boch20150930_10q.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

 

OR

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

 

For the transition period from __________________to_______________________

 

Commission file number 0-25135

 

Bank of Commerce Holdings

 

 

   

California

94-2823865

(State or jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

   

1901 Churn Creek Road Redding, California

96002

(Address of principal executive offices)

(Zip Code)

   

 

Registrant’s telephone number, including area code: (530) 722-3952

 

 

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

 

 Yes ☒ No ☐

 

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

 

Yes☒ No ☐

 

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

 

(Check One)

       

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller Reporting Company ☐

 

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

 

Yes ☐ No ☒

 

Outstanding shares of Common Stock, no par value, as of October 22, 2015: 13,373,890

 

 
1

Table Of Contents
 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q

 

 

Part I. FINANCIAL INFORMATION

3

 

Item 1. Financial Statements

3

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

43

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

70

 

Item 4. Controls and Procedures

71

     

Part II. OTHER INFORMATION

72

 

Item 1. Legal Proceedings

72

 

Item 1a. Risk Factors

72

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

72

 

Item 3. Defaults Upon Senior Securities

72

 

Item 4. Mine Safety Disclosures

72

 

Item 5. Other Information

72

 

Item 6. Exhibits

72

     

SIGNATURES

73

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets (Unaudited)

September 30, 2015 and December 31, 2014

 

 

   

September 30,

   

December 31,

 

(Amounts in thousands, except share information)

 

2015

   

2014

 

Assets:

               

Cash and due from banks

  $ 8,564     $ 9,571  

Interest-bearing deposits in other banks

    16,745       48,851  

Total cash and cash equivalents

    25,309       58,422  
                 

Securities available-for-sale, at fair value

    157,309       186,986  

Securities held-to-maturity, at amortized cost

    36,093       36,806  
                 

Loans, net of deferred fees and costs

    719,251       661,055  

Allowance for loan and lease losses

    (10,891 )     (10,820 )

Net loans

    708,360       650,235  
                 

Premises and equipment, net

    11,112       12,295  

Other real estate owned

    1,525       502  

Life insurance

    22,326       21,844  

Deferred tax asset

    10,638       10,231  

Other assets

    18,057       19,871  

Total assets

  $ 990,729     $ 997,192  
                 

Liabilities and shareholders' equity:

               

Liabilities:

               

Demand - noninterest bearing

  $ 162,437     $ 157,557  

Demand - interest bearing

    295,209       298,160  

Savings deposits

    93,367       88,569  

Certificates of deposit

    228,492       244,749  

Total deposits

    779,505       789,035  
                 

Federal Home Loan Bank of San Francisco borrowings

    75,000       75,000  

Junior subordinated debentures

    10,310       10,310  

Other liabilities

    17,239       19,245  

Total liabilities

    882,054       893,590  
                 

Commitments and contingencies (Note 12)

               

Shareholders' equity:

               

Preferred stock, no par value, 2,000,000 shares authorized: Series B (liquidation preference $1,000 per share) issued and outstanding: 20,000 as of September 30, 2015 and December 31, 2014

    19,931       19,931  

Common stock, no par value, 50,000,000 shares authorized: 30,467,270 issued; 13,373,890 outstanding as of September 30, 2015 and 13,297,777 outstanding as of December 31, 2014

    24,180       23,891  

Retained earnings

    65,232       59,867  

Accumulated other comprehensive loss

    (668 )     (87 )

Total shareholders' equity

    108,675       103,602  

Total liabilities and shareholders' equity

  $ 990,729     $ 997,192  

 

 

See accompanying notes to consolidated financial statements.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

For the three and nine months ended September 30, 2015 and 2014

 

 

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 

(Amounts in thousands, except per share information)

 

2015

   

2014

   

2015

   

2014

 

Interest income:

                               

Interest and fees on loans

  $ 8,357     $ 7,350     $ 24,572     $ 21,632  

Interest on taxable securities

    743       1,001       2,489       3,230  

Interest on tax-exempt securities

    592       629       1,793       1,916  

Interest on interest-bearing deposits in other banks

    40       122       167       386  

Total interest income

    9,732       9,102       29,021       27,164  

Interest expense:

                               

Interest on demand deposits

    116       123       339       362  

Interest on savings deposits

    53       59       162       173  

Interest on certificates of deposit

    586       650       1,771       1,985  

Interest on Federal Home Loan Bank of San Francisco borrowings

    475       228       1,187       52  

Interest on junior subordinated debentures

    47       94       143       281  

Total interest expense

    1,277       1,154       3,602       2,853  

Net interest income

    8,455       7,948       25,419       24,311  

Provision for loan and lease losses

          1,050             2,500  

Net interest income after provision for loan and lease losses

    8,455       6,898       25,419       21,811  

Noninterest income:

                               

Service charges on deposit accounts

    52       50       153       135  

Fees on payroll and benefit processing

    138       127       416       371  

Earnings on cash surrender value - life insurance

    158       171       482       459  

Gain (loss) on investment securities, net

    137       32       413       (252 )

Other income

    323       291       1,079       2,458  

Total noninterest income

    808       671       2,543       3,171  

Noninterest expense:

                               

Salaries and related benefits

    3,208       3,520       10,693       10,664  

Premises and equipment

    714       749       2,157       2,069  

Write-down of other real estate owned

                      290  

Federal Deposit Insurance Corporation insurance premium

    159       204       544       584  

Data processing fees

    243       226       736       656  

Professional service fees

    337       283       1,167       817  

Other expenses

    913       789       2,992       4,182  

Total noninterest expense

    5,574       5,771       18,289       19,262  

Income before provision for income taxes

    3,689       1,798       9,673       5,720  

Provision for income taxes

    1,164       525       2,957       1,676  

Net income

  $ 2,525     $ 1,273     $ 6,716     $ 4,044  

Less: Preferred stock dividends

    50       50       150       150  

Income available to common shareholders

  $ 2,475     $ 1,223     $ 6,566     $ 3,894  
                                 

Earnings per share - basic

  $ 0.18     $ 0.09     $ 0.49     $ 0.29  

Weighted average shares - basic

    13,340       13,294       13,327       13,536  

Earnings per share - diluted

  $ 0.18     $ 0.09     $ 0.49     $ 0.29  

Weighted average shares - diluted

    13,377       13,339       13,358       13,582  

 

 

See accompanying notes to consolidated financial statements.

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

For the three and nine months ended September 30, 2015 and 2014

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 

(Amounts in thousands)

 

2015

   

2014

   

2015

   

2014

 

Net income

  $ 2,525     $ 1,273     $ 6,716     $ 4,044  
                                 

Available-for-sale securities:

                               

Change in unrealized gains (losses)

    253       528       (544 )     5,253  

Income tax (expense) benefit

    (104 )     (217 )     224       (2,162 )
                                 

Change in unrealized gains (losses), net of tax

    149       311       (320 )     3,091  
                                 

Reclassification adjustment for realized (gains) loss included in net income

    (137 )     (32 )     (413 )     252  

Income tax expense (benefit)

    54       11       170       (106 )

Realized (gains) losses, net of tax

    (83 )     (21 )     (243 )     146  

Net change in unrealized gains (losses) on available-for-sale securities

    66       290       (563 )     3,237  
                                 

Held-to-maturity securities:

                               

Amortization of held-to-maturity fair value adjustment

    (37 )     (37 )     (116 )     (116 )

Income tax benefit

    14       14       47       47  

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

    (23 )     (23 )     (69 )     (69 )
                                 

Derivatives:

                               

Change in unrealized (losses) gain

    (457 )     296       (917 )     (233 )

Income tax benefit (expense)

    188       (122 )     377       96  

Change in unrealized (losses) gain, net of tax

    (269 )     174       (540 )     (137 )
                                 

Reclassification adjustment for loss (gain) on derivatives included in net income

    418       (22 )     1,005       (1,900 )

Income tax (benefit) expense

    (177 )     10       (414 )     783  

Reclassification adjustment for net loss (gain) realized in earnings, net of tax

    241       (12 )     591       (1,117 )

Net change in unrealized (losses) gains on derivatives

    (28 )     162       51       (1,254 )

Other comprehensive income (loss)

    15       429       (581 )     1,914  

Comprehensive income – Bank of Commerce Holdings

  $ 2,540     $ 1,702     $ 6,135     $ 5,958  

 

 

See accompanying notes to consolidated financial statements.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the twelve months ended December 31, 2014 and nine months ended September 30, 2015 (Unaudited)

 

 

 

                                   

Accumulated

         
                   

Common

           

Other Comp-

         
   

Preferred

   

Common

   

Stock

   

Retained

   

Loss

         

(Amounts in thousands except per share information)

 

Amount

   

Shares

   

Amount

   

Earnings

   

Net of Tax

   

Total

 

Balance at January 1, 2014

  $ 19,931       13,977     $ 28,304     $ 55,944     $ (2,392 )   $ 101,787  

Net Income

                      5,727             5,727  

Other comprehensive income, net of tax

                            2,305       2,305  

Comprehensive income

                                  8,032  

Dividend on preferred stock

                      (200 )           (200 )

Repurchase of common stock

          (700 )     (4,562 )                 (4,562 )

Dividend on common stock ($0.12 per share)

                      (1,604 )           (1,604 )

Common stock issued under employee plans and related tax benefit

          14       66                   66  

Stock options exercised

          3       23                   23  

Compensation expense associated with stock options

                60                   60  
Restricted stock granted (unvested)           3                          

Balance at December 31, 2014

  $ 19,931       13,297     $ 23,891     $ 59,867     $ (87 )   $ 103,602  

 

 

 

                                   

Accumulated

         
                   

Common

           

Other Comp-

         
   

Preferred

   

Common

   

Stock

   

Retained

   

Loss

         

(Amounts in thousands except per share information)

 

Amount

   

Shares

   

Amount

   

Earnings

   

Net of Tax

   

Total

 

Balance at January 1, 2015

  $ 19,931       13,294     $ 23,891     $ 59,867     $ (87 )   $ 103,602  

Net income

                      6,716             6,716  

Other comprehensive loss, net of tax

                            (581 )     (581 )

Comprehensive income

                                  6,135  

Dividend on preferred stock

                      (150 )           (150 )

Dividend on common stock ($0.09 per share)

                      (1,201 )           (1,201 )

Common stock issued under employee plans and related tax benefit

          9       36                   36  

Stock options exercised

          37       152                   152  

Compensation expense associated with stock options

                33                   33  

Compensation expense associated with restricted stock

                68                   68  
Restricted stock granted (unvested)           34                          

Balance at September 30, 2015

  $ 19,931       13,374     $ 24,180     $ 65,232     $ (668 )   $ 108,675  

 

 

See accompanying notes to consolidated financial statements.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2015 and September 30, 2014

 

 

   

For the Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 6,716     $ 4,044  

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

               

Provision for loan and lease losses

          2,500  

Provision for depreciation and amortization

    1,126       962  

Compensation expense associated with stock options

    33       43  

Compensation expense associated with restricted stock

    68        

Net (gain) loss on sale of securities available-for-sale

    (413 )     252  

Amortization of investment premiums and accretion of discounts, net

    1,424       1,199  

Amortization of held-to-maturity fair value adjustment

    (116 )     (116 )

(Gain) loss on sale of fixed assets

    (4 )     4  

Write-down of fixed assets

    238        

Write-down of other real estate owned

          290  

Loss on sale of other real estate owned

    4       11  

Increase in cash surrender value of life insurance

    (482 )     (459 )

Increase in deferred compensation and salary continuation plans

    28       275  

(Increase) decrease in deferred loan fees and costs

    (561 )     119  

Decrease (increase) in other assets

    669       (511 )

(Decrease) increase in other liabilities

    (1,165 )     1,177  

Net cash provided by operating activities

    7,565       9,790  
                 

Cash flows from investing activities:

               

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

    18,328       13,608  

Proceeds from sale of available-for-sale securities

    61,255       81,820  

Purchases of available-for-sale securities

    (52,015 )     (64,247 )

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

    849       186  

Purchases of held-to-maturity securities

          (244 )

Investment in qualified affordable housing projects

    (863 )     (1,764 )

Net redemption of Federal Home Loan Bank of San Francisco stock

    1,263       (1,902 )

Loan originations, net of principal repayments

     (51,452     (17,745

Purchase of loan pools

    (34,770 )     (49,250

Repayments on loan pools

    24,937       8,586  

Purchase of life insurance

          (5,000 )

Purchase of premises and equipment

    (347 )     (2,583 )

Proceeds from the sale of other real estate owned

    2,864       656  

Proceeds from settlement of note to former mortgage subsidiary

          686  

Net cash used by investing activities

    (29,951 )     (37,193 )

 

 

See accompanying notes to consolidated financial statements.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

 

 

   

For the Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2015

   

2014

 

Cash flows from financing activities:

               

Net increase in demand deposits and savings deposits

  $ 6,727     $ 10,765  

Net (decrease) increase in certificates of deposit

    (16,257 )     10,462  

Advances on term debt

    240,000       75,000  

Repayment of term debt

    (240,000 )     (75,000 )

Proceeds from stock options exercised

    152       23  

Repurchase of common stock

          (4,562 )

Cash dividends paid on preferred stock

    (150 )     (150 )

Cash dividends paid on common stock

    (1,199 )     (1,227 )

Net cash (used) provided by financing activities

    (10,727 )     15,311  

Net decrease in cash and cash equivalents

    (33,113 )     (12,092 )

Cash and cash equivalents at beginning of year

    58,422       58,515  

Cash and cash equivalents at end of period

  $ 25,309     $ 46,423  

 

 

See accompanying notes to consolidated financial statements.

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the nine months ended September 30, 2015 and September 30, 2014

 

 

   

For the Nine Months Ended

 
   

September 30,

 

(Amounts in thousands)

 

2015

   

2014

 

Supplemental disclosures of cash flow activity:

               

Cash paid during the period for:

               

Income taxes

  $ 3,650     $  

Interest

  $ 3,342     $ 2,931  

Supplemental disclosures of non cash investing activities:

               

Transfer of loans to other real estate owned

  $ 3,721     $ 437  

Transfer of fixed asset to other real estate owned

  $ 170     $  
                 

Change in unrealized gain on investment securities available-for-sale

  $ (957 )   $ 5,505  

Change in net deferred tax asset related to change in unrealized gain on investment securities available-for-sale

    394       (2,268 )

Change in accumulated other comprehensive income due to change in unrealized gain on investment securities available-for-sale

  $ (563 )   $ 3,237  
                 

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

  $ (116 )   $ (116 )

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

    47       47  

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

  $ (69 )   $ (69 )
                 

Change in unrealized (loss) on derivatives

  $ (917 )   $ (233 )

Change in net deferred tax asset related to change in unrealized loss on derivatives

    377       96  

Change in accumulated other comprehensive income due to change in unrealized loss on derivatives

  $ (540 )   $ (137 )
                 

Reclassification of expense (earnings) from loss (gains) on derivatives

  $ 1,005     $ (1,900 )

Change in net deferred tax asset related to reclassification of (loss) earnings from gains on derivatives

    (414 )     783  

Change in accumulated other comprehensive income due to reclassification of expense (earnings) from loss (gain) on derivatives

  $ 591     $ (1,117 )

Supplemental disclosures of non cash financing activities:

               

Stock issued under employee plans

  $ 36     $ 66  

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

  $ 400     $ 399  

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

  $ 50     $ 50  

 

 

See accompanying notes to consolidated financial statements.

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”), is a bank holding company (“BHC”) with its principal offices in Redding, California. The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The balance sheet as of September 30, 2015 and December 31, 2014, which has been derived from the unaudited interim consolidated financial statements and audited consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and the disclosures made are adequate to make the information not misleading.

  

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with prevailing practices within the banking and securities industries. In preparing such consolidated financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses (“ALLL”), the valuation of Other Real Estate Owned (“OREO”), and fair value measurements. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation. The results of reclassifications are not considered material and have no effect on previously reported net income. Subsequent to the issuance of the Company’s 2014 Annual Report on Form 10-K, the Company identified an error in the “pass” and “watch” classifications disclosed in the internal risk ratings table. Loans previously reported in the “watch” classification that are subject to enhanced monitoring but did not meet the regulatory definition of “watch” should have been reported in the “pass” classification. The revision reclassifies loans from the “watch” classification to the “pass” classification. There is no effect on the 2014 Consolidated Balance Sheets or 2014 Consolidated Statements of Operations. There is also no impact on the Company’s criticized or classified assets. See Note 6 - Loans in the Notes to Consolidated Financial Statements for further discussion. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2014 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2015 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Holding Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As of September 30, 2015 and December 31, 2014, the Company had one wholly-owned trust (“Trust”) formed in 2005 to issue trust preferred securities and related common securities. The Company has not consolidated the accounts of the Trust in its Consolidated Financial Statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”) ASC 810, Consolidation (“ASC 810”). As a result, the junior subordinated debentures issued by the Company to the Trust are reflected on the Company’s Consolidated Balance Sheets.

  

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. ASU No 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. ASU No. 2015-03 should be applied on a retrospective basis. The Company is currently evaluating the impacts of this ASU on the Company's consolidated financial statements.

 

In February 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on simplifying the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities by reducing the number of consolidation model from four to two, among other changes. The ASU will be effective for periods beginning after December 31, 2015, while early adoption is permitted. The Company does not expect this ASU to have a material impact on the Company's consolidated financial statements.

  

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) 

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim and annual periods beginning after December 15, 2017 as deferred by ASU No. 2015-14; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of the ASU to determine the potential impact the new standard will have on the Company's consolidated financial statements.

 

 

NOTE 3. NOTE RECEIVABLE

 

Pursuant to the terms of a note receivable held by the Company in conjunction with the Company’s disposal of the former mortgage subsidiary, the Company received note payments (the “Note”) that commenced in 2013 and were due quarterly over a consecutive five year period. The Note carried a zero rate of interest and the obligation was guaranteed by the continuing shareholder of the Mortgage Company. As of March 31, 2014, the Company had received all principal amounts due through that date under the original Note agreement, and the Note carried an outstanding principal balance of $2.7 million.

