of those borrowers reside in areas where hurricanes have caused severe damage. The loans that were affected are primarily ITIN loans, which are secured by first deeds of trust and consumer home improvement loans, which are unsecured. These loans are not serviced by us and we are dependent on third party servicers for collection efforts, processing payment deferral requests and obtaining loss information. We have not seen any significant increase in losses as a result of the hurricanes.
Deposits
Total deposits as of September 30, 2018 were $1.1 billion compared to $1.1 billion at December 31, 2017, an increase of $42.0 million or 5% annualized. The following table presents the deposit balances by major category as of September 30, 2018, and December 31, 2017.
(Amounts in thousands)
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Deposits
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Noninterest-bearing demand
|
|
$
|
361,516
|
|
|
|
32
|
%
|
|
$
|
305,650
|
|
|
|
28
|
%
|
Interest-bearing demand
|
|
|
251,323
|
|
|
|
22
|
|
|
|
260,221
|
|
|
|
24
|
|
Money market accounts
|
|
|
259,230
|
|
|
|
23
|
|
|
|
236,769
|
|
|
|
21
|
|
Savings
|
|
|
111,388
|
|
|
|
10
|
|
|
|
110,837
|
|
|
|
10
|
|
Certificates of deposit, $100,000 or greater
|
|
|
126,948
|
|
|
|
10
|
|
|
|
148,438
|
|
|
|
13
|
|
Certificates of deposit, less than $100,000
|
|
|
34,356
|
|
|
|
3
|
|
|
|
40,817
|
|
|
|
4
|
|
Total
|
|
$
|
1,144,761
|
|
|
|
100
|
%
|
|
$
|
1,102,732
|
|
|
|
100
|
%
|
The following table sets forth the distribution of our year-to-date average daily balances and their respective average rates for the nine months ended September 30, 2018, and the year ended December 31, 2017.
|
|
For the Nine Months Ended September 30, 2018
|
|
|
For the Year Ended December 31, 2017
|
|
(Amounts in thousands)
|
|
Average Balance
|
|
|
Rate
|
|
|
Average Balance
|
|
|
Rate
|
|
Interest-bearing demand
|
|
$
|
231,958
|
|
|
|
0.16
|
%
|
|
$
|
209,792
|
|
|
|
0.13
|
%
|
Money market accounts
|
|
|
245,797
|
|
|
|
0.24
|
%
|
|
|
224,913
|
|
|
|
0.21
|
%
|
Savings
|
|
|
108,382
|
|
|
|
0.24
|
%
|
|
|
111,376
|
|
|
|
0.18
|
%
|
Certificates of deposit
|
|
|
171,941
|
|
|
|
1.13
|
%
|
|
|
205,648
|
|
|
|
1.06
|
%
|
Interest-bearing deposits
|
|
|
758,078
|
|
|
|
0.42
|
%
|
|
|
751,729
|
|
|
|
0.42
|
%
|
Noninterest-bearing demand
|
|
|
320,316
|
|
|
|
|
|
|
|
289,735
|
|
|
|
|
|
Average total deposits
|
|
$
|
1,078,394
|
|
|
|
0.29
|
%
|
|
$
|
1,041,464
|
|
|
|
0.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank of San Francisco borrowings
|
|
$
|
30,037
|
|
|
|
1.94
|
%
|
|
$
|
302
|
|
|
|
0.99
|
%
|
Other borrowings, net
|
|
|
15,601
|
|
|
|
7.07
|
%
|
|
|
17,981
|
|
|
|
6.48
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
3.67
|
%
|
|
|
10,310
|
|
|
|
2.78
|
%
|
Average total borrowings
|
|
$
|
55,948
|
|
|
|
3.69
|
%
|
|
$
|
28,593
|
|
|
|
5.09
|
%
|
Deposit Maturity Schedule
The following table sets forth the maturities of certificates of deposit in amounts of $100,000 or more as of September 30, 2018.