 

During the first quarter of 2014, the Company’s management became increasingly concerned about whether remaining principal due under the original terms of the Note would be collectible. As a result, during April 2014, the Company executed a promissory note compromise settlement agreement (the “Agreement”) with the Mortgage Company. The Agreement settled and determined all the respective rights and obligations under the Note.

 

Under the terms of the Agreement, the Mortgage Company paid cash in the amount of $686 thousand and transferred a 1-4 family mortgage note with a principal balance of $560 thousand to the Company. Simultaneously, the Company applied a portion of the cash proceeds to pay off the outstanding balance of the Mortgage Company’s warehouse line of credit held with the Bank. The Mortgage Company’s line of credit was subsequently closed during 2014. As a result of the Agreement, the Company recognized a loss of $1.4 million in full and complete satisfaction of the Note during the first quarter of 2014.

 

The table below presents the details of the closing transaction.

 

 

(Amounts in thousands)

 

Amount

 

Proceeds:

       

Cash received

  $ 686  

1-4 family mortgage note (fair value)

    560  

Net proceeds received

    1,246  

Assets derecognized:

       

Note due from the mortgage company

    2,753  

Discount on the note

    (374 )

Warehouse line of credit

    259  

Total assets derecognized

    2,638  

Loss on settlement of the note

  $ 1,392  

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) 

 

NOTE 4. EARNINGS PER SHARE

 

Basic Earnings Per Share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period excluding unvested restricted stock awards. Holders of unvested restricted stock awards do not receive dividend or voting rights and do not share in undistributed earnings. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that subsequently shared in the earnings of the Company.

 

The following is a computation of basic and diluted EPS for the three and nine months ended September 30, 2015 and 2014.

 

 

 

   

For the Three Months Ended

   

For the Nine Months Ended

 

(Amounts in thousands, except per share information)

 

September 30,

   

September 30,

 

Earnings Per Share

 

2015

   

2014

   

2015

   

2014

 

Numerators:

                               

Net income

  $ 2,525     $ 1,273     $ 6,716     $ 4,044  

Less:

                               

Preferred cash dividends

    50       50       150       150  

Net income available to common shareholders

  $ 2,475     $ 1,223     $ 6,566     $ 3,894  

Denominators:

                               

Weighted average number of common shares outstanding - basic

    13,340       13,294       13,327       13,536  

Effect of potentially dilutive common shares (1)

    37       45       31       46  

Weighted average number of common shares outstanding - diluted

    13,377       13,339       13,358       13,582  

Earnings per common share:

                               

Basic

  $ 0.18     $ 0.09     $ 0.49     $ 0.29  

Diluted

  $ 0.18     $ 0.09     $ 0.49     $ 0.29  

Anti-dilutive options not included in earnings per share calculation

    120,700       103,411       149,346       110,575  

(1) Represents assumed exercise of dilutive options and dilutive restricted stock 

 

On March 20, 2014, the Company announced that its Board of Directors authorized the purchase of up to 700,000 or 5% of its outstanding shares over a 12 month period. The stock repurchase plan authorized the Company to conduct open market purchases or privately negotiated transactions from time to time when, at management’s discretion, it was determined that market conditions and other factors warranted such purchases. Pursuant to the plan, the Company repurchased 700,000 common shares during the six months ended June 30, 2014.

 

 

NOTE 5. SECURITIES

 

Securities are classified as available-for-sale if the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. Unrealized holding gains or losses are included in accumulated other comprehensive income (loss) as a separate component of shareholders’ equity, net of tax. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

 

Securities are classified as held-to-maturity if the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives.

 

Transfers of securities from available-for-sale to held-to-maturity are accounted for at fair value as of the date of the transfer. The difference between the fair value and the amortized cost at the date of transfer is considered a premium or discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in other accumulated comprehensive income (loss), and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity security. The Company did not have any transfers in or out of the various securities classifications for the nine months ended September 30, 2015 and twelve months ended December 31, 2014.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities as of September 30, 2015, and December 31, 2014.

 

 

   

As of September 30, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 

(Amounts in thousands)

  Cost     Gain      Loss     

Fair Value

 

Available-for-sale securities:

                               

U.S. government & agencies

  $ 3,931     $ 67     $     $ 3,998  

Obligations of state and political subdivisions

    55,778       1,740       (65 )     57,453  

Residential mortgage backed securities and collateralized mortgage obligations

    34,091       215       (248 )     34,058  

Corporate securities

    36,531       282       (253 )     36,560  

Commercial mortgage backed securities

    9,358       10       (102 )     9,266  

Other asset backed securities

    15,994       91       (111 )     15,974  

Total

  $ 155,683     $ 2,405     $ (779 )   $ 157,309  

Held-to-maturity securities:

                               

Obligations of state and political subdivisions

  $ 36,093     $ 693     $ (492 )   $ 36,294  

 

 

 

   

As of December 31, 2014

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Estimated

 

(Amounts in thousands)

  Cost      Gain     Loss    

Fair Value

 

Available-for-sale securities:

                               

U.S. government & agencies

  $ 6,351     $ 58     $ (16 )   $ 6,393  

Obligations of state and political subdivisions

    52,629       1,788       (54 )     54,363  

Residential mortgage backed securities and collateralized mortgage obligations

    46,727       457       (169 )     47,015  

Corporate securities

    37,392       475       (133 )     37,734  

Commercial mortgage backed securities

    10,402       60       (73 )     10,389  

Other asset backed securities

    30,896       393       (197 )     31,092  

Total

  $ 184,397     $ 3,231     $ (642 )   $ 186,986  

Held-to-maturity securities:

                               

Obligations of state and political subdivisions

  $ 36,806     $ 712     $ (400 )   $ 37,118  

 

 

 

The following table presents the maturities of investment securities at September 30, 2015.

 

 

   

Available-For-Sale

   

Held-To-Maturity

 

(Amounts in thousands)

 

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Amounts maturing in:

                               

One year or less

  $ 7,237     $ 7,258     $     $  

One year through five years

    51,370       51,602       1,504       1,540  

Five years through ten years

    50,613       51,544       16,619       16,874  

After ten years

    46,463       46,905       17,970       17,880  

Total

  $ 155,683     $ 157,309     $ 36,093     $ 36,294  

 

The amortized cost and fair value of residential mortgage backed, collateralized mortgage obligations and commercial mortgage securities are presented by their expected average life, rather than contractual maturity, because the underlying loans may be repaid without prepayment penalties.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following table presents the fair value of the securities held for pledging, segregated by purpose, as of September 30, 2015.

 

 

(Amounts in thousands)

 

Pledged

   

Available To Be Pledged

   

Total Held For Pledging Purposes

 

Public funds collateral

  $ 19,083     $ 9,923     $ 29,006  

Federal Home Loan Bank of San Francisco borrowings

          16,629       16,629  

Interest rate swap contracts

    3,136       1,361       4,497  

Total

  $ 22,219     $ 27,913     $ 50,132  

 

 

 

The following table presents the cash proceeds from sales of securities and the associated gross realized gains and gross realized losses that have been included in earnings for the three and nine months ended September 30, 2015 and 2014.

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(Amounts in thousands)

 

2015

   

2014

   

2015

   

2014

 

Proceeds from sales of securities

  $ 25,340     $ 13,036     $ 61,255     $ 81,820  
                                 

Gross realized gains on sales of securities:

                               

Obligations of state and political subdivisions

  $ 16     $ 44     $ 86     $ 215  

Residential mortgage backed securities and collateralized mortgage obligations

    49       7       111       75  

Corporate securities

    52       82       134       309  

Commercial mortgage backed securities

    10             14       5  

Other asset backed securities

    50       10       142       73  

Total gross realized gains on sales of securities

    177       143       487       677  

Gross realized losses on sales of securities:

                               

U.S. government & agencies

    (4 )           (5 )     (114 )

Obligations of state and political subdivisions

    (4 )     (50 )     (4 )     (209 )

Residential mortgage backed securities and collateralized mortgage obligations

    (2 )     (61 )     (12 )     (543 )

Corporate securities

                      (8 )

Commercial mortgage backed securities

                      (33 )

Other asset backed securities

    (30 )           (53 )     (22 )

Total gross realized losses on sales of securities

    (40 )     (111 )     (74 )     (929 )

Gain (loss) on investment securities, net

  $ 137     $ 32     $ 413     $ (252 )

 

 

Investment securities that were in an unrealized loss position as of September 30, 2015 and December 31, 2014 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or underlying collateral.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

 

   

As of September 30, 2015

 
   

Less Than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Amounts in thousands)

 

Value

      Loss     

Value

      Loss     

Value

      Loss   

Available-for-sale securities:

                                               

U.S. government & agencies

  $     $     $     $     $     $  

Obligations of states and political subdivisions

    6,284       (60 )     358       (5 )     6,642       (65 )

Residential mortgage backed securities and collateralized mortgage obligations

    14,174       (155 )     3,629       (93 )     17,803       (248 )

Corporate securities

    18,600       (232 )     3,478       (21 )     22,078       (253 )

Commercial mortgage backed securities

    5,040       (50 )     1,539       (52 )     6,579       (102 )

Other asset backed securities

    2,668       (2 )     3,581       (109 )     6,249       (111 )

Total temporarily impaired securities

  $ 46,766     $ (499 )   $ 12,585     $ (280 )   $ 59,351     $ (779 )

Held-to-maturity securities:

                                               

Obligations of states and political subdivisions

  $ 7,829     $ (182 )   $ 4,679     $ (310 )   $ 12,508     $ (492 )

 

 

 

   

As of December 31, 2014

 
   

Less Than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Amounts in thousands)

 

Value

       Loss    

Value

       Loss    

Value

      Loss   

Available-for-sale securities:

                                               

U.S. government & agencies

  $     $     $ 1,269     $ (16 )   $ 1,269     $ (16 )

Obligations of states and political subdivisions

    3,952       (34 )     2,078       (20 )     6,030       (54 )

Residential mortgage backed securities and collateralized mortgage obligations

    10,193       (66 )     5,365       (103 )     15,558       (169 )

Corporate securities

    7,058       (36 )     6,542       (97 )     13,600       (133 )

Commercial mortgage backed securities

    4,912       (14 )     1,542       (59 )     6,454       (73 )

Other asset backed securities

    4,891       (16 )     6,088       (181 )     10,979       (197 )

Total temporarily impaired securities

  $ 31,006     $ (166 )   $ 22,884     $ (476 )   $ 53,890     $ (642 )

Held-to-maturity securities:

                                               

Obligations of states and political subdivisions

  $ 1,556     $ (14 )   $ 12,726     $ (386 )   $ 14,282     $ (400 )

 

 

At September 30, 2015, 67 securities were in unrealized loss positions and at December 31, 2014, 73 securities were in unrealized loss positions. For the nine months ended September 30, 2015, the Company did not recognize any other-than-temporary impairment losses. For the year ended December 31, 2014, the Company recognized an other-than-temporary impairment of $22 thousand for securities that were in a loss position at December 31, 2014 and sold in January of 2015.

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

  

NOTE 6. LOANS

 

Outstanding loan balances consist of the following at September 30, 2015, and December 31, 2014.

 

 

   

September 30,

   

December 31,

 

(Amounts in thousands)

 

2015

   

2014

 

Commercial

  $ 144,749     $ 150,253  

Commercial real estate:

               

Real estate - construction and land development

    29,701       30,099  

Real estate - commercial non-owner occupied

    237,597       213,883  

Real estate - commercial owner occupied

    151,762       120,324  

Residential real estate:

               

Real estate - residential - ITIN

    50,162       52,830  

Real estate - residential - 1-4 family mortgage

    12,185       13,156  

Real estate - residential - equity lines

    45,733       44,981  

Consumer and other

    46,644       35,372  

Gross loans

    718,533       660,898  

Deferred fees and costs, net

    718       157  

Loans, net of deferred fees and costs

    719,251       661,055  

Allowance for loan and lease losses

    (10,891 )     (10,820 )

Net loans

  $ 708,360     $ 650,235  

 

 

Gross loan balances in the table above include net purchase discounts of $2.0 million and $998 thousand as of September 30, 2015, and December 31, 2014, respectively.

 

Loans are reported as past due when any portion of the principal and interest are not received by the due date. The days past due will continue to increase for each day until full principal and interest are received (i.e. if payment is not received within 30 days of the due date, the loan will be considered 30 days past due; if payment is not received within 60 days of the due date, the loan will be considered 60 days past due, etc.). Loans that become 90 days past due will be placed in nonaccrual status unless well secured and in the process of collection.

 

Age analysis of gross loan balances for past due loans, segregated by class of loans, as of September 30, 2015, and December 31, 2014, was as follows.

 

 

                Greater                           Recorded  
    30-59     60-89     Than 90                           Investment >  

(Amounts in thousands)

 

 Days Past

   

 Days Past

   

Days Past

   

Total Past

                   

90 Days and

 

September 30, 2015

 

 Due

   

 Due

   

Due

   

Due

   

Current

   

Total

   

Accruing

 

Commercial

  $ 346     $ 171     $ 606     $ 1,123     $ 143,626     $ 144,749     $  

Commercial real estate:

                                                       

Real estate - construction and land development

                            29,701       29,701        

Real estate - commercial non-owner occupied

    1,262             5,330       6,592       231,005       237,597        

Real estate - commercial owner occupied

    15             1,928       1,943       149,819       151,762        

Residential real estate:

                                                       

Real estate - residential - ITIN

    971       104       1,221       2,296       47,866       50,162        

Real estate - residential - 1-4 family mortgage

          394       665       1,059       11,126       12,185        

Real estate - residential - equity lines

    82       98       23       203       45,530       45,733        

Consumer and other

    133       42       52       227       46,417       46,644       52  

Total gross loans

  $ 2,809     $ 809     $ 9,825     $ 13,443     $ 705,090     $ 718,533     $ 52  

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

 

                Greater                           Recorded  
    30-59     60-89     Than 90                           Investment >  

(Amounts in thousands)

 

Days Past

   

Days Past

   

Days Past

   

Total Past

                   

90 Days and

 

December 31, 2014

 

Due

   

Due

   

Due

   

Due

   

Current

   

Total

   

Accruing

 

Commercial

  $ 2,421     $ 301     $ 2,161     $ 4,883     $ 145,370     $ 150,253     $  

Commercial real estate:

                                                       

Real estate - construction and land development

                            30,099       30,099        

Real estate - commercial non-owner occupied

                7,086       7,086       206,797       213,883        

Real estate - commercial owner occupied

                1,378       1,378       118,946       120,324        

Residential real estate:

                                                       

Real estate - residential - ITIN

    1,080       122       2,017       3,219       49,611       52,830        

Real estate - residential - 1-4 family mortgage

                1,580       1,580       11,576       13,156        

Real estate - residential - equity lines

    145       99       24       268       44,713       44,981        

Consumer and other

    158       57       23       238       35,134       35,372       23  

Total gross loans

  $ 3,804     $ 579     $ 14,269     $ 18,652     $ 642,246     $ 660,898     $ 23  

 

 

A loan is considered impaired when based on current information and events the Company determines it is probable that it will not be able to collect all amounts due according to the original loan contract, including scheduled interest payments. Generally, when the Company identifies a loan as impaired, it measures the loan for potential impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, the current fair value of collateral is used, less selling costs.

 

The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every six to twelve months. The Company obtains 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 the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser.

 

Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment. The Company’s 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 the Company’s Chief Credit Officer.

 

Although an external appraisal is the primary source to value collateral dependent loans, the Company 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, the Company does not believe there are significant time lapses for the recognition of additional losses on collateral dependent loans.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables summarize impaired loans by loan class as of September 30, 2015, and December 31, 2014.

 

 

   

As of September 30, 2015

 
           

Unpaid

         
   

Recorded

   

Principal

   

Related

 

(Amounts in thousands)

 

Investment

   

Balance

   

Allowance

 

With no related allowance recorded:

                       

Commercial

  $ 1,772     $ 2,349     $  

Commercial real estate:

                       

Real estate - commercial non-owner occupied

    5,154       6,157        

Real estate - commercial owner occupied

    1,928       2,651        

Residential real estate:

                       

Real estate - residential - ITIN

    7,874       9,555        

Real estate - residential - 1-4 family mortgage

    1,669       2,629        

Real estate - residential - equity lines

    165       167        

Total with no related allowance recorded

  $ 18,562     $ 23,508     $  

With an allowance recorded:

                       

Commercial

  $ 790     $ 838     $ 134  

Commercial real estate:

                       

Real estate - commercial non-owner occupied

    828       828       39  

Real estate - commercial owner occupied

    352       352       20  

Residential real estate:

                       

Real estate - residential - ITIN

    1,777       1,791       301  

Real estate - residential - equity lines

    563       564       282  

Consumer and other

    33       33       13  

Total with an allowance recorded

  $ 4,343     $ 4,406     $ 789  

Subtotal:

                       

Commercial

  $ 2,562     $ 3,187     $ 134  

Commercial real estate

    8,262       9,988       59  

Residential real estate

    12,048       14,706       583  

Consumer and other

    33       33       13  

Total impaired loans

  $ 22,905     $ 27,914     $ 789  

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

 

   

As of December 31, 2014

 
   

Recorded

   

Principal

   

Related

 

(Amounts in thousands)

 

Investment

   

Balance

   

Allowance

 

With no related allowance recorded:

                       

Commercial

  $ 4,298     $ 8,461     $  

Commercial real estate:

                       

Real estate - commercial non-owner occupied

    6,909       10,207        

Real estate - commercial owner occupied

    1,378       2,102        

Residential real estate:

                       

Real estate - residential - ITIN

    7,106       8,803        

Real estate - residential - 1-4 family mortgage

    1,608       2,578        

Real estate - residential - equity lines

    201       202        

Total with no related allowance recorded

  $ 21,500     $ 32,353     $  

With an allowance recorded:

                       

Commercial

  $ 2,299     $ 2,317     $ 314  

Commercial real estate:

                       

Real estate - commercial non-owner occupied

    2,248       2,846       411  

Real estate - commercial owner occupied

    1,218       1,218       21  

Residential real estate:

                       

Real estate - residential - ITIN

    3,002       3,103       503  

Real estate - residential - 1-4 family mortgage

    527       537       3  

Real estate - residential - equity lines

    579       579       289  

Consumer and other

    35       35       15  

Total with an allowance recorded

  $ 9,908     $ 10,635     $ 1,556  

Subtotal:

                       

Commercial

  $ 6,597     $ 10,778     $ 314  

Commercial real estate

    11,753       16,373       432  

Residential real estate

    13,023       15,802       795  

Consumer and other

    35       35       15  

Total impaired loans

  $ 31,408     $ 42,988     $ 1,556  

 

 

Had nonaccrual loans performed in accordance with their contractual terms, the Company would have recognized additional interest income, net of tax, of approximately $127 thousand and $212 thousand for the three months ended September 30, 2015 and 2014, respectively. The Company would have recognized additional interest income, net of tax, of approximately $287 thousand and $541 thousand for the nine months ended September 30, 2015 and 2014, respectively.

 

Nonaccrual loans, segregated by loan class, were as follows as of September 30, 2015, and December 31, 2014.

 

   

September 30,

   

December 31,

 

(Amounts in thousands)

 

2015

   

2014

 

Commercial

  $ 2,506     $ 5,112  

Commercial real estate:

               

Real estate - commercial non-owner occupied

    5,154       8,318  

Real estate - commercial owner occupied

    1,928       1,378  

Residential real estate:

               

Real estate - residential - ITIN

    4,228       4,647  

Real estate - residential - 1-4 family mortgage

    1,669       2,135  

Real estate - residential - equity lines

    23       24  

Consumer and other

    33       35  

Total

  $ 15,541     $ 21,649  

 

 
19

Table Of Contents
 

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

  

The following table summarizes average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2015 and 2014.

 

 

   

Three Months Ended

   

Three Months Ended

 
   

September 30, 2015

   

September 30, 2014

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 

(Amounts in thousands)

 

Investment

   

Recognized

   

Investment

   

Recognized

 

Commercial

  $ 2,885     $     $ 6,511     $ 13  

Commercial real estate:

                               

Real estate - commercial non-owner occupied

    6,874       12       10,055       11  

Real estate - commercial owner occupied

    2,281       15       5,271       20  

Residential real estate:

                               

Real estate - residential - ITIN

    9,616       36              

Real estate - residential - 1-4 family mortgage

    1,677             12,197       30  

Real estate - residential - equity lines

    742       6       1,155       8  

Consumer and other

    33             29        

Total

  $ 24,108     $ 69     $ 35,218     $ 82  

 

 

 

   

Nine Months Ended

   

Nine Months Ended

 
   

September 30, 2015

   

September 30, 2014

 
   

Average

   

Interest

   

Average

   

Interest

 
   

Recorded

   

Income

   

Recorded

   

Income

 

(Amounts in thousands)

 

Investment

   

Recognized

   

Investment

   

Recognized

 

Commercial

  $ 3,919     $ 22     $ 5,848     $ 15  

Commercial real estate:

                               

Real estate - commercial non-owner occupied

    7,767       37       11,948       155  

Real estate - commercial owner occupied

    2,286       52       6,112       58  

Residential real estate:

                               

Real estate - residential - ITIN

    9,819       102              

Real estate - residential - 1-4 family mortgage

    1,790             12,179       83  

Real estate - residential - equity lines

    763       20       1,238       25  

Consumer and other

    34             19        

Total

  $ 26,378     $ 233     $ 37,344     $ 336  

 

 

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. Loans are reported as troubled debt restructurings when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it 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 the Bank will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement.

 

At September 30, 2015 and December 31, 2014, impaired loans of $6.9 million and $9.2 million were classified as performing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms.

 

In order for a restructured loan to be on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligations to lend additional funds on the restructured loans as of September 30, 2015 or December 31, 2014.

 

As of September 30, 2015, the Company had $18.0 million in troubled debt restructurings compared to $23.5 million as of December 31, 2014. As of September 30, 2015, the Company had 121 loans that qualified as troubled debt restructurings, of which 102 loans were performing according to their restructured terms. Troubled debt restructurings represented 2.51% of gross loans as of September 30, 2015, compared with 3.55% at December 31, 2014.

 

 
20

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

The types of modifications offered can generally be described in the following categories:

 

Rate – A modification in which the interest rate is modified.

 

Maturity – A modification in which the maturity date, timing of payments or frequency of payments is modified.

 

Payment deferral – A modification in which a portion of the principal is deferred.

 

 

The following tables present the period ended balances of newly restructured loans and the types of modifications that occurred during the three and nine months ended September 30, 2015 and 2014, respectively.

 

 

   

For the Three Months Ended
September 30, 2015

   

For the Three Months Ended
September 30, 2014

 
                   

Rate &

                                   

Rate &

         
           

Rate &

   

Payment

   

Payment

                   

Rate &

   

Payment

         

(Amounts in thousands)

 

Rate

   

Maturity

   

Deferral

   

Deferral

   

Total

   

Rate

   

Maturity

   

Deferral

   

Total

 

Commercial

  $     $ 45     $     $     $ 45     $     $ 5,165     $     $ 5,165  

Residential real estate:

                                                                       

Real estate - residential - ITIN

                      103       103       57             38       95  

Total

  $     $ 45     $     $ 103     $ 148     $ 57     $ 5,165     $ 38     $ 5,260  

 

 

 

 

   

For the Nine Months Ended
September 30, 2015

   

For the Nine Months Ended
September 30, 2014

 
                   

Rate &

                                   

Rate &

         
           

Rate &

   

Payment

   

Payment

                   

Rate &

   

Payment

         

(Amounts in thousands)

 

Rate

   

Maturity

   

Deferral

   

Deferral

   

Total

   

Rate

   

Maturity

   

Deferral

   

Total

 

Commercial

  $     $ 45     $     $ 734     $ 779     $     $ 5,165     $     $ 5,165  

Residential real estate:

                                                                       

Real estate - residential - ITIN

    115             266       206       587       209             39       248  

Total

  $ 115     $ 45     $ 266     $ 940     $ 1,366     $ 209     $ 5,165     $ 39     $ 5,413  

 

 

The tables below provide information regarding the number of loans where the contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties for the three and nine months ended September 30, 2015 and 2014.

 

 

   

For the Three Months Ended September 30, 2015

   

For the Three Months Ended September 30, 2014

 
           

Pre-

   

Post-

           

Pre-

   

Post-

 
           

Modification

   

Modification

           

Modification

   

Modification

 
           

Outstanding

   

Outstanding

           

Outstanding

   

Outstanding

 

(Amounts in thousands)

 

Number of

   

Recorded

   

Recorded

   

Number of

   

Recorded

   

Recorded

 

Troubled Debt Restructurings

 

Contracts

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

 

Commercial

    1     $ 49     $ 49       2     $ 9,070     $ 9,070  

Residential real estate:

                                               

Real estate - residential - ITIN

    2       225       193       2       113       113  

Total

    3     $ 274     $ 242       4     $ 9,183     $ 9,183  

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

   

For the Nine Months Ended September 30, 2015

   

For the Nine Months Ended September 30, 2014

 
           

Pre-

   

Post-

           

Pre-

   

Post-

 
           

Modification

   

Modification

           

Modification

   

Modification

 
           

Outstanding

   

Outstanding

           

Outstanding

   

Outstanding

 

(Amounts in thousands)

 

Number of

   

Recorded

   

Recorded

   

Number of

   

Recorded

   

Recorded

 

Troubled Debt Restructurings

 

Contracts

   

Investment

   

Investment

   

Contracts

   

Investment

   

Investment

 

Commercial

    2     $ 872     $ 872       2     $ 9,070     $ 9,070  

Residential real estate:

                                               

Real estate - residential - ITIN

    8       747       678       4       263       267  

Total

    10     $ 1,619     $ 1,550       6     $ 9,333     $ 9,337  

 

 

The following tables present loans modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and nine months ended September 30, 2015 and 2014.

 

 

   

For the Three Months Ended

   

For the Three Months Ended

 
   

September 30, 2015

   

September 30, 2014

 

(Amounts in thousands)

 

Number of

   

Recorded

   

Number of

   

Recorded

 

Troubled Debt Restructurings That Subsequently Defaulted

 

Contracts

   

Investment

   

Contracts

   

Investment

 

Residential real estate:

                               

Real estate - residential - ITIN

        $       1     $ 53  

Total

        $       1     $ 53  

 

 

 

   

For the Nine Months Ended

   

For the Nine Months Ended

 
   

September 30, 2015

   

September 30, 2014

 

(Amounts in thousands)

 

Number of

   

Recorded

   

Number of

   

Recorded

 

Troubled Debt Restructurings That Subsequently Defaulted

 

Contracts

   

Investment

   

Contracts

   

Investment

 

Residential real estate:

                               

Real estate - residential - ITIN

        $       2     $ 139  

Total

        $       2     $ 139  

 

 

The Company defines a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. The Company defines a nonperforming loan as an impaired loan which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

Performing and nonperforming loans, segregated by class of loans, are as follows at September 30, 2015 and December 31, 2014.

 

   

September 30, 2015

 

(Amounts in thousands)

 

Performing

   

Nonperforming

   

Total

 

Commercial

  $ 142,243     $ 2,506     $ 144,749  

Commercial real estate:

                       

Real estate - construction and land development

    29,701             29,701  

Real estate - commercial non-owner occupied

    232,443       5,154       237,597  

Real estate - commercial owner occupied

    149,834       1,928       151,762  

Residential real estate:

                       

Real estate - residential - ITIN

    45,934       4,228       50,162  

Real estate - residential - 1-4 family mortgage

    10,516       1,669       12,185  

Real estate - residential - equity lines

    45,710       23       45,733  

Consumer and other

    46,559       85       46,644  

Total gross loans

  $ 702,940     $ 15,593     $ 718,533  

 

 

   

December 31, 2014

 

(Amounts in thousands)

 

Performing

   

Nonperforming

   

Total

 

Commercial

  $ 145,141     $ 5,112     $ 150,253  

Commercial real estate:

                       

Real estate - construction and land development

    30,099             30,099  

Real estate - commercial non-owner occupied

    205,565       8,318       213,883  

Real estate - commercial owner occupied

    118,946       1,378       120,324  

Residential real estate:

                       

Real estate - residential - ITIN

    48,183       4,647       52,830  

Real estate - residential - 1-4 family mortgage

    11,021       2,135       13,156  

Real estate - residential - equity lines

    44,957       24       44,981  

Consumer and other

    35,314       58       35,372  

Total gross loans

  $ 639,226     $ 21,672     $ 660,898  

 

 

In conjunction with evaluating the performing versus nonperforming nature of the Company’s loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (grade) for each loan class:

 

Pass Grade - Borrowers classified as Pass Grades specifically demonstrate:

 

Strong Cash Flows – borrower’s cash flows must meet or exceed the Company’s minimum debt service coverage ratio.

Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin.

Qualitative Factors – in addition to meeting the Company’s minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a pass grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character.

 

Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral.

 

Watch Grade – Generally, borrowers classified as Watch exhibit some level of deterioration in one or more of the following:

 

Adequate Cash Flows – borrowers in this category demonstrate adequate cash flows and debt service coverage ratios, but also exhibit one or more less than positive conditions such as declining trends in the level of cash flows, increasing or sole reliance on secondary sources of cash flows, and/or do not meet the Company’s minimum debt service coverage ratio. However, cash flow remains at acceptable levels to meet debt service requirements.

Adequate Collateral Margin – the collateral securing the debt remains adequate but also exhibits a declining trend in value or expected volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate to cover the outstanding debt under a liquidation scenario.

Qualitative Factors – while the borrower’s cash flow and collateral margin generally remain adequate, one or more quantitative and qualitative factors may also factor into assigning a Watch Grade including the borrower’s level of leverage (debt to equity), deterioration in prospects, limited experience in their industry, newly formed company, overall deterioration in the industry, negative trends or recent events in a borrower’s credit history, deviation from core business, and any other relevant factors.

 

Special Mention Grade – Generally, borrowers classified as Special Mention exhibit a greater level of deterioration than Watch graded loans and warrant management’s close attention. If left uncorrected, the potential weaknesses could threaten repayment prospects in the future. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse risk grade.

 

The following represents potential characteristics of a Special Mention Grade but do not necessarily generate automatic reclassification into this loan grade:

 

Adequate Cash Flows – borrowers in this category demonstrate adequate cash flows and debt service coverage ratios, but also reflect adverse trends in operations or continuing financial deterioration that, if it does not stabilize and reverse in a reasonable timeframe, retirement of the debt may be jeopardized.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

Adequate Collateral Margin – the collateral securing the debt remains adequate but also exhibits a continuing declining trend in value or volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate, but should the negative collateral trend continue, the full recovery of the outstanding debt under a liquidation scenario could be jeopardized.

Qualitative Factors – while the borrower’s cash flow and/or collateral margin continue to deteriorate but generally remain adequate, one or more quantitative and qualitative factors may also be factoring into assigning a Special Mention Grade including inadequate or incomplete loan documentation, perfection of collateral, inadequate credit structure, borrower unable or unwilling to produce current and adequate financial information, and any other relevant factors.

 

 

Substandard Grade – A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be classified as impaired.

 

The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade:

 

Sustained or substantial deteriorating financial trends,

Unresolved management problems,

Collateral is insufficient to repay debt; collateral is not sufficiently supported by independent sources, such as asset-based financial audits, appraisals, or equipment evaluations,

Improper perfection of lien position, which is not readily correctable,

Unanticipated and severe decline in market values,

High reliance on secondary source of repayment,

Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the borrower’s capacity to repay the debt,

Fraud committed by the borrower,

IRS liens that take precedence,

Forfeiture statutes for assets involved in criminal activities,

Protracted repayment terms outside of policy that are for longer than the same type of credit in the Company portfolio,

Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the collateral pledged, if any.

 

 

Doubtful Grade – A credit risk rated as Doubtful has all the weaknesses inherent in a credit classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. As such, all doubtful loans are considered impaired. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to:

 

Proposed merger(s),

Acquisition or liquidation procedures,

Capital injection,

Perfecting liens on additional collateral,

Refinancing plans.

 

 

Generally, a Doubtful grade does not remain outstanding for a period greater than six months. After six months, the pending events should have either occurred or not occurred. The credit grade should have improved or the principal balance charged against the ALLL.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

Credit grade definitions, including qualitative factors, for all credit grades are reviewed and approved annually by the Company’s Loan Committee. During the current year, the Company determined that certain amounts in the “pass” and “watch” classifications disclosed in the internal risk ratings table included in the Company’s 2014 annual consolidated financial statements were incorrect. Accordingly, $46.9 million have been reclassified from “watch” to “pass” in the December 31, 2014 table below. The following table summarizes internal risk rating by loan class as of September 30, 2015, and December 31, 2014.

 

 

 

   

As of September 30, 2015

 
                   

Special

                         

(Amounts in thousands)

 

Pass

   

Watch

   

Mention

   

Substandard

   

Doubtful

   

Total

 

Commercial

  $ 119,969     $ 11,330     $ 6,644     $ 6,806     $     $ 144,749  

Commercial real estate:

                                               

Real estate - construction and land development

    29,669       32                         29,701  

Real estate - commercial non-owner occupied

    227,725       694       2,827       6,351             237,597  

Real estate - commercial owner occupied

    143,882       3,752       1,848       2,280             151,762  

Residential real estate:

                                               

Real estate - residential - ITIN

    41,908                   8,254             50,162  

Real estate - residential - 1-4 family mortgage

    9,694             576       1,915             12,185  

Real estate - residential - equity lines

    41,416       1,724       1,683       910             45,733  

Consumer and other

    46,307             269       68             46,644  

Total gross loans

  $ 660,570     $ 17,532     $ 13,847     $ 26,584     $     $ 718,533  

 

 

 

 

   

As of December 31, 2014

 
   

Pass

   

Watch

   

Special

                         

(Amounts in thousands)

 

(Restated)

   

(Restated)

   

Mention

   

Substandard

   

Doubtful

   

Total

 

Commercial

  $ 121,282     $ 14,116     $ 4,018     $ 10,837     $     $ 150,253  

Commercial real estate:

                                               

Real estate - construction and land development

    30,056       43                         30,099  

Real estate - commercial non-owner occupied

    201,155       1,953       869       9,906             213,883  

Real estate - commercial owner occupied

    111,689       5,864             2,771             120,324  

Residential real estate:

                                               

Real estate - residential - ITIN

    42,721                   10,109             52,830  

Real estate - residential - 1-4 family mortgage

    10,769                   2,387             13,156  

Real estate - residential - equity lines

    41,624       2,380             977             44,981  

Consumer and other

    35,279       3       18       72             35,372  

Total gross loans

  $ 594,575     $ 24,359     $ 4,905     $ 37,059     $     $ 660,898  

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

 

The following tables summarize the ALLL by portfolio for the three and nine months ended September 30, 2015 and 2014.

 

 

   

For the Three Months Ended September 30, 2015

 
           

Commercial

   

Residential

                         

(Amounts in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Consumer

   

Unallocated

   

Total

 

ALLL:

                                               

Beginning balance

  $ 3,389     $ 5,447     $ 1,480     $ 583     $ 503     $ 11,402  

Charge offs

          (289 )     (309 )     (181 )           (779 )

Recoveries

    121       1       139       7             268  

Provision

    (91 )     64       (45 )     194       (122 )      

Ending balance

  $ 3,419     $ 5,223     $ 1,265     $ 603     $ 381     $ 10,891  

 

 

 

   

For the Three Months Ended September 30, 2014

 
           

Commercial

   

Residential

                         

(Amounts in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Consumer

   

Unallocated

   

Total

 

ALLL:

                                               

Beginning balance

  $ 3,331     $ 3,870     $ 2,333     $ 238     $ 110     $ 9,882  

Charge offs

    (299 )     (241 )     (44 )     (1 )           (585 )

Recoveries

    43       1       9                   53  

Provision

    364       625       (95 )     124       32       1,050  

Ending balance

  $ 3,439     $ 4,255     $ 2,203     $ 361     $ 142     $ 10,400  

 

 

 

   

For the Nine Months Ended September 30, 2015

 
           

Commercial

   

Residential

                         

(Amounts in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Consumer

   

Unallocated

   

Total

 

ALLL:

                                               

Beginning balance

  $ 3,503     $ 4,875     $ 1,671     $ 449     $ 322     $ 10,820  

Charge offs

    (406 )     (428 )     (450 )     (385 )           (1,669 )

Recoveries

    869       669       202                   1,740  

Provision

    (547 )     107       (158 )     539       59        

Ending balance

  $ 3,419     $ 5,223     $ 1,265     $ 603     $ 381     $ 10,891  

 

 

   

For the Nine Months Ended September 30, 2014

 
           

Commercial

   

Residential

                         

(Amounts in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Consumer

   

Unallocated

   

Total

 

ALLL:

                                               

Beginning balance

  $ 7,057     $ 2,784     $ 2,493     $ 35     $ 1,803     $ 14,172  

Charge offs

    (4,105 )     (2,525 )     (313 )     (1 )           (6,944 )

Recoveries

    500       1       171                   672  

Provision

    (13 )     3,995       (148 )     327       (1,661 )     2,500  

Ending balance

  $ 3,439     $ 4,255     $ 2,203     $ 361     $ 142     $ 10,400  

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables summarize the ALLL and the recorded investment in loans and leases as of September 30, 2015 and December 31, 2014.