(Amounts in thousands)
|
|
September 30,
|
|
Maturing in:
|
|
2018
|
|
Three months or less
|
|
$
|
16,650
|
|
Three through six months
|
|
|
33,893
|
|
Six through twelve months
|
|
|
19,783
|
|
Over twelve months
|
|
|
56,622
|
|
Total
|
|
$
|
126,948
|
|
We have an agreement with Promontory Interfinancial Network LLC (“Promontory”) allowing provision of FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. Promontory’s Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) use a deposit-matching program to exchange Bank deposits in excess of the current deposit insurance limits for excess balances at other participating banks, on a dollar-for-dollar basis, that would be fully insured at the Bank. These products are designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers. CDARS and ICS deposits can be reciprocal or one-way.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For calendar quarters prior to June 30, 2018, CDARS/ ICS reciprocal deposits were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, this is no longer so.
Included in our certificates of deposit balances are $24.4 million of subscription time deposits obtained in prior years through online deposit listing services. We no longer utilize online deposit listing services. As they mature, these legacy deposits are not being renewed.
Borrowings
Term Debt
At September 30, 2018, we had total term debt outstanding with a carrying value of $14.3 million compared to $17.0 million at December 31, 2017. Term debt consisted of the following:
Federal Home Loan Bank of San Francisco Borrowings
As of September 30, 2018 and December 31, 2017 the Bank had no Federal Home Loan Bank of San Francisco advances outstanding. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2018 or the year ended December 31, 2017 was $30.0 million and $302 thousand, respectively. Strong loan growth combined with seasonal decreases in deposits necessitated Federal Home Loan Bank of San Francisco borrowings during the first two quarters of 2018. The borrowings were repaid during the third quarter from strong organic core deposit growth. See Note 6
Term Debt
in the
Notes to Consolidated Financial Statements
for information on our Federal Home Loan Bank of San Francisco borrowings.
Senior Debt
In December of 2015, we entered into a senior debt loan agreement to borrow $10.0 million. The debt is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce, matures in 2020, and at September 30, 2018, had a balance of $4.4 million net of unamortized debt issuance costs. Interest on the senior debt is paid at a variable rate equal to three month LIBOR plus 400 basis points resetting monthly. The effective interest rate at September 30, 2018, was 6.34%.
Subordinated Debt
In December of 2015, we issued $10.0 million of fixed to floating rate Subordinated Notes. The Subordinated Debt initially bears interest at 6.88% per annum for a five-year term. Thereafter, interest on the Subordinated Debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points resetting quarterly. At September 30, 2018, the Subordinated Debt had a balance of $9.9 million net of unamortized debt issuance costs. The notes are due in 2025.
Junior Subordinated Debentures
Bank of Commerce Holdings Trust II
During July 2005, we participated in a $10.0 million private placement of trust-preferred securities (the "Trust-Preferred Securities") through a wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). Trust II simultaneously issued $310 thousand common securities to the Holding Company. Interest on the Trust-Preferred Securities is paid quarterly at a rate equal to three month LIBOR plus 158 basis points resetting quarterly (3.91% at September 30, 2018).
The Trust-Preferred Securities mature on September 15, 2035, and the covenants allow for redemption of the securities at our option during any quarter prior to maturity.
The proceeds from the sale of the Trust-Preferred Securities were used by the Trust II to purchase from the Holding Company the aggregate principal amount of $10.3 million of the Holding Company’s junior subordinate debentures (the "Notes"). The net proceeds to the Holding Company from the sale of the Notes to Trust II were partially distributed to the Bank. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.
LIQUIDITY AND CASH FLOW
Redding Bank of Commerce
The principal objective of the Bank’s liquidity management program is to maintain its ability to meet the day-to-day cash flow requirements of its customers who wish either to withdraw funds on deposit or to draw upon their credit facilities.