 

 

   

As of September 30, 2015

 
           

Commercial

   

Residential

                         

(Amounts in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Consumer

   

Unallocated

   

Total

 

ALLL:

                                               

Individually evaluated for impairment

  $ 134     $ 59     $ 583     $ 13     $     $ 789  

Collectively evaluated for impairment

    3,285       5,164       682       590       381       10,102  

Total

  $ 3,419     $ 5,223     $ 1,265     $ 603     $ 381     $ 10,891  

Gross loans:

                                               

Individually evaluated for impairment

  $ 2,562     $ 8,262     $ 12,048     $ 33     $     $ 22,905  

Collectively evaluated for impairment

    142,187       410,798       96,032       46,611             695,628  

Total gross loans

  $ 144,749     $ 419,060     $ 108,080     $ 46,644     $     $ 718,533  

 

 

   

As of December 31, 2014

 
           

Commercial

   

Residential

                         

(Amounts in thousands)

 

Commercial

   

Real Estate

   

Real Estate

   

Consumer

   

Unallocated

   

Total

 

ALLL:

                                               

Individually evaluated for impairment

  $ 314     $ 432     $ 795     $ 15     $     $ 1,556  

Collectively evaluated for impairment

    3,189       4,443       875       435       322       9,264  

Total

  $ 3,503     $ 4,875     $ 1,670     $ 450     $ 322     $ 10,820  

Gross loans:

                                               

Individually evaluated for impairment

  $ 6,597     $ 11,753     $ 13,023     $ 35     $     $ 31,408  

Collectively evaluated for impairment

    143,656       352,553       97,944       35,337             629,490  

Total gross loans

  $ 150,253     $ 364,306     $ 110,967     $ 35,372     $     $ 660,898  

 

The ALLL totaled $10.9 million or 1.52% of total gross loans at September 30, 2015 and $10.8 million or 1.64% at December 31, 2014. As of September 30, 2015, the Company had $203.9 million in commitments to extend credit, and recorded a reserve for unfunded commitments of $695 thousand in other liabilities in the Consolidated Balance Sheets.

 

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 Company’s ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 Contingencies and ASC Topic 310 Receivables.

 

The allowance is increased by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a monthly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies.

 

Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

 

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Management believes that the ALLL was adequate as of September 30, 2015. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.

 

As of September 30, 2015, approximately 74% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. The U.S. recession, the housing market downturn, and low real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial construction and commercial loan portfolios. Deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

 

All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. For collateral dependent loans, this can be accomplished by charging off the impaired portion of the loan based on the underlying value of the collateral. For non collateral dependent loans the Company establishes a specific component within the ALLL based on the present value of the future cash flows. If the Bank determines the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged off against the ALLL. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

 

The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2015, the unallocated allowance amount represented 3% of the ALLL, compared to 3% at December 31, 2014. The ALLL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge offs may occur.

 

The Company has lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. Management reviews and approves these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.

 

The following is a brief summary, by loan type, of management’s evaluation of the general risk characteristics and underwriting standards:

 

Commercial Loans – Commercial loans are underwritten after evaluating the borrower’s financial ability to maintain profitability including future expansion objectives. In addition, the borrower’s qualitative qualities are evaluated, such as management skills and experience, ethical traits, and overall business acumen. Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may deviate from initial projections, and the value of collateral securing these loans may vary.

 

Most commercial loans are generally secured by the assets being financed and other business assets such as accounts receivable or inventory. Management may also incorporate a personal guarantee; however, some short term loans may be extended on an unsecured basis. Repayment of commercial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from its customers. In addition, the Company maintains a commercial loan with its former mortgage subsidiary in which mortgage loans are pledged as collateral.

 

Commercial Real Estate (“CRE”) Loans – CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions.

 

The properties securing the Company’s CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria.

 

Generally, CRE loans to developers and builders that are secured by non owner occupied properties require the borrower to have had an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is secured. These loans are closely monitored by on-site inspections, and are considered to have higher inherent risks than other CRE loans due to their ultimate repayment sensitivity to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long term financing.

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Consumer Loans – The Company’s consumer loan originations are generally limited to home equity loans with nominal originations in unsecured personal loans. The portfolio also includes unsecured consumer home improvement loans with an ongoing purchase commitment and residential solar panel loans secured by UCC filing purchased during 2014 The Company is highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

 

The Company maintains an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

 

Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provide the foundation for the three major components of the Company’s ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the Company’s ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is the Company’s policy to classify a credit as loss with a concurrent charge off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.

 

In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. The Company’s loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans.

 

These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge offs or recoveries, among other relevant credit risk factors. Management periodically reviews and updates its historical loss ratios based on net charge off experience for each loan class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.

 

General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of the Company’s loan portfolio.

 

 

NOTE 7. OTHER REAL ESTATE OWNED

 

OREO represents real estate to which the Bank has taken control in partial or full satisfaction of loans and properties originally acquired for branch expansion but no longer intended to be used for that purpose. OREO is recorded at fair value less costs to sell, which becomes the property’s new cost basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. Any write-up in the fair value of the asset at the date of acquisition is reported as noninterest income unless there has been a prior charge off, in which case a recovery is credited to the ALLL. Thereafter, management periodically performs valuations and the property is carried at the lower of the cost or fair value less expected selling costs. Subsequent valuation adjustments are recognized under the line item Write-down of other real estate owned in the Consolidated Statements of Operations. Net expenses incurred from OREO property are recorded in noninterest expense, in the Consolidated Statements of Operations.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

At September 30, 2015, and December 31, 2014, the recorded investment in OREO was $1.5 million and $502 thousand, respectively. For the nine months ended September 30, 2015, the Company transferred 17 foreclosed properties in the amount of $3.9 million to OREO. During the nine months ended September 30, 2015, the Company sold 12 properties with a balance of $2.9 million for a net loss of $4 thousand. The September 30, 2015 OREO balance consists of four 1-4 family residential real estate properties in the amount of $361 thousand, six nonfarm nonresidential properties in the amount of $993 thousand and one undeveloped commercial property in the amount of $170 thousand. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure is $1.1 million.

 

NOTE 8. ACCOUNTING FOR INCOME TAXES AND UNCERTAINTIES

 

The Company's provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Company's income before taxes. The principal difference between statutory tax rates and the Company's effective tax rate is the benefit derived from investing in tax-exempt securities, federal tax credits afforded through the Company’s investments in qualified affordable housing projects and bank-owned life insurance.

 

Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.

 

The Company applies the provisions of FASB ASC 740, Income Taxes, relating to the accounting for uncertainty in income taxes. The Company periodically reviews its income tax positions based on tax laws and regulations, and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment. The Company’s uncertain tax positions were nominal in amount as of September 30, 2015.

 

The Company’s effective income tax rate was 31% for the nine months ended September 30, 2015, compared with 29% for the same period a year ago.

 

 

NOTE 9. QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS

 

At September 30, 2015, the Company’s investments in Qualified Affordable Housing Projects that generate Low Income Housing Tax Credits (“LIHTC”) were $5.0 million. These investments are recorded in other assets with a corresponding funding obligation of $1.5 million recorded in other liabilities. The Company has invested in four separate LIHTC projects which provide the Company with CRA credit. Additionally, the investments in LIHTC projects provide the Company with tax credits and with operating loss tax benefits over an approximately 18 year period. None of the original investments will be repaid. The tax credits and the operating loss tax benefits that are generated by each of the properties are expected to exceed the total value of the investments made by the Company and provide returns on the investments of between 4% and 8%. The investments in LIHTC projects are being accounted for using the proportional amortization method, under which the Company amortizes the initial cost of an investment in proportion to the amount of the tax credits and other tax benefits received, and recognizes the net investment performance in the Consolidated Statements of Operations as a component of income tax expense.

 

The following table presents the Company’s original investment in LIHTC projects, the current recorded investment balance, and the unfunded liability balance of each investment at September 30, 2015 and December 31, 2014. In addition, the table reflects the tax credits and tax benefits, amortization of the investment and the net impact to the Company’s income tax provision for the nine months ended September 30, 2015 and the year ended December 31, 2014.

 

 

(Amounts in thousands)

 

Original

   

Current

   

Unfunded

   

Tax Credits

   

Amortization

   

Net

 

Qualified Affordable Housing Projects at

 

Investment

   

Recorded

   

Liability

   

and

   

of

   

Income Tax

 

September 30, 2015

 

Value

   

Investment

   

Obligation

   

Benefits (1)

   

Investments (2)

   

Benefit

 

Raymond James California Housing Opportunities Fund II

  $ 2,000     $ 1,599     $ 628     $ 170     $ 137     $ 33  
                                                 

WNC Institutional Tax Credit Fund 38, L.P.

    1,000       810       215       104       77       27  

Merritt Community Capital Corporation Fund XV, L.P.

    2,500       1,877       610       208       173       35  

California Affordable Housing Fund

    2,454       697             155       155        

Total

  $ 7,954     $ 4,983     $ 1,453     $ 637     $ 542     $ 95  

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(Amounts in thousands)

 

Original

   

Current

   

Unfunded

   

Tax Credits

   

Amortization

   

Net

 

Qualified Affordable Housing Projects at

 

Investment

   

Recorded

   

Liability

   

and

   

of

   

Income Tax

 

December 31, 2014

 

Value

   

Investment

   

Obligation

   

Benefits (1)

   

Investments (2)

   

Benefit

 

Raymond James California Housing Opportunities Fund II

  $ 2,000     $ 1,846     $ 736     $ 160     $ 154     $ 31  
                                                 

WNC Institutional Tax Credit Fund 38, L.P.

    1,000       888       314       105       112       26  

Merritt Community Capital Corporation Fund XV, L.P.

    2,500       2,050       1,374       340       450       58  

California Affordable Housing Fund

    2,454       852             209       187       22  

Total

  $ 7,954     $ 5,636     $ 2,424     $ 814     $ 903     $ 137  
   

(1) The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects operating loss. Tax benefits are calculated using a 34% tax rate.
(2)
This amount reduces the tax credits and benefits generated by the Qualified Affordable Housing Projects.

 

 

 

The following table presents the Company’s generated tax credits and tax benefits from investments in qualified affordable housing projects at three and nine months ended September 30, 2015 and 2014.

 

   

For the Three Months Ended

 
   

September 30, 2015

   

September 30, 2014

 

(Amounts in thousands)

 

Generated

   

Tax Benefits From

   

Generated

   

Tax Benefits from

 

Qualified Affordable Housing Projects

 

Tax Credits

   

Taxable Losses

   

Tax Credits

   

Taxable Losses

 

Raymond James California Housing Opportunities Fund II

  $ 43     $ 13     $ 29     $ 10  

WNC Institutional Tax Credit Fund 38, L.P.

    27       8       21       5  

Merritt Community Capital Corporation Fund XV, L.P.

    54       15       66       19  

California Affordable Housing Fund

    40       12       39       12  

Total

  $ 164     $ 48     $ 155     $ 46  

 

 

   

For the Nine Months Ended

 
   

September 30, 2015

   

September 30, 2014

 

(Amounts in thousands)

 

Generated

   

Tax Benefits From

   

Generated

   

Tax Benefits from

 

Qualified Affordable Housing Projects

 

Tax Credits

   

Taxable Losses

   

Tax Credits

   

Taxable Losses

 

Raymond James California Housing Opportunities Fund II

  $ 131     $ 39     $ 86       30  

WNC Institutional Tax Credit Fund 38, L.P.

    81       23       63       15  

Merritt Community Capital Corporation Fund XV, L.P.

    163       45       199       56  

California Affordable Housing Fund

    118       37       119       38  

Total

  $ 493     $ 144     $ 467     $ 139  

 

 

The tax credits and benefits were partially offset by the amortization of the principal investment balances of $181 thousand and $542 thousand for the three and nine months ended September 30, 2015 respectively, compared to $260 thousand and $665 thousand for the comparable periods of 2014.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

The following table reflects the anticipated net income tax benefit at September 30, 2015, that is expected to be recognized by the Company over the remaining life of the investments.

 

 

   

Raymond James

   

WNC Institutional

   

Merritt Community

   

California

   

Total Net

 

(Amounts in thousands)

 

California Housing

   

Tax Credit

   

Capital Corporation

   

Affordable Housing

   

Income Tax

 

Qualified Affordable Housing Projects

 

Opportunities Fund II

   

Fund 38, L.P.

   

Fund XV, L.P

   

Fund

   

Benefit

 

Anticipated net income tax benefit less amortization of investments:

                                       

2015

  $ 12     $ 9     $ 12     $ 1     $ 34  

2016

    46       37       47       1       131  

2017

    46       36       45             127  

2018

    45       35       45             125  

2019 and thereafter

    263       155       238       1       657  

Total

  $ 412     $ 272     $ 387     $ 3     $ 1,074  

 

 

NOTE 10. FEDERAL FUNDS PURCHASED AND LINES OF CREDIT

 

At September 30, 2015 and December 31, 2014, the Company had no outstanding federal funds purchased balances. At September 30, 2015, the Bank had available lines of credit with the Federal Home Loan Bank of San Francisco totaling $221.9 million and the Bank had available lines of credit with the Federal Reserve totaling $23.0 million subject to certain collateral requirements, namely the amount of certain pledged loans.

 

The Bank had uncommitted federal funds line of credit agreements with three financial institutions totaling $40.0 million at September 30, 2015. If the Bank had borrowed from these lines at September 30, 2015, interest rates would have ranged from 0.30% to 1.20%. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility. The lines are reviewed and renewed periodically throughout the year, and are intended to support short-term liquidity needs. The agreements may restrict consecutive day usage.

 

NOTE 11. TERM DEBT

 

The Bank had outstanding secured advances from the Federal Home Loan Bank of San Francisco at September 30, 2015 and December 31, 2014 of $75.0 million. The $75.0 million advance outstanding at September 30, 2015, matures during 2016.

 

The maximum amount outstanding from the Federal Home Loan Bank of San Francisco under term advances at any month end during the nine months ended September 30, 2015, and the year ended December 31, 2014 was $120.0 million and $75.0 million, respectively. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2015 and year ended December 31, 2014 was $91.9 million and $77.5 million, respectively. The weighted average interest rate on the borrowings at September 30, 2015 and December 31, 2014 was 0.30% and 0.24%, respectively.

 

The Federal Home Loan Bank of San Francisco borrowings are secured by an investment in Federal Home Loan Bank of San Francisco stock, certain real estate mortgage loans which have been specifically pledged to the Federal Home Loan Bank of San Francisco pursuant to their collateral requirements, and certain securities held in the Bank’s investment securities portfolio. As of September 30, 2015, based upon the level of Federal Home Loan Bank of San Francisco advances, the Company was required to hold an investment in Federal Home Loan Bank of San Francisco stock of $4.5 million. Furthermore, the Company has pledged $349.0 million of its commercial and real estate mortgage loans, and has borrowed $75.0 million against the pledged loans. As of September 30, 2015, the Company held $15.9 million (amortized cost) in securities with the Federal Home Loan Bank of San Francisco for pledging purposes. All of the securities pledged to the Federal Home Loan Bank of San Francisco were unused as collateral as of September 30, 2015.

 

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

Lease Commitments – The Company leases four sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates based on predetermined escalation schedules. Substantially all of the leases provide the Company with the option to extend the lease terms one or more times following expiration of the initial term.

 

The following table sets forth rent expense and rent income for the three and nine months ended September 30, 2015 and 2014.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(Amounts in thousands)

 

2015

   

2014

   

2015

   

2014

 

Rent income

  $ 7     $ 3     $ 13     $ 11  

Rent expense

    142       142       426       424  

Net

  $ 135     $ 139     $ 413     $ 413  

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

The following table sets forth, as of September 30, 2015, the future minimum lease payments under non-cancelable operating leases.

 

 

(Amounts in thousands)

       

Amounts due in:

       

2015

  $ 149  

2016

    608  

2017

    549  

2018

    431  

2019

    402  

Thereafter

    1,296  

Total

  $ 3,435  

 

 

Financial Instruments with Off-Balance Sheet Risk – The Company’s consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank’s business and involve elements of credit, liquidity, and interest rate risk.

 

The following table presents a summary of the Bank’s commitments and contingent liabilities at September 30, 2015 and December 31, 2014.

 

 

(Amounts in thousands)

 

September 30, 2015

   

December 31, 2014

 

Commitments to extend credit

  $ 197,958     $ 200,991  

Standby letters of credit

    2,649       2,731  

Guaranteed commitments outstanding

    3,357       1,864  

Total commitments

  $ 203,964     $ 205,586  

 

 

In the normal course of business the Bank is a party to financial instruments with off-balance sheet credit risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve elements of credit and interest rate risk similar to the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and financial guarantees, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any covenant or condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

While most standby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.

 

Standby letters of credit and financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including international trade finance, commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

 

The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. The Bank was not required to perform on any financial guarantees for the nine months ended September 30, 2015, and the year ended December 31, 2014. At September 30, 2015, approximately $133 thousand of standby letters of credit expire within one year, and $2.5 million expire thereafter.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

The reserve for unfunded commitments, which is included in other liabilities on the Consolidated Balance Sheets, was $695 thousand at September 30, 2015 and December 31, 2014. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic conditions. During the nine months ended September 30, 2015 the Company made no additional provision to the reserve for unfunded commitments. When a provision is necessary, the expense is recorded in other noninterest expense in the Consolidated Statements of Operations.

 

Legal Proceedings – The Company is involved in various pending and threatened legal actions arising in the ordinary course of business. The Company maintains reserves for losses from legal actions, which are both probable and estimable. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company’s financial position or results of operations.

 

Concentrations of Credit Risk –The Company grants real estate construction, commercial, and installment loans to customers throughout northern California. In management’s judgment, a concentration exists in real estate-related loans, which represented approximately 74% and 71% of the Company’s gross loan portfolio at September 30, 2015 and December 31, 2014, respectively.

 

Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the repayment of these loans. Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.

 

The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to other depository institutions in aggregate or to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as internal limits for allowable exposure to other depository institutions in aggregate or to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents activity in accumulated other comprehensive income for the nine months ended September 30, 2015.

 

 

   

Unrealized

   

Unrealized

   

Accumulated Other

 
   

Gains (Losses) on

   

(Losses) Gains on

   

Comprehensive

 

(Amounts in thousands)

 

Securities

   

Derivatives

   

(Loss) Income

 

Accumulated other comprehensive loss as of December 31, 2014

  $ 1,810     $ (1,897 )   $ (87 )

Comprehensive income three months ended March 31, 2015

    292       (21 )     271  

Comprehensive loss three months ended June 30, 2015

    (967 )     100       (867 )

Comprehensive income three months ended September 30, 2015

    43       (28 )     15  

Accumulated other comprehensive loss as of September 30, 2015

  $ 1,178     $ (1,846 )   $ (668 )

 

 

The following table presents activity in accumulated other comprehensive income for the nine months ended September 30, 2014.

 

 

   

Unrealized

   

Unrealized

   

Accumulated Other

 
   

(Losses) Gains on

   

Losses on

   

Comprehensive

 

(Amounts in thousands)

 

Securities

   

Derivatives

   

(Loss) Income

 

Accumulated other comprehensive loss as of December 31, 2013

  $ (1,809 )   $ (583 )   $ (2,392 )

Comprehensive income three months ended March 31, 2014

    1,786       (120 )     1,666  

Comprehensive loss three months ended June 30, 2014

    1,115       (1,296 )     (181 )

Comprehensive income three months ended September 30, 2014

    267       162       429  

Accumulated other comprehensive loss as of September 30, 2014

  $ 1,359     $ (1,837 )   $ (478 )

 

 

Accumulated other comprehensive income is reported net of related tax effects. Detailed information on the tax effects of the individual components of comprehensive income are presented in the Consolidated Statements of Comprehensive Income.

 

 

NOTE 14. DERIVATIVES

 

The Company uses derivatives to hedge the risk of changes in market interest rates to limit the impact on earnings and cash flows relating to specific groups of assets and liabilities. Presently, the Company utilizes interest rate swaps (the “hedging instrument”) with other major financial institutions (counterparties) to hedge interest expenses associated with certain Federal Home Loan Bank of San Francisco borrowings (the “hedged instrument”). The Company does not use derivative instruments for trading or speculative purposes.

 

For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. The Company formally assesses both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately into earnings.

 

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheets. In accordance with ASC 815, the Company designated its interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument, except any ineffective portion, are recorded in accumulated other comprehensive income until earnings are impacted by the hedged instrument. No components of the Company’s hedging instruments are excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

 

Classification of the gain or loss in the Consolidated Statements of Operations upon release from accumulated other comprehensive income is the same as that of the underlying exposure. The Company discontinues the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were in accumulated other comprehensive income are recognized immediately in earnings.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

During June 2014, the Company concluded that certain forecasted Federal Home Loan Bank of San Francisco advances were no longer probable. The forward starting interest rate swaps that were in place to hedge the forecasted advances were terminated and gains of $952 thousand in accumulated other comprehensive income were immediately recognized in earnings.

 

At September 30, 2015, the Company has one active interest rate swap, and one forward starting interest rate swap to hedge interest rate risk associated with current and forecasted variable rate Federal Home Loan Bank of San Francisco advances. The hedge strategy converts LIBOR based variable rate of interest on active and forecasted Federal Home Loan Bank of San Francisco advances to fixed interest rates.

 

The following table summarizes the Company’s interest rate swap contracts with counterparties outstanding at September 30, 2015. The interest rate swap contracts are made with a single issuer and include the right of offset.

 

 

(Amounts in thousands)

                           
                       

Description

 

We Pay Fixed

   

We Receive Variable (1)

   

Notional Amount

 

Effective Date

Maturity Date

Interest rate swap - active #1

    2.64

%

    0.30 %   $ 75,000  

August 3, 2015

August 1, 2016

Forward starting interest rate swap #2

    3.22

%

 

Variable

    $ 75,000  

August 1, 2016

August 1, 2017

 (1) Rate floats to 3 month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.

 

 

The following table lists the active and forward starting interest rate swap derivatives separately by asset (gains) and liabilities (losses), and the fair value of such derivatives at September 30, 2015, and December 31, 2014.

 

 

       

Asset Derivatives

   

Liability Derivatives

 

(Amounts in thousands)

     

September 30,

   

December 31,

   

September 30,

   

December 31,

 

Description

 

Designation

 

2015

   

2014

   

2015

   

2014

 

Interest rate swap - matured

 

Cash flow hedge

  $     $     $     $ 880  

Interest rate swap - active #1

 

Cash flow hedge

                1,384       1,298  

Forward starting interest rate swap #2

 

Cash flow hedge

                1,752       1,046  

Total

  $     $     $ 3,136     $ 3,224  

 

 

The following table summarizes the gains (losses) recorded during the three and nine months ended September 30, 2015 and 2014, and their location within the Consolidated Statements of Operations.

 

 

(Amounts in thousands)

     

Three Months Ended
September 30,

   

Nine Months Ended
September 30,

 

Description

 

Consolidated Statement of Operations Location

 

2015

   

2014

   

2015

   

2014

 

Interest rate swap (1)

 

Interest on Federal Home Loan Bank of San Francisco borrowings

  $ (410 )   $     $ (997 )   $  

Forward starting interest rate swap (2)

 

Interest on Federal Home Loan Bank of San Francisco borrowings

          22             283  

Forward starting interest rate swap (3)

 

Other noninterest income

                      1,617  

Total

  $ (410 )   $ 22     $ (997 )   $ 1,900  

 

(1) Loss represents net settlement recorded during the period on active interest rate swaps.
(2)
Gains represent tax adjusted amounts reclassified from accumulated other comprehensive income pertaining to the terminated forward starting interest rate swap.
(3)
Gains represent tax adjusted amounts reclassified from accumulated other comprehensive income immediately upon cancellation of forecasted Federal Home Loan Bank of San Francisco borrowings.

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

The following table summarizes the gains and (losses) on all derivative instruments (active and forward starting) designated as cash flow hedges recorded in accumulated other comprehensive income and reclassified into earnings during the three and nine months ended September 30, 2015 and 2014.

 

 

(Amounts in thousands)

 

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Description

 

2015

   

2014

   

2015

   

2014

 

Interest rate swaps

  $ (241 )   $ 12     $ (591 )   $ 1,117  

 

 

The following table summarizes management’s estimate of the amount of existing losses on derivative instruments recorded in accumulated other comprehensive income that are expected to reclassified into earnings within the next 12 months, assuming various rate shock scenarios. In each scenario, the impact to net income as a result of the increase in interest rates paid on the hedged instrument would remain unchanged because the derivative instrument is effectively offsetting changes in cash flows of the hedged instrument.

 

 

 

(Amounts in thousands)

 

Interest Rate Shock

 

Description

 

Flat

   

+100bp

   

+200bp

 

Reclassifications from accumulated other comprehensive income

  $ 1,054     $ 613     $ 171  

 

 

The following table summarizes the derivatives that have a right of offset at September 30, 2015 and December 31, 2014.

 

 

                   

Gross Amounts Not Offset In The
Consolidated Balance Sheets

         

(Amounts in thousands)

 

Gross Amounts of Recognized Assets / (Liabilities)

   

Gross Amounts Offset In The Consolidated Balance Sheets

   

Net Amounts of Assets / (Liabilities) Included In The Consolidated Balance Sheets

   

Fair Value of Collateral Posted

   

Net Amount

 

September 30, 2015

                                       

Derivative liabilities

                                       

Interest rate swaps

  $ (3,136 )   $     $ (3,136 )   $ 4,497     $ 1,361  
                                         

December 31, 2014

                                       

Derivative liabilities

                                       

Interest rate swaps

  $ (3,224 )   $     $ (3,224 )   $ 3,533     $ 309  

 

 

Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the contract. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties fail to perform under the terms of those contracts. Assuming no recoveries of underlying collateral, credit risk is measured by the market value of the derivative financial instrument.

 

The contracts with the derivative counterparties contain a provision where if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. Similarly, the Company could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

 

The Company was required to post collateral against the obligations of $3.1 million at September 30, 2015. Accordingly, the Company pledged three mortgage backed securities with an aggregate par value of $4.3 million and an aggregate fair value of $4.5 million.

 

 

NOTE 15. FAIR VALUES

 

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2015 and December 31, 2014, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets. The table indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

Non-financial assets and non-financial liabilities defined by the FASB ASC 820, Fair Value Measurement, such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the table. In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of FASB ASC 825, Financial Instruments, such as bank-owned life insurance policies.

 

 

(Amounts in thousands)

 

Carrying

   

Fair Value Measurements Using

         

September 30, 2015

 

Amounts

   

Level 1

   

Level 2

   

Level 3

   

Total

 

Financial assets:

                                       

Cash and cash equivalents

  $ 25,309     $ 25,309     $     $     $ 25,309  

Securities available-for-sale

  $ 157,309     $     $ 157,309     $     $ 157,309  

Securities held-to-maturity

  $ 36,093     $     $ 36,294     $     $ 36,294  

Net loans

  $ 708,360     $     $     $ 714,764     $ 714,764  

Federal Home Loan Bank of San Francisco stock

  $ 4,465     $ 4,465     $     $     $ 4,465  

Financial liabilities:

                                       

Deposits

  $ 779,505     $     $ 781,643     $     $ 781,643  

Federal Home Loan Bank of San Francisco advances

  $ 75,000     $     $ 75,000     $     $ 75,000  

Subordinated debenture

  $ 10,310     $     $ 5,177     $     $ 5,177  

Derivatives

  $ 3,136     $     $ 3,136     $     $ 3,136  

 

 

(Amounts in thousands)

 

Carrying

   

Fair Value Measurements Using

         

December 31, 2014

 

Amounts

   

Level 1

   

Level 2

   

Level 3

   

Total

 

Financial assets:

                                       

Cash and cash equivalents

  $ 58,422     $ 58,422     $     $     $ 58,422  

Securities available-for-sale

  $ 186,986     $ 2,571     $ 184,415     $     $ 186,986  

Securities held-to-maturity

  $ 36,806     $     $ 37,118     $     $ 37,118  

Net loans

  $ 650,235     $     $     $ 661,126     $ 661,126  

Federal Home Loan Bank of San Francisco stock

  $ 5,728     $ 5,728     $     $     $ 5,728  

Financial liabilities:

                                       

Deposits

  $ 789,035     $     $ 790,068     $     $ 790,068  

Federal Home Loan Bank of San Francisco advances

  $ 75,000     $     $ 75,000     $     $ 75,000  

Subordinated debenture

  $ 10,310     $     $ 4,932     $     $ 4,932  

Derivatives

  $ 3,224     $     $ 3,224     $     $ 3,224  

 

 

Fair Value Hierarchy

 

Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2 valuations utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 valuations include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

 

 
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Notes to Consolidated Financial Statements (Unaudited)

  

Level 3 valuations are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value:

 

Cash and cash equivalents – The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a reasonable estimate of fair value because of the relatively short term between the origination of the instrument and its expected realization. Therefore, the Company believes the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.

 

Securities – Investment securities fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices or matrix pricing, which is a mathematical technique, used widely by the industry that relies on the securities relationship to other benchmark securities, and are classified as Level 2.

 

Net Loans – For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on specific risk adjusted spreads to the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The ALLL is considered to be a reasonable estimate of loan discount for credit quality concerns. Given that there are commercial loans with specific terms that are not readily available; the Company believes the fair value of loans is derived from Level 3 inputs.

 

Federal Home Loan Bank of San Francisco stock – The carrying value of Federal Home Loan Bank stock approximates fair value as the shares can only be redeemed by the issuing institution at par. The Company measures the fair value of FHLB stock using Level 1 inputs.

 

Deposits – The Company measures fair value of maturing deposits using Level 2 inputs. The fair values of deposits were derived by discounting their expected future cash flows based on the Federal Home Loan Bank of San Francisco yield curves, and maturities. The Company obtained Federal Home Loan Bank of San Francisco yield curve rates as of the measurement date, and believes these inputs fall under Level 2 of the fair value hierarchy. Deposits with no defined maturities, the fair values are the amounts payable on demand at the respective reporting date.

 

Federal Home Loan Bank of San Francisco advances – For variable rate Federal Home Loan Bank of San Francisco borrowings, the carrying value approximates fair value. The Company measures the fair value of Federal Home Loan Bank of San Francisco advances using Level 2 inputs.

 

Subordinated debenture – The fair value of the subordinated debenture is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debentures would be issued with similar credit ratings as ours and similar remaining maturities. At September 30, 2015, future cash flows were discounted at 6.13%. The Company measures the fair value of subordinated debentures using Level 2 inputs.

 

Commitments – Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower’s credit quality has declined, we record a reserve for these unfunded commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is not material. As such, no disclosures are made on the fair value of commitments.

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities and derivatives are recorded at fair value on a recurring basis. From time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans and certain other assets including OREO. These nonrecurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual assets.

 

 
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Notes to Consolidated Financial Statements (Unaudited)

  

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value, as of September 30, 2015 and December 31, 2014.

 

 

(Amounts in thousands)

 

Fair Value at September 30, 2015

 

Recurring Basis

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Available-for-sale securities:

                               

U.S. government and agencies

  $ 3,998     $     $ 3,998     $  

Obligations of states and political subdivisions

    57,453             57,453        

Residential mortgage backed securities and collateralized mortgage obligations

    34,058             34,058        

Corporate securities

    36,560             36,560        

Commercial mortgage backed securities

    9,266             9,266        

Other investment securities (1)

    15,974             15,974        

Total assets measured at fair value

  $ 157,309     $     $ 157,309     $  

Derivatives – interest rate swaps

  $ 3,136     $     $ 3,136     $  

Total liabilities measured at fair value

  $ 3,136     $     $ 3,136     $  

 (1) Principally consists of residential mortgage backed securities issued by both by governmental and nongovernmental agencies, and SBA pool securities.

 

 

(Amounts in thousands)

 

Fair Value at December 31, 2014

 

Recurring Basis

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Available-for-sale securities:

                               

U.S. government and agencies

  $ 6,393     $     $ 6,393     $  

Obligations of states and political subdivisions

    54,363             54,363        

Residential mortgage backed securities and collateralized mortgage obligations

    47,015             47,015        

Corporate securities

    37,734       1,467       36,267        

Commercial mortgage backed securities

    10,389       1,104       9,285        

Other investment securities (1)

    31,092             31,092        

Total assets measured at fair value

  $ 186,986     $ 2,571     $ 184,415     $  

Derivatives – interest rate swaps

  $ 3,224     $     $ 3,224     $  

Total liabilities measured at fair value

  $ 3,224     $     $ 3,224     $  

 (1) Principally consists of residential mortgage backed securities issued by both by governmental and nongovernmental agencies, and SBA pool securities.

 

 

Recurring Items

 

Debt Securities – The available-for-sale securities amount in the recurring fair value table above represents securities that have been adjusted to their fair values. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things. The Company has determined that the source of these fair values falls within Level 2 of the fair value hierarchy.

 

Forward starting interest rate swaps – The valuation of the Company’s interest rate swaps was obtained from third party pricing services. The fair values of the interest rate swaps were determined by using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis was based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the source of these derivatives’ fair values falls within Level 2 of the fair value hierarchy.

 

Sensitivity of the Level 3 Fair Value Measurements

 

There were no assets or liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis at September 30, 2015 or at December 31, 2014. There were no transfers in or out of level 3 during the nine months ended September 30, 2015 or the year ended December 31, 2014.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

  

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following table presents information about the Company’s assets and liabilities at September 30, 2015 and December 31, 2014 measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below present the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair values as of the date reported upon.

 

 

(Amounts in thousands)

 

Fair Value at September 30, 2015

 

Nonrecurring basis:

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Collateral dependent impaired loans

  $ 1,617     $     $     $ 1,617  

Other real estate owned

    575                   575  

Total assets measured at fair value

  $ 2,192     $     $     $ 2,192  

 

 

(Amounts in thousands)

 

Fair Value at December 31, 2014

 

Nonrecurring basis:

 

Total

   

Level 1

   

Level 2

   

Level 3

 

Collateral dependent impaired loans

  $ 10,319     $     $     $ 10,319  

Other real estate owned

    166                   166  

Total assets measured at fair value

  $ 10,485     $     $     $ 10,485  

 

 

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2015 and 2014.

 

 

(Amounts in thousands)

 

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Fair value adjustment loss:

 

2015

   

2014

   

2015

   

2014

 

Collateral dependent impaired loans

  $ 199     $     $ 744     $ 4,988  

Other real estate owned

                108       290  

Total

  $ 199     $     $ 852     $ 5,278  

 

 

During the nine months ended September 30, 2015, collateral dependent impaired loans with a carrying amount of $2.4 million were written down to their fair value of $1.6 million resulting in a $744 thousand adjustment to the ALLL.

 

During the nine months ended September 30, 2015, five properties were transferred into OREO with an aggregate carrying value of $683 thousand and written down to its fair value of $575 thousand, resulting in a $108 thousand adjustment to the ALLL.