We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds is public deposits. We may be required to collateralize a portion of public deposits that exceed FDIC insurance limitations based on the state of California’s risk assessment of the Bank. Public deposits represent 2% of our total deposits at September 30, 2018 and December 31, 2017.
In addition to liquidity provided by core deposits, loan repayments and cash flows from securities, the Bank can borrow on established conditional federal funds lines of credit, sell securities, borrow on a secured basis from the Federal Home Loan Bank of San Francisco, borrow on a secured basis from the Federal Reserve Bank, or issue subscription / brokered certificates of deposit. The Bank’s tight liquidity position during the second quarter necessitated the use of its Federal Home Loan Bank of San Francisco credit line. The borrowings were repaid during the third quarter as a result of strong organic core deposit growth and the seasonal increase in deposits.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2018, the Bank has the following credit arrangements:
|
●
|
We have an available line of credit with the Federal Home Loan Bank of San Francisco of $397.7 million; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities.
|
|
●
|
We have an available line of credit with the Federal Reserve Bank of $27.2 million subject to collateral requirements, namely the amount of pledged loans.
|
|
●
|
We have entered into nonbinding federal funds line of credit agreements with three financial institutions. The lines totaled $35.0 million at September 30, 2018 and had interest rates ranging from 2.39% to 3.06%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions.
|
Bank of Commerce Holdings
The Holding Company is a separate entity from the Bank and must provide for its own liquidity. We currently hold $19.8 million from our May 2017 public offering. Historically, our principal source of cash has been dividends received from the Bank. During 2018, the Bank paid a dividend of $1.5 million to the Holding Company. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company in the future.
Consolidated Statements of Cash Flows
As disclosed in the
Consolidated Statements of Cash Flows
, net cash of $15.2 million was provided by operating activities during the nine months ended September 30, 2018. The primary difference between net income and cash provided by operating activities was non-cash items including depreciation and amortization totaling $1.6 million and net amortization of investment premiums and accretion of discounts of $1.4 million.
Net cash of $28.7 million used in investing activities consisted principally of $31.3 million in purchases of investment securities and $47.3 million in net loan purchases and originations partially offset by $27.6 million in proceeds from sale of investment securities and $23.9 million in proceeds from maturities and payments of investment securities.
Net cash of $37.8 million provided by financing activities consisted of an increase in deposits of $42.0 million partially offset by a $2.7 million decrease in net term debt.
CAPITAL RESOURCES
We use equity capital to support growth and pay dividends. The objective of effective capital management is to produce above market long-term returns for our shareholders. Our sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt or trust notes.
REGULATORY CAPITAL GUIDELINES
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. The current rules (commonly known as Basel III) require the Bank and the Company to meet a capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. The capital conservation buffer of 2.50% is added to the minimum capital ratios and is being phased in between 2016 and 2019. For 2018, the partially phased in buffer is 1.875%.
When the capital rule is fully phased in, the minimum capital requirements plus the conservation buffer will exceed the well-capitalized thresholds by 0.5 percentage points. This 0.5-percentage-point cushion will allow institutions to dip into a portion of their capital conservation buffer before reaching a status that is considered less than well capitalized for prompt corrective action purposes.
The Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law during the second quarter of 2018. The act amends the Federal Deposit Insurance Act to require federal banking agencies to develop a specified Community Bank Leverage Ratio (the ratio of a bank's equity capital to its consolidated assets) for banks with assets of less than $10.0 billion. Banks that exceed this ratio shall be deemed to comply with all other capital and leverage requirements.
CAPITAL ADEQUACY
Overall capital adequacy is monitored regularly by management and reported to our Board of Directors on a monthly basis. Our regulators measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. As illustrated on the table below, the Holding Company and the Bank exceed the standards under these rules.