 

The loan amounts above represent impaired, collateral dependent loans that have been adjusted to fair value during the respective reporting period. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL.

 

The loss represents charge offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged off is zero. When the fair value of the collateral is based on a current appraised value, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

 

The OREO amount above represents impaired real estate that has been adjusted to fair value during the respective reporting period. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The determination of fair value is based on recent appraisals of the foreclosed properties, which take into account recent sales prices adjusted for unobservable inputs, such as opinions provided by local real estate brokers and other real estate experts. The Company records OREO as a nonrecurring Level 3.

 

 
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Notes to Consolidated Financial Statements (Unaudited)

  

Limitations – Fair value estimates are made at a specific point in time, based on relevant market information and other information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on current on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities, and property, plant and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

 

 

NOTE 16. PURCHASE OF FINANCIAL ASSETS

 

On February 27, 2015, the Company purchased $6.4 million of commercial real estate loans. The loans are being serviced by the Company and were purchased without recourse. The Company purchased a total par value of $6.4 million in loans with accrued interest at the settlement date of $17 thousand at a net premium of $91 thousand in exchange for a cash payment of $6.5 million. The fair value was equal to the price paid to acquire the portfolio as the difference between par value and cash purchase price represents the fair value adjustment.

 

On September 23, 2014, the Company purchased $18.1 million of owner-occupied commercial real estate loans secured by first deeds of trust originated under the SBA 504 loan program. The loans are serviced by the Company and were purchased without recourse. The Company purchased a total par value of $18.1 million in loans with accrued interest at the settlement date of $77 thousand at a net premium of $377 thousand in exchange for a cash payment of $18.5 million. The fair value was equal to the price paid to acquire the portfolio as the difference between the par value and cash purchase price represents the fair value adjustment.

 

On May 12, 2014, the Company agreed to purchase $40.0 million of unsecured consumer home improvement loans. The loans were purchased without recourse or servicing rights. The agreement calls for purchases up to $4.0 million per month up to a maximum par value of $40.0 million. As of September 30, 2015 the Company has paid cash totaling $57.7million, and received cash repayments of $18.1 million for $39.6 million in net loans. The Company initially measured the acquired loan portfolio at a fair equal to the price paid to acquire the portfolio as the difference between the par value and cash purchase price represents the fair value adjustment.

 

On February 27, 2014, the Company purchased a pool of residential solar panel loans secured by UCC filing with a par value of $12.9 million for a cash payment of $12.7 million. The loans and the related servicing were purchased without recourse. The fair value was equal to the price paid to acquire the portfolio as the difference between the par value and cash purchase price represents the fair value adjustment.

 

 

NOTE 17. SUBSEQUENT EVENT

 

On October 28, 2015 the Bank entered into a Purchase and Assumption Agreement with Bank of America to purchase certain assets of five Bank of America branches located in northern California, including approximately $258 million in deposits and $421 thousand in loans. The transaction is anticipated to close in the first quarter of 2016, pending final regulatory approvals. The branches that will be acquired are located in Colusa, Corning, Orland, Willows, and Yreka.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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 contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. You can find many of these statements by looking for words such as “anticipates,” “expects,” “believes,” “estimates” and “intends” and words or phrases of similar meaning. We make forward-looking statements regarding projected sources of funds, use of proceeds, availability of acquisition and growth opportunities, dividends, adequacy of our allowance for loan and lease losses (“ALLL”) and provision for loan losses, our commercial real estate portfolio and subsequent charge offs, among others. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission (“SEC”), and the following factors that might cause actual results to differ materially from those presented:

 

Our ability to attract new deposits and loans

Demand for financial services in our market areas

Competitive market pricing factors

Deterioration of economic conditions that could result in increased loan losses

Risks associated with concentrations of real estate related loans

Market interest rate volatility

Stability of funding sources and continued availability of borrowing

Changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth

Our ability to recruit and maintain key management staff

Our ability to raise capital and incur debt on reasonable terms

Regulatory limits on the Bank’s ability to pay dividends to the Company

The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and related rules and regulations on the Company’s business operations and competitiveness, including the impact of executive compensation restrictions, which may affect the Company’s ability to retain and recruit executives in competition with firms in other industries who do not operate under those restrictions

The impact of the Dodd-Frank Act on the Company’s interchange fee revenue, interest expense, FDIC deposit insurance assessments and regulatory compliance expense

Continued consolidation in the financial services industry resulting in larger financial institutions that may have greater resources could change the competitive landscape

 

There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. We do not intend to update these forward-looking statements. Readers should consider any forward-looking statements in light of this explanation, and we caution readers about relying on forward-looking statements.

 

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, 2014 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, 2014 to September 30, 2015. Also discussed are significant trends and changes in the Company’s results of operations for the nine months ended September 30, 2015, compared to the same period in 2014. 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.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”) is a corporation organized under the laws of California and a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce). The Company has 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.”

 

The Company commenced banking operations in 1982 and currently operates four full service facilities in two diverse markets in Northern California. We provide a wide range of financial services and products for business and retail customers which are competitive with those traditionally offered by banks of similar size in California.

 

Our principal executive office is located at 1901 Churn Creek Road, Redding, California and the telephone number is (530) 722-3939.

   

Executive Overview

 

Significant items for the three months ended September 30, 2015 were as follows:

 

Net income available to common shareholders of $2.5 million for the three months ended September 30, 2015 was an improvement of $1.3 million (102%) over $1.2 million net income available to common shareholders earned during the third quarter of 2014, and an improvement of $135 thousand (6%) over $2.3 million available to common shareholders earned during the previous quarter.

Return on average assets improved to 0.99% in the third quarter of 2015 compared to 0.49% in the same quarter of 2014.

Return on average equity improved to 9.12% in the third quarter of 2015 compared to 4.76% in the same quarter of 2014.

Nonperforming assets at September 30, 2015, totaled $17.1 million, a decrease of $7.8 million (31%) compared to September 30, 2014, and a decrease of $1.2 million (27% annualized) compared to June 30, 2015.

Gross loans at September 30, 2015, totaled $718.5 million, an increase of $18.7 million (11% annualized) since June 30, 2015.

Continuing improved asset quality resulted in no additional provision for loan and lease losses during the third quarter.

The Company’s book value per share increased to $6.64 per common share at September 30, 2015, from $6.17 per common share at September 30, 2014 (8%) and $6.48 at June 30, 2015 (10% annualized).

The Company’s net interest margin improved to 3.62% for the quarter ended September 30, 2015 from 3.43% for the third quarter of 2014.

 

 

Significant items for the nine months ended September 30, 2015 were as follows:

 

Net income available to common shareholders of $6.6 million for the nine months ended September 30, 2015 was an improvement of $2.7 million (69%) over $3.9 million net income available to common shareholders earned during the nine months ended September 30, 2014.

Return on average assets for the nine months ended September 30, 2015 improved to 0.89% compared to 0.54% for the same period in 2014.

Return on average equity for the nine months ended September 30, 2015 improved to 8.27% compared to 5.10% for the same period in 2014.

Nonperforming assets at September 30, 2015, totaled $17.1 million, a decrease of $5.1 million (31% annualized) compared to December 31, 2014.

Gross loans at September 30, 2015, totaled $718.5 million, an increase of $57.6 million (12% annualized) since December 31, 2014.

Net loan loss recoveries of $71 thousand combined with continuing improved asset quality resulted in no additional provision for loan and lease losses during the first nine months of 2015.

The Company’s book value per share increased to $6.64 per common share at September 30, 2015, from $6.29 per common share at December 31, 2014 (7% annualized).

The Company’s net interest margin improved to 3.68% for the nine months ended September 30, 2015 from 3.57% for the year ended December 31, 2014.

The Company’s efficiency ratio improved to 65.4% during the first nine months of 2015 compared to 70.1% during the same period in 2014.

 

 

Subsequent Event

On October 28, 2015 the Bank entered into a Purchase and Assumption Agreement with Bank of America to purchase certain assets of five Bank of America branches located in northern California, including approximately $258 million in deposits and $421 thousand in loans. The transaction is anticipated to close in the first quarter of 2016, pending final regulatory approvals. The branches that will be acquired are located in Colusa, Corning, Orland, Willows, and Yreka.

 

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, 2014 filed with the SEC on March 10, 2015. 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.

 

 
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Valuation of Investments and Impairment of Securities

 

At the time of purchase, the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs and intent to hold. The Company does not engage in trading activity. Securities designated as held-to-maturity are carried at cost adjusted for the accretion of discounts and amortization of premiums. The Company has the ability and intent to hold these securities to maturity. Securities designated as available-for-sale may be sold to implement the Company’s asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as part of accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Gains or losses on sale of securities are based on the specific identification method. The market value and underlying rating of the security is monitored for quality. Securities may be adjusted to reflect changes in valuation as a result of other-than-temporary declines in value. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed rate investments, from changes in interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends.

 

When an investment is other-than-temporarily impaired, the Company assesses whether it intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If the Company intends to sell the security or if it is more likely than not that the Company will be required to sell security before recovery of the amortized cost basis, the entire amount of other-than-temporary impairment (“OTTI”) 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 OTTI has occurred for an investment. The Company follows a consistent and systematic process for determining OTTI loss. The Company has designated the ALCO responsible for the other-than-temporary evaluation process.

 

The ALCO Committee’s assessment of whether OTTI 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) the intent and ability of the Company to retain its 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.

 

Allowance for Loan and Lease Losses

 

ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. The allowance is increased by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers our past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. Management reviews the ALLL on a monthly basis and conducts a formal assessment of the adequacy of the ALLL on a quarterly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

 

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management's best estimate of the probable impact these changes would have on the loan portfolio as a whole.

 

 
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Income Taxes

 

Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach. We recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences that have been recognized in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. 

 

In projecting future taxable income, management develops assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. The Company files consolidated federal and combined state income tax returns.

 

ASC 740-10-55 Income Taxes requires a two-step process that separates recognition from measurement of tax positions. We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. The measurement process is applied only after satisfying the recognition requirement and determines what amount of a tax position will be sustainable upon a potential examination or settlement. If upon measuring, the tax position produces a range of potential tax benefits, the Company may claim the highest tax benefit from that range as long as it is over 50% likely to be realized using a probability analysis.

 

Management believes that all of our tax positions taken meet the more likely than not recognition threshold. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.

 

Derivative Financial Instruments and Hedging Activities

 

The Company uses derivatives to hedge the risk of changes in market interest rates to limit the impact on earnings and cash flow relating to specific groups of assets and liabilities. Presently, the Company utilizes interest rate swaps (the “hedging instrument”) with other major financial institutions (counterparties) to hedge interest expenses associated with certain Federal Home Loan Bank of San Francisco borrowings (the “hedged instrument”). The Company does not use derivative instruments for trading or speculative purposes.

 

For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. The Company formally assesses both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately into earnings.

 

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheets. In accordance with ASC 815, the Company has designated its interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument in cash flow hedges, except any ineffective portion, are recorded in accumulated other comprehensive income until earnings are impacted by the hedged instrument. No components of the Company’s hedging instruments are excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

 

Classification of the gain or loss in the Consolidated Statements of Operations upon release from accumulated other comprehensive income is the same as that of the underlying exposure. The Company discontinues the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were in accumulated other comprehensive income are recognized immediately in earnings.

 

 
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The following table summarizes the Company’s interest rate swap contracts with counterparties outstanding at September 30, 2015. The interest rate swap contracts are made with a single issuer and include the right of offset.

 

 

(Amounts in thousands)

                             

Description

 

We Pay Fixed

   

We Receive Variable (1)

   

Notional Amount

 

Effective Date

 

Maturity Date

Interest rate swap - active #1

    2.64

%

    0.30 %   $ 75,000  

August 3, 2015

 

August 1, 2016

Forward starting interest rate swap #2

    3.22

%

 

Variable

    $ 75,000  

August 1, 2016

 

August 1, 2017

(1) Rate floats to 3 month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.

 

 

The following table summarizes management’s estimate of the amount of existing losses on derivative instruments record in accumulated other comprehensive income that are expected to reclassified into earnings within the next 12 months, assuming various rate shock scenarios. In each scenario, the impact to net income as a result of the increase in interest rates paid on the hedged instrument would remain unchanged because the derivative instrument is effectively offsetting changes in cash flows of the underlying hedged instrument.

 

 

(Amounts in thousands)

 

Interest Rate Shock

 

Description

 

Flat

   

+100bp

   

+200bp

 

Reclassifications from accumulated other comprehensive income

  $ 1,054     $ 613     $ 171  

 

 

Fair Value Measurements

 

We use fair value measurements to record fair value adjustments to certain assets and liabilities, and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available-for-sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a nonrecurring basis, such as certain impaired loans held for investment, and (“OREO”). 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, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements. Additional information on our use of fair value measurements and our related valuation methodologies is provided in Note 15 of the Notes to the Consolidated Financial Statements incorporated in this document.

 

Sources of Income

 

We derive our income primarily from net interest income, which is the difference between the interest income we receive on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Other sources of noninterest income include fees earned on deposit related services, payroll processing, gain on sale of available-for-sale securities, earnings on bank-owned life insurance and dividends on Federal Home Loan Bank of San Francisco stock.

 

Our income depends to a great extent on net interest income, which correlates strongly with certain interest rate characteristics. These interest rate characteristics are highly sensitive to many factors which are beyond our control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. In recent years the Bank has originated higher volumes of longer term fixed rate loans. These loans, combined with the structure of the Bank’s investment portfolio, the use of floors in the pricing of our variable rate loans and funding mix caused the Bank to become liability sensitive, which would negatively impact earnings in a rising interest rate environment. To mitigate this liability sensitive position, the Bank entered into an interest rate swap on a portion of its FHLB borrowings and has been working to shorten the average duration of its investment portfolio. These actions have brought the Bank’s interest rate risk profile to a position that is neutral / slightly liability sensitive.

 

 
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Net interest income reflects both the amount of earning assets we hold and our net interest margin, which is the difference between the yield we earn on our assets and the interest rate we pay to fund those assets. As a result, changes in either our net interest margin or the amount of earning assets we hold will affect our net interest income and earnings.

 

Increases or decreases in interest rates could adversely affect our net interest margin. Although the yield we earn on our assets 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.

 

 
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RESULTS OF OPERATIONS

 

OVERVIEW

 

Net income available to common shareholders for the nine months of 2015 increased $1.3 million compared to the same period a year ago. In the current year, net interest income was $1.1 million higher, provision for loan and lease losses was $2.5 million lower, and noninterest expenses were $973 thousand lower. These positive changes were partially offset by noninterest income that was $628 thousand lower and an income tax provision that was higher by $1.3 million.

 

Diluted Earnings Per Share (“EPS”) were $ 0.49 for the nine months ended September 30, 2015 compared with $0.29 for the same period a year ago. The increase in diluted EPS compared to the same period a year ago resulted mostly from increased net income, and also from a small decrease in weighted average shares outstanding, resulting from common stock repurchases.

 

The Company continued its quarterly cash dividends of $0.03 per share during the quarter ended September 30, 2015. In determining the amount of dividend to be paid, management gives consideration to capital preservation objectives, expected asset growth, projected earnings, the overall dividend pay-out ratio, and the dividend yield.

 

Return on Average Assets, Average Total Equity and Common Shareholders' Equity

 

The following table presents the returns on average assets, average total equity and average common shareholders' equity for the nine months ended September 30, 2015 and 2014. For each of the periods presented, the table includes the calculated ratios based on reported net income and net income available to common shareholders as shown in the Consolidated Statements of Operations incorporated in this document.

 

 

   

For the Nine Months Ended

 
   

September 30, 2015

   

September 30, 2014

 

Return on average assets:

               

Net income

    0.91

%

    0.56

%

Income available to common shareholders

    0.89

%

    0.54

%

Return on average total equity:

               

Net income

    8.46

%

    5.29

%

Income available to common shareholders

    8.27

%

    5.10

%

Return on average common shareholders’ equity:

               

Net income

    10.41

%

    6.58

%

Income available to common shareholders

    10.18

%

    6.34

%

 

 
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Net Interest Income and Net Interest Margin

 

Net interest income is the largest source of our operating income. For the nine months ended September 30, 2015 compared to the same period a year ago:

 

Net interest income increased $1.1 million.

Interest income increased $1.9 million or 7% to $29.0 million, which reflects the increase in average earnings assets and the reallocation of lower yielding assets into higher yielding loans.

Interest expense increased $749 thousand or 26% to $3.6 million.

Interest expense on deposits decreased $248 thousand.

Interest expense on the Bank’s Federal Home Loan Bank of San Francisco borrowings increased $1.1 million.

Interest expense on other borrowings decreased $138 thousand.

 

 

For the three months ended September 30, 2015 compared to the same period a year ago:

 

Net interest income increased $507 thousand.

Interest income increased $630 thousand or 7% to $9.7 million.

Interest expense increased $123 thousand or 11% to $1.3 million.

Interest expense on deposits decreased $77 thousand.

Interest expense on the Bank’s Federal Home Loan Bank of San Francisco borrowings increased $247 thousand.

Interest expense on other borrowings decreased $47 thousand.

 

 

In 2011, to mitigate interest rate and market risks, the Bank entered into forward starting interest rate swaps to hedge interest rate risk associated with variable rate Federal Home Loan Bank of San Francisco borrowings. The hedges converted the LIBOR based floating rate of interest on the $75.0 million Federal Home Loan Bank of San Francisco borrowings to fixed interest rates. The remaining interest rate swaps adjust each August and were/are 0.94% at August 2013, 1.84% at August 2014, 2.64% at August 2015 and 3.22% at August 2016.

 

During the first six months of 2014, the net cost of the Bank’s FHLB borrowings was reduced when hedge gains from a previous set of interest rate swaps, were reclassified out of accumulated other comprehensive income into earnings as a reduction of interest expense. As a result, interest expense on FHLB borrowings for the first nine months of 2014 was a $52 thousand.

 

Interest expense on other borrowings, primarily junior subordinated debentures was $143 thousand and $281 thousand for the first nine months of 2015 and 2014, respectively. At September 30, 2014 the Company had $5.1 million of junior subordinated debentures that carried a rate of LIBOR plus 3.30% and $10.3 million of junior subordinated debentures with a rate of LIBOR plus 1.58%. During December of 2014, the Company repaid the $5.1 million of junior subordinated debentures resulting in a decrease in interest on other borrowings in 2015.

 

The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax-equivalent basis was 3.82% for the nine months ended September 30, 2015, an increase of 11 basis points as compared to the same period a year ago. The increase in the net interest margin resulted from a 21 basis point increase in the tax-equivalent yield on average earning assets offset by a 10 basis point increase in interest expense to fund average earning assets. Maintaining our net interest margin in a historically low interest rate environment, while confronted with known increases in Federal Home Loan Bank of San Francisco borrowing costs will be challenging in the foreseeable future. Management will continue to reallocate the asset mix into higher yielding assets by pursuing organic loan growth and actively managing the investment securities portfolio within our accepted risk tolerance.

 

 
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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, 2015 and 2014.

 

 

   

Three Months Ended September 30, 2015

   

Three Months Ended September 30, 2014

 
   

Average

                   

Average

                 

(Amounts in thousands)

 

Balance

   

Interest

   

Yield/ Rate

   

Balance

   

Interest

   

Yield/ Rate

 

Interest-earning assets:

                                               

Net loans (1)

  $ 705,762     $ 8,357       4.70

%

  $ 631,674     $ 7,350       4.62

%

Taxable securities

    115,165       743       2.56

%

    138,355       1,001       2.86

%

Tax-exempt securities

    76,190       592       3.08

%

    83,503       629       2.99

%

Interest-bearing due from banks

    30,430       40       0.52

%

    64,829       122       0.76

%

Average interest-earning assets

    927,547       9,732       4.16

%

    918,361       9,102       3.93

%

Cash & due from banks

    11,355                       12,320                  

Bank premises

    11,265                       12,551                  

Other assets

    41,867                       40,815                  

Average total assets

  $ 992,034                     $ 984,047                  
                                                 

Interest-bearing liabilities:

                                               

Interest-bearing demand

  $ 284,508       116       0.16

%

  $ 270,395       123       0.18

%

Savings deposits

    93,230       53       0.23

%

    91,556       59       0.26

%

Certificates of deposit

    235,551       586       0.99

%

    260,592       650       0.99

%

Federal Home Loan Bank
of San Francisco Borrowings

    86,359       475       2.18

%

    85,054       228       1.06

%

Other borrowings

    10,310       47       1.81

%

    15,465       94       2.41

%

Average interest-bearing liabilities

  $ 709,958       1,277       0.71

%

  $ 723,062       1,154       0.63

%

Noninterest-bearing demand

    158,232                       142,426                  

Other liabilities

    16,140                       16,612                  

Shareholders’ equity

    107,704                       101,947                  

Average liabilities and shareholders’ equity

  $ 992,034                     $ 984,047                  

Net interest income and net interest margin

          $ 8,455       3.62

%

          $ 7,948       3.43

%

Tax equivalent net interest margin (2)

                    3.75

%

                    3.57

%

Interest income on loans includes fee expense of approximately $(109) thousand and $(81) thousand for the three months ended September 30, 2015 and 2014, respectively.

(1)    Average nonaccrual loans of $16.6 million and $26.0 million for the three months ended September 30, 2015 and 2014 are included, respectively.

(2)    Tax-exempt income has been adjusted to a tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $305 thousand and $324 thousand for the three months ended September 30, 2015 and 2014, respectively.

 

 
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Nine Months Ended September 30, 2015

   

Nine Months Ended September 30, 2014

 
   

Average

                   

Average

                 

(Amounts in thousands)

 

Balance

   

Interest

   

Yield/ Rate

   

Balance

   

Interest

   

Yield/ Rate

 

Interest-earning assets:

                                               

Net loans (1)

  $ 694,082     $ 24,572       4.73

%

  $ 614,494     $ 21,632       4.71

%

Taxable securities

    124,199       2,489       2.68

%

    150,157       3,230       2.88

%

Tax-exempt securities

    76,755       1,793       3.12

%

    84,560       1,916       3.03

%

Interest-bearing due from banks

    28,021       167       0.80

%

    63,034       386       0.82

%

Average interest-earning assets

    923,057       29,021       4.20

%

    912,245       27,164       3.98

%

Cash & due from banks

    10,832                       10,903                  

Bank premises

    11,738                       11,984                  

Other assets

    42,676                       34,869                  

Average total assets

  $ 988,303                     $ 970,001                  
                                                 

Interest-bearing liabilities:

                                               

Interest-bearing demand

  $ 276,446       339       0.16

%

  $ 270,594       362       0.18

%

Savings deposits

    92,565       162       0.23

%

    91,484       173       0.25

%

Certificates of deposit

    242,569       1,771       0.98

%

    260,962       1,985       1.02

%

Federal Home Loan Bank
of San Francisco Borrowings

    91,941       1,187       1.73

%

    78,388       52       0.09

%

Other borrowings

    10,310       143       1.85

%

    15,465       281       2.43

%

Average interest-bearing liabilities

  $ 713,831       3,602       0.67

%

  $ 716,893       2,853       0.53

%

Noninterest-bearing demand

    151,567                       135,338                  

Other liabilities

    16,719                       15,658                  

Shareholders’ equity

    106,186                       102,112                  

Average liabilities and shareholders’ equity

  $ 988,303                     $ 970,001                  

Net interest income and net interest margin

          $ 25,419       3.68

%

          $ 24,311       3.56

%

Tax equivalent net interest margin (2)

                    3.82

%

                    3.71

%

Interest income on loans includes fee expense of approximately $(231) thousand and $(247) thousand for the nine months ended September 30, 2015 and 2014, respectively.

(1)   Average nonaccrual loans of $18.1 million and $26.8 million for the nine months ended September 30, 2015 and 2014 are included, respectively.

(2)   Tax-exempt income has been adjusted to a tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $924 thousand and $987 thousand for the nine months ended September 30, 2015 and 2014, respectively.

 

 
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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, 2015 and 2014. 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, 2015 Over
Three Months Ended September 30, 2014

 

(Amounts in thousands)

 

Volume

   

Rate

   

Total

 

Increase (decrease) in interest income:

                       

Net loans

  $ 875     $ 132     $ 1,007  

Taxable securities

    (157 )     (101 )     (258 )

Tax-exempt securities (1)

    (88 )     32       (56 )

Interest-bearing due from banks

    (52 )     (30 )     (82 )

Total increase (decrease)

    578       33       611  
                         

Increase (decrease) in interest expense:

                       

Interest-bearing demand

    7       (14 )     (7 )

Savings deposits

    1       (7 )     (6 )

Certificates of deposit

    (62 )     (2 )     (64 )

Federal Home Loan Bank of San Francisco borrowings

    3       244       247  

Other borrowings

    (27 )     (20 )     (47 )

Total (decrease) increase

    (78 )     201       123  

Net increase (decrease)

  $ 656     $ (168 )   $ 488  

 (1) Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.

 

 

 

 

   

Nine Months Ended September 30, 2015 Over
Nine Months Ended September 30, 2014

 

(Amounts in thousands)

 

Volume

   

Rate

   

Total

 

Increase (decrease) in interest income:

                       

Net loans

  $ 2,817     $ 123     $ 2,940  

Taxable securities

    (531 )     (210 )     (741 )

Tax-exempt securities (1)

    (280 )     94       (186 )

Interest-bearing due from banks

    (209 )     (10 )     (219 )

Total increase (decrease)

    1,797       (3 )     1,794  
                         

Increase (decrease) in interest expense:

                       

Interest-bearing demand

    8       (31 )     (23 )

Savings deposits

    2       (13 )     (11 )

Certificates of deposit

    (136 )     (78 )     (214 )

Federal Home Loan Bank of San Francisco borrowings

    33       1,102       1,135  

Other borrowings

    (81 )     (57 )     (138 )

Total (decrease) increase

    (174 )     923       749  

Net increase (decrease)

  $ 1,971     $ (926 )   $ 1,045  

 (1) Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.

 

 

PROVISION FOR LOAN AND LEASE LOSSES

 

The Company made no provision for loan and lease losses during the first nine months of 2015 compared to a provision of $2.5 million during nine months ended September 30, 2014. See Note 6 - Loans in the Notes to Consolidated Financial Statements for further discussion.

 

 
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

NONINTEREST INCOME

 

Noninterest income for the nine months ended September 30, 2015 was $2.5 million, a decrease of $628 thousand, or 20%, compared to the same period a year ago. The following table presents the key components of noninterest income for the three and nine months ended September 30, 2015 and 2014.

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
                   

Change

   

Change

                   

Change

   

Change

 

(Amounts in thousands)

 

2015

   

2014

   

Amount

   

Percent

   

2015

   

2014

   

Amount

   

Percent

 

Noninterest income:

                                                               

Service charges on deposit accounts

  $ 52     $ 50     $ 2       4

%

  $ 153     $ 135     $ 18       13

%

Payroll and benefit processing

    138       127       11       9

%

    416       371       45       12

%

Earnings on cash surrender value – life insurance

    158       171       (13 )     (8

)%

    482       459       23       5

%

Gain (loss) on investment securities, net

    137       32       105       328

%

    413       (252 )     665       264

%

Other

    323       291       32       11

%

    1,079       2,458       (1,379 )     (56

)%

Total noninterest income

  $ 808     $ 671     $ 137       20

%

  $ 2,543     $ 3,171     $ (628 )     (20

)%

 

 

During the nine months ended September 30, 2015, the Company purchased 39 securities with weighted average yields of 2.34%. During the same period the Company sold 54 securities with weighted average yields 2.48%.

 

During June of 2014, the Company recognized $1.6 million in hedge gains in other noninterest income related to interest payments associated with previously forecasted FHLB advances.

 

NONINTEREST EXPENSE

 

Noninterest expense for the nine months ended September 30, 2015 was $18.3 million, a decrease of $973 thousand or 5% compared to the same period a year ago. The following table presents the key elements of noninterest expense for the three and nine months ended September 30, 2015 and 2014.

 

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
                   

Change

   

Change

                   

Change

   

Change

 

(Amounts in thousands)

 

2015

   

2014

   

Amount

   

Percent

   

2015

   

2014

   

Amount

   

Percent

 

Noninterest expense:

                                                               

Salaries & related benefits

  $ 3,208     $ 3,520     $ (312 )     (9

)%

  $ 10,693     $ 10,664     $ 29       0

%

Premises & equipment

    714       749       (35 )     (5

)%

    2,157       2,069       88       4

%

Write-down of other real estate owned

                     

%

          290       (290 )     (100

)%

FDIC insurance premium

    159       204       (45 )     (22

)%

    544       584       (40 )     (7

)%

Data processing

    243       226       17       8

%

    736       656       80       12

%

Professional service fees

    337       283       54       19

%

    1,167       817       350       43

%

Other

    913       789       124       16

%

    2,992       4,182       (1,190 )     (28

)%

Total noninterest expense

  $ 5,574     $ 5,771     $ (197 )     (3

)%

  $ 18,289     $ 19,262     $ (973 )     (5

)%

 

 

Salaries and related benefits expense for the three months ended September 30, 2015 were $3.2 million, a decrease of $312 thousand or 9% compared to the same period a year ago. The decrease in salaries and related benefits was primarily driven by increased deferred loan origination costs as a result of increased loan production and implementation of an updated loan origination cost study.

 

During the first quarter of 2014 management determined that there was further impairment on commercial property held in OREO and recorded a write-down of the carrying value in the amount of $290 thousand. There were no write-downs recorded for OREO during the nine months ended September 30, 2015 See Note 7 - Other Real Estate Owned in the Notes to Consolidated Financial Statements for further discussion.

 

Professional service fees for the three and nine months ended September 30, 2015 were $337 thousand and $1.2 million, an increase of $54 thousand or 19% and $350 thousand or 43% compared to the same periods a year ago, respectively. The increase in professional service fees during the current year is driven by increased use of outside services.

 

 

 
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Other noninterest expense for the nine months ended September 30, 2015 was $3.0 million, a decrease of $1.2 million, compared to the same period a year ago. During March of 2014 the Company negotiated the settlement of a note receivable from its former mortgage subsidiary which resulted in a loss of $1.4 million.

 

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 the Company's tax provision and the related effective tax rate for the three and nine months ended September 30, 2015 and 2014.

 

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 

(Amounts in thousands)

 

2015

   

2014

   

2015

   

2014

 

Provision for income taxes

  $ 1,164     $ 525     $ 2,957     $ 1,676  

Effective tax rate

    31.55

%

    29.20

%

    30.57

%

    29.30

%

 

 

The effective tax rates differed from the federal statutory rate of 34% and the state rate of 10.84% principally because of non-taxable income arising from bank-owned life insurance, income on tax-exempt investment securities, and tax credits arising from Low Income Housing Tax Credits (“LIHTC”). The investment in LIHTC projects is being accounted for using the proportional amortization method, under which the Company amortizes the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognizes the net investment performance in the Consolidated Statements of Operations as a component of income tax expense. The Company’s effective tax rate is derived from income tax expense divided by income before provision for income taxes. While pre-tax income has continued to increase, the company’s anticipated tax credits (from qualified low income housing investments) and tax exempt income (from municipal bonds and BOLI) have not increased. As these items comprise an ever decreasing percentage of pre-tax income, the Company’s income tax provision as a percent of pre-tax income increases.

 

 
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

FINANCIAL CONDITION

 

BALANCE SHEET

 

As of September 30, 2015, the Company had total consolidated assets of $990.7 million, gross loans of $718.5 million, an ALLL of $10.9 million, deposits outstanding of $779.5 million, and shareholders’ equity of $108.7 million.

 

As of September 30, 2015, the Company maintained cash positions at the Federal Reserve Bank and correspondent banks in the amount of $8.6 million. The Company also held interest-bearing deposits in the amount of $16.7 million.

 

Available-for-sale investment securities totaled $157.3 million at September 30, 2015, compared with $187.0 million at December 31, 2014. During the first nine months of 2015, the Company purchased 39 securities with a par value of $49.9 million and weighted average yield of 2.34% and sold 54 securities with a par value of $59.1 million and weighted average yield of 2.48%. The sales activity resulted in $413 thousand in net realized gains for the nine months ended September 30, 2015. During the nine months ended September 30, 2015, the Company also received $18.3 million in proceeds from principal payments, calls and maturities within the available-for-sale investment securities portfolio. Average securities balances and weighted average tax equivalent yields for the nine months ended September 30, 2015 and 2014 were $201.0 million and 3.46% compared to $234.7 million and 3.49%, respectively. Reductions in the available-for-sale investment portfolio during the nine months ended September 30, 2015 were used to fund higher yielding loan assets and reduce Federal Home Loan Bank of San Francisco borrowings.

  

During the current quarter, the Company’s securities transactions were focused on improving credit quality and continuing to shorten the effective duration of the portfolio in anticipation of rising interest rates. Management will continue to actively seek out opportunities to reduce the overall effective duration of the portfolio and accelerate cash flows, while also improving credit quality and liquidity. This strategy could entail absorbing small losses and slightly reduced yields within the portfolio to meet longer term objectives. At September 30, 2015, the Company’s net unrealized gains on available-for-sale investment securities were $1.6 million compared with $1.8 million and $1.5 million at September 30, 2014 and June 30, 2015, respectively. The increase in net unrealized gains during the current quarter resulted primarily from increases in the fair value of the Company’s municipal bond portfolio, as a result of increases in interest rates.

 

The Company recorded gross loan balances of $718.5 million at September 30, 2015, compared with $660.9 million at December 31, 2014; an increase of $57.6 million. The increase in gross loans compared to the prior year was driven by strong organic loan originations and the purchase of wholesale loan pools. During the nine months ended September 30, 2015, the Company purchased $28.3 million and $6.4 million in consumer and commercial real estate investor loan pools, respectively. See Note 16 - Purchase of Financial Assets in the Notes to the Consolidated Financial Statements in this document for further information regarding the purchase of these pools.

 

The Company continues to monitor credit quality, and adjust the ALLL to ensure that the ALLL is maintained at a level that management believes is adequate to cover estimated credit losses in the loan and lease portfolio. The increase in the ALLL during the nine months ended September 30, 2015 resulted from net loan loss recoveries of $71 thousand. As a result of net recoveries, and continued improved asset quality, no additional provision for loan and lease losses was deemed necessary during the current year. The Company’s ALLL as a percentage of gross loans was 1.52% as of September 30, 2015 compared 1.64% as of December 31, 2014.

 

At September 30, 2015, given the Bank’s ALLL methodology which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, management believes the Company’s ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses.

 

Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, decreased by $6.1 million to $15.6 million, or 2.17% of gross loans, as of September 30, 2015, compared to $21.7 million, or 3.28% of gross loans as of December 31, 2014. Past due loans as of September 30, 2015 decreased to $13.4 million, compared to $18.7 million as of December 31, 2014. The decrease in past due loans occurred primarily in the commercial and 1-4 family residential loan portfolios. Management believes that risk grading for past due loans appropriately reflects the risk associated with the past due loans.

 

The Company’s OREO balance at September 30, 2015, was $1.5 million compared to $502 thousand at December 31, 2014. During the third quarter of 2015, the addition of four nonfarm nonresidential properties and two 1-4 family residential properties were partially offset by the sale of one nonfarm nonresidential property and two 1-4 family residential properties. See Note 7 - Other Real Estate Owned in the Notes to Consolidated Financial Statements in this document, for further details relating to the Company’s OREO portfolio.

 

Premises and equipment totaled $11.1 million at September 30, 2015, a decrease of $1.2 million compared to $12.3 million at December 31, 2014. Bank-owned life insurance increased $482 thousand during the nine months ended September 30, 2015 to $22.3 million compared to $21.8 million at December 31, 2014. The Company’s net deferred tax assets were $10.6 million at September 30, 2015, compared to $10.2 million at December 31, 2014. Other assets which include the Bank’s investment in low income housing tax credits and investment in Federal Home Loan Bank of San Francisco stock totaled $18.1 million at September 30, 2015, compared to $19.9 million at December 31, 2014.