As of September 30, 2018, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s risk category. The Holding Company and the Bank’s capital amounts and ratios as of September 30, 2018, are presented in the following table.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
September 30, 2018
|
|
(Amounts in thousands)
|
|
Capital
|
|
|
Actual
Ratio
|
|
|
Well
Capitalized
Requirement
|
|
|
Minimum
Capital
Requirement
|
|
|
Applicable
2018 Capital
Conservation Buffer
|
|
|
Minimum Capital
Ratio plus Capital
Conservation Buffer
|
|
Holding Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital Ratio
|
|
$
|
135,184
|
|
|
|
12.65
|
%
|
|
|
n/a
|
|
|
|
4.50
|
%
|
|
|
1.875
|
%
|
|
|
6.375
|
%
|
Tier 1 Capital Ratio
|
|
$
|
145,184
|
|
|
|
13.59
|
%
|
|
|
n/a
|
|
|
|
6.00
|
%
|
|
|
1.875
|
%
|
|
|
7.875
|
%
|
Total Capital Ratio
|
|
$
|
168,271
|
|
|
|
15.75
|
%
|
|
|
n/a
|
|
|
|
8.00
|
%
|
|
|
1.875
|
%
|
|
|
9.875
|
%
|
Tier 1 Leverage Ratio
|
|
$
|
145,184
|
|
|
|
11.18
|
%
|
|
|
n/a
|
|
|
|
4.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital Ratio
|
|
$
|
140,436
|
|
|
|
13.14
|
%
|
|
|
6.50
|
%
|
|
|
4.50
|
%
|
|
|
1.875
|
%
|
|
|
6.375
|
%
|
Tier 1 Capital Ratio
|
|
$
|
140,436
|
|
|
|
13.14
|
%
|
|
|
8.00
|
%
|
|
|
6.00
|
%
|
|
|
1.875
|
%
|
|
|
7.875
|
%
|
Total Capital Ratio
|
|
$
|
153,523
|
|
|
|
14.36
|
%
|
|
|
10.00
|
%
|
|
|
8.00
|
%
|
|
|
1.875
|
%
|
|
|
9.875
|
%
|
Tier 1 Leverage Ratio
|
|
$
|
140,436
|
|
|
|
10.78
|
%
|
|
|
5.00
|
%
|
|
|
4.00
|
%
|
|
|
n/a
|
|
|
|
n/a
|
|
On December 10, 2015, the Holding Company issued $10.0 million in aggregate principal amount of Subordinated Notes to certain institutional investors. The Subordinated Notes qualify as Tier 2 Capital under the Final Rules. See Item 1a -
Risk Factors
, in our Annual Report on Form 10-K for the year ended December 31, 2017 for further detail on potential risks relating to the Subordinated Notes.
As part of a branch acquisition in 2016, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. When calculating capital ratios, goodwill and core deposit intangibles are subtracted from Tier 1 capital. Both of these intangible assets are subtracted from tangible equity as part of the calculation of tangible book value per share.
Cash Dividends and Payout Ratios per Common Share
We declared a cash dividend of $0.04 per common share for the three months ended September 30, 2018 and June 30, 2018. During the three months ended March 31, 2018 and the year ended December 31, 2017, we declared quarterly cash dividends of $0.03 per common share.
These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, capital preservation and expected growth. The dividend rate will be reassessed periodically by the Board of Directors in accordance with the dividend policy. There is no assurance that future cash dividends on common shares will be declared or increased.
The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three and nine months ended September 30, 2018 and 2017.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Dividends declared per common share
|
|
$
|
0.04
|
|
|
$
|
0.03
|
|
|
$
|
0.11
|
|
|
$
|
0.09
|
|
Dividend payout ratio
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
16
|
%
|
|
|
18
|
%
|
OFF-BALANCE SHEET ARRANGEMENTS
Information regarding Off-Balance Sheet Arrangements is included in Note 7,
Commitments and Contingencies,
in the
Notes to Consolidated Financial Statements
incorporated in this document.
CONCENTRATION OF CREDIT RISK
Information regarding Concentration of Credit Risk is included in Note 7,
Commitments and Contingencies,
in the
Notes to Consolidated Financial Statements
incorporated in this document.