 

 
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Total deposits as of September 30, 2015 were $779.5 million compared to $789.0 million at December 31, 2014, a decrease of $9.5 million. During the first nine months of 2015, total non-maturing deposits increased $6.7 million or 1% while certificates of deposit decreased $16.2 million or 7%. Management anticipates core deposit growth throughout the remainder of the year and desires to continue to reduce reliance on certificates of deposit as a funding source.

 

Federal Home Loan Bank of San Francisco borrowings totaled $75.0 million at September 30, 2015, and December 31, 2014. Junior subordinated debentures were $10.3 million for both September 30, 2015 and December 31, 2014. Other liabilities which include the Bank’s supplemental executive retirement plan, derivative instruments, and funding obligation for investments in qualified affordable housing projects decreased $2.0 million to $17.2 million as of September 30, 2015 compared to $19.2 million at December 31, 2014.

 

The Company repurchased 700,000 common shares under a plan announced and completed in the second quarter of 2014. As such, the weighted average number of dilutive common shares outstanding for the nine months ended September 30, 2015 decreased by 223,874 shares compared to the same period a year ago.

 

Investment Securities

 

The composition of our investment securities portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates interest rate risk and a portion of credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral) and collateral for certain public funds deposits.

 

Available-for-sale investment securities totaled $157.3 million at September 30, 2015, compared $187.0 million at December 31, 2014, respectively. During the first three quarters of 2015, reductions in the available-for-sale investment portfolio were used to fund higher yielding loan assets and reduce Federal Home Loan Bank of San Francisco borrowings.

 

The Company’s held-to-maturity investment portfolio is generally utilized to hold longer term securities that may have greater price risk many of which are pledged as collateral for the Bank’s local agency deposit program. This portfolio includes securities with longer durations and higher coupons than securities held in the available-for-sale securities portfolio. Held-to-maturity investment securities had carrying amounts of $36.1 million at September 30, 2015, compared with $36.8 million at December 31, 2014. There were no held-to-maturity securities purchased during the nine months ended September 30, 2015.

 

The following table presents the investment securities portfolio by classification and major type as of September 30, 2015 and December 31, 2014.

 

 

   

September 30,

   

December 31,

 

(Amounts in thousands)

 

2015

   

2014

 

Available-for-sale securities: (1)

               

U.S. government & agencies

  $ 3,998     $ 6,393  

Obligations of state and political subdivisions

    57,453       54,363  

Residential mortgage backed securities and collateralized mortgage obligations

    34,058       47,015  

Corporate securities

    36,560       37,734  

Commercial mortgage backed securities

    9,266       10,389  

Other asset backed securities

    15,974       31,092  

Total

  $ 157,309     $ 186,986  

Held-to-maturity securities: (1)

               

Obligations of state and political subdivisions

  $ 36,093     $ 36,806  

 (1) Available-for-sale securities are reported at estimated fair value, and held-to-maturity securities are reported at amortized cost.

 

 
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The following table presents information regarding the amortized cost, maturity structure and average yield of the investment portfolio at September 30, 2015.

 

 

                   

Over One Through

   

Over Five Through

                                 
   

Within One Year

   

Five Years

   

Ten Years

   

Over Ten Years

   

Total

 

(Amounts in thousands)

 

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

   

Amount

   

Yield

 

Available-for-sale securities:

                                                                               

U.S. government & agencies

  $      

%

  $ 3,931       3.20

%

  $      

%

  $      

%

  $ 3,931       3.20

%

Obligations of state and political subdivisions

    791       2.50

%

    5,509       2.86

%

    27,043       3.07

%

    22,435       2.69

%

    55,778       2.89

%

Mortgage backed securities and collateralized mortgage obligations

    1,388       3.73

%

    23,872       2.84

%

    8,831       3.21

%

         

%

    34,091       2.97

%

Corporate securities

    5,058       0.79

%

    18,058       2.47

%

    10,771       2.50

%

    2,644       2.05

%

    36,531       2.21

%

Commercial mortgage backed securities

         

%

         

%

    2,025       2.09

%

    7,333       2.78

%

    9,358       2.63

%

Other asset backed securities

         

%

         

%

    1,943       1.39

%

    14,051       2.95

%

    15,994       2.76

%

Total

  $ 7,237       1.54

%

  $ 51,370       2.74

%

  $ 50,613       2.87

%

  $ 46,463       2.74

%

  $ 155,683       2.73

%

Held-to-maturity securities:

                                                                               

Obligations of state and political subdivisions

  $      

%

  $ 1,504       3.41

%

  $ 16,619       2.96

%

  $ 17,970       3.25

%

  $ 36,093       3.12

%

 

 

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.

 

LOANS AND PORTFOLIO CONCENTRATIONS

 

Loans and Portfolio Concentration

 

We concentrate our portfolio lending activities primarily within El Dorado, Placer, Sacramento, and Shasta counties in California. We manage our credit risk through various diversifications of our loan portfolio, the application of sound underwriting policies and procedures, and ongoing credit monitoring practices. Generally, the loans are secured by real estate or other assets located in California. Repayment is expected from the borrower’s business cash flows or cash flows from real estate investments.

 

The Company recorded gross loan balances of $718.5 million at September 30, 2015, compared with $660.9 million at December 31, 2014; an increase of $57.6 million. The increase in gross loans compared to the prior year was driven by strong organic loan originations and the purchase of wholesale loan pools. See Note 16 - Purchase of Financial Assets in the Notes to the Consolidated Financial Statements in this document for further information regarding the purchase of these pools.

 

 
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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, 2015 and December 31, 2014.

 

 

   

September 30,

   

% of Gross

   

December 31,

   

% of Gross

 

(Amounts in thousands)

 

2015

   

Loans

   

2014

   

Loans

 

Commercial

  $ 144,749       20

%

  $ 150,253       23

%

Commercial real estate:

                               

Real estate - construction and land development

    29,701       4       30,099       5  

Real estate - commercial non-owner occupied

    237,597       34       213,883       32  

Real estate - commercial owner occupied

    151,762       21       120,324       18  

Residential real estate:

                               

Real estate - residential - ITIN

    50,162       7       52,830       8  

Real estate - residential - 1-4 family mortgage

    12,185       2       13,156       2  

Real estate - residential - equity lines

    45,733       6       44,981       7  

Consumer and other

    46,644       6       35,372       5  

Gross loans

    718,533       100

%

    660,898       100

%

Deferred loan fees, net

    718               157          

Loans, net of deferred fees and costs

    719,251               661,055          

Allowance for loan and lease losses

    (10,891 )             (10,820 )        

Net loans

  $ 708,360             $ 650,235          

 

 

 

The following table sets forth the maturity and re-pricing distribution of our gross loans outstanding as of September 30, 2015, which, based on remaining scheduled repayments of principal, were due within the periods indicated.

 

 

           

After One

                 
   

Within One

   

Through

   

After Five

         

(Amounts in thousands)

 

Year

   

Five Years

   

Years

   

Total

 

Commercial

  $ 48,966     $ 46,991     $ 48,792     $ 144,749  

Commercial real estate:

                               

Real estate - construction and land development

    11,417       8,001       10,283       29,701  

Real estate - commercial non-owner occupied

    9,962       38,814       188,821       237,597  

Real estate - commercial owner occupied

    9,427       24,224       118,111       151,762  

Residential real estate:

                               

Real estate - residential - ITIN

                50,162       50,162  

Real estate - residential - 1-4 family mortgage

    576       982       10,627       12,185  

Real estate - residential - equity lines

    3,055       2,388       40,290       45,733  

Consumer and other

    41,651       641       4,352       46,644  

Gross loans

  $ 125,054     $ 122,041     $ 471,438     $ 718,533  

Loans due after one year with:

                               

Fixed rates

          $ 53,009     $ 139,216     $ 192,225  

Variable rates

            69,032       332,222       401,254  

Total

          $ 122,041     $ 471,438     $ 593,479  

 

 

Loans with unique credit characteristics

 

In April of 2009, the Company completed a loan ‘swap’ transaction which included the purchase of a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans are made to legal United States residents without a social security number, and are geographically dispersed throughout the United States. The ITIN loan portfolio is serviced through 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 are forced to foreclose and service these ITIN properties ourselves, we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Purchased Loans

 

The loan portfolio includes purchased loan pools, purchased participations and loans originated by the Company. Additional information regarding the individual purchased loan pools can be found in the Note 16 Purchase of Financial Assets in the Notes to Consolidated Financial Statements in this document.

 

The following table presents the recorded investment in purchased loans at September 30, 2015 and December 31, 2014.

 

 

(Amounts in thousands)

 

September 30, 2015

   

December 31, 2014

 

Purchased Loans

 

Balance

   

% of Gross Loans

   

Balance

   

% of Gross Loans

 
Commercial   $      

%

  $ 304      

%

Commercial real estate     45,273       6       42,051       6  
Residential real estate     60,822       8       65,019       10  
Consumer and other     43,276       6       32,164       5  

Total purchased loans

  $ 149,371       20

%

  $ 139,538       21

%

 

 

ASSET QUALITY

 

Nonperforming Assets

 

The Company’s 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, the Company’s dependence on real estate secured loans could increase the risk of loss in the loan portfolio of the Company in a market of declining real estate values. Furthermore, declining real estate values negatively impact holdings of OREO.

 

We manage asset quality and mitigate credit risk through the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Loan Committee is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for loan and lease losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable incurred losses. The amount of provision charge is dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of loan portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of these factors is performed through an analysis of the adequacy of the ALLL. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the ALLL, and to determine the adequacy of the allowance, are conducted on a monthly basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan portfolio, prevailing economic conditions and other factors.

 

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when we identify a loan as impaired, we measure the loan for potential impairment using discount cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every six to twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 the Company’s 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 relatively certain.

 

Upon acquisition of real estate collateral, typically through the foreclosure process, we promptly begin to market the property for sale. If we do not begin to receive offers or indications of interest, we will analyze the price and review market conditions to assess the pricing level that would enable us to sell the property. In addition, we obtain updated appraisals on OREO property every six to twelve months. Increases in valuation adjustments recorded in a period are primarily based on (1) updated appraisals received during the period, or (2) management’s authorization to reduce the selling price of the property during the period. Unless a current appraisal is available, an appraisal will be ordered prior to a loan migrating to OREO. At the time of foreclosure, OREO is recorded at fair value less costs to sell (“cost”), which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, management periodically performs valuations and the property is carried at the lower of the cost or fair value less expected selling costs.

 

The following table summarizes our nonperforming assets as of September 30, 2015 and December 31, 2014.

 

 

(Amounts in thousands)

 

September 30,

   

December 31,

 

Nonperforming Assets

 

2015

   

2014

 

Commercial

  $ 2,506     $ 5,112  

Commercial real estate:

               

Real estate - commercial non-owner occupied

    5,154       8,318  

Real estate - commercial owner occupied

    1,928       1,378  

Total commercial real estate

    7,082       9,696  

Residential real estate:

               

Real estate - residential - ITIN

    4,228       4,647  

Real estate - residential - 1-4 family mortgage

    1,669       2,135  

Real estate - residential - equity lines

    23       24  

Total residential real estate

    5,920       6,806  

Consumer and other

    33       35  

Total nonaccrual loans

    15,541       21,649  

90 days past due and still accruing

    52       23  

Total nonperforming loans

    15,593       21,672  

Other real estate owned

    1,525       502  

Total nonperforming assets

  $ 17,118     $ 22,174  

Nonperforming loans to loans, net of deferred fees and costs

    2.17

%

    3.28

%

Nonperforming assets to total assets

    1.73

%

    2.22

%

 

 

The Company is continually performing extensive reviews of the commercial real estate portfolio, including stress testing. These reviews are being performed on both our non-owner and owner occupied credits. These reviews are being completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects. Stress testing has been performed to determine the effect of rising cap rates, interest rates, and vacancy rates on the portfolio. Based on our analysis, the Company believes our lending teams are effectively managing the risks in this portfolio. There can be no assurance that any further declines in economic conditions, such as potential increases in retail or office vacancy rates, will not exceed the projected assumptions utilized in stress testing resulting in additional nonperforming loans in the future.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Loans are reported as troubled debt restructurings when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it 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 the Bank will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

 

As of September 30, 2015, the Company had $18.0 million in troubled debt restructurings compared to $23.5 million as of December 31, 2014. As of September 30, 2015, the Company had 121 restructured loans that qualified as troubled debt restructurings, of which 102 loans were performing according to their restructured terms. Troubled debt restructurings represented 2.51% of gross loans as of September 30, 2015, compared with 3.55% at December 31, 2014.

 

At September 30, 2015 and December 31, 2014, impaired loans of $6.9 million and $9.2 million were classified as accruing troubled debt restructurings, respectively. The restructured loans on accrual status represent the majority of impaired loans accruing interest at each respective date. In order for a restructured loan to be on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligation to lend additional funds on the restructured loans as of September 30, 2015.

 

The following table sets forth a summary of the Company’s restructured loans that qualify as TDRs as of September 30, 2015 and December 31, 2014.

 

 

(Amounts in thousands)

 

September 30,

   

December 31,

 

Troubled Debt Restructurings

 

2015

   

2014

 

Accruing troubled debt restructurings:

               

Commercial

  $ 56     $ 1,485  

Commercial real estate:

               

Real estate - commercial non-owner occupied

    828       840  

Real estate - commercial owner occupied

          858  

Residential real estate:

               

Real estate - residential - ITIN

    5,423       5,462  

Real estate - residential - equity lines

    563       579  

Total accruing troubled debt restructurings

  $ 6,870     $ 9,224  

Nonaccruing troubled debt restructurings:

               

Commercial

  $ 1,248     $ 2,136  

Commercial real estate:

               

Real estate - commercial non-owner occupied

    5,154       8,317  

Real estate - commercial owner occupied

    1,928       1,080  

Residential real estate:

               

Real estate - residential - ITIN

    2,562       2,420  

Real estate - residential - 1-4 family mortgage

    224       242  

Consumer and other

    33       35  

Total nonaccruing troubled debt restructurings

  $ 11,149     $ 14,230  

Total troubled debt restructurings:

               

Commercial

  $ 1,304     $ 3,621  

Commercial real estate:

               

Real estate - commercial non-owner occupied

    5,982       9,157  

Real estate - commercial owner occupied

    1,928       1,938  

Residential real estate:

               

Real estate - residential - ITIN

    7,985       7,882  

Real estate - residential - 1-4 family mortgage

    224       242  

Real estate - residential - equity lines

    563       579  

Consumer and other

    33       35  

Total troubled debt restructurings

  $ 18,019     $ 23,454  

Total troubled debt restructurings to loans gross loans outstanding at period end

    2.51

%

    3.55

%

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

 

The ALLL at September 30, 2015, increased $71 thousand to $10.9 million compared to $10.8 million at December 31, 2014. The Company recorded net recoveries of $71 thousand for the nine months ended September 30, 2015 compared to net charge offs of $6.5 million for the year ended December 31, 2014. During the first nine months of 2015 net loan loss recoveries combined with continuing improved asset quality resulted in no additional provision for loan and lease losses.

 

Purchased loans were recorded on the date of purchase at estimated fair value; fair value discounts include a component for estimated credit losses. The Company evaluates post-acquisition historical credit losses on purchased loans, credit default discounts on purchased loans, and other data to evaluate the likelihood of realizing the recorded investment of purchased loans. Management establishes allocations of the ALLL for any estimated deficiency.

 

The following table summarizes the activity in the ALLL reserves at September 30, 2015, December 31, 2014 and September 30, 2014

 

 

   

September 30,

   

December 31,

   

September 30,

 

(Amounts in thousands)

 

2015

   

2014

   

2014

 

Beginning balance ALLL

  $ 10,820     $ 14,172     $ 14,172  

Provision for loan and lease loss charged to expense

          3,175       2,500  

Loans charged off

    (1,669 )     (7,319 )     (6,944 )

Loan and lease loss recoveries

    1,740       792       672  

Ending balance ALLL

  $ 10,891     $ 10,820     $ 10,400  
                         

Nonaccrual loans at period end:

                       

Commercial

  $ 2,506     $ 5,112     $ 7,065  

Real estate - commercial non-owner occupied

    5,154       8,318       8,518  

Real estate - commercial owner occupied

    1,928       1,378       1,378  

Real estate - residential - ITIN

    4,228       4,647       5,281  

Real estate - residential - 1-4 family mortgage

    1,669       2,135       2,157  

Real estate - residential - equity lines

    23       24       89  

Consumer and other

    33       35        

Total nonaccrual loans

    15,541       21,649       24,488  

Accruing troubled-debt restructured loans:

                       

Commercial

    56       1,485       1,585  

Real estate - commercial non-owner occupied

    828       840       844  

Real estate - commercial owner occupied

          858       863  

Real estate - residential - ITIN

    5,423       5,462       5,222  

Real estate - residential - equity lines

    563       579       584  

Total accruing restructured loans

    6,870       9,224       9,098  
                         

All other accruing impaired loans

    494       535       757  

Total impaired loans

  $ 22,905     $ 31,408     $ 34,343  
                         

Gross loans outstanding at period end

  $ 718,533     $ 660,898     $ 649,695  
                         

Ratio of ALLL to gross loans outstanding at period end

    1.52

%

    1.64

%

    1.60

%

Nonaccrual loans to gross loans outstanding at period end

    2.16

%

    3.28

%

    3.77

%

 

 

As of September 30, 2015, impaired loans totaled $22.9 million, of which $15.5 million were in nonaccrual status. Of the total impaired loans, $9.7 million or 121 were ITIN loans with an average balance of approximately $80 thousand. The remaining impaired loans consist of 12 commercial loans, six commercial real estate loans, seven residential mortgages, 11 home equity loans and one consumer loan.

 

At September 30, 2015, impaired loans had a corresponding valuation allowance of $789 thousand. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.

 

 
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table sets forth the allocation of the ALLL and percent of loans in each category to gross loans as of September 30, 2015 and December 31, 2014.

 

 

   

September 30, 2015

   

December 31, 2014

 

(Amounts in thousands)

 

Amount

   

% Loan Category

   

Amount

   

% Loan Category

 

ALLL at end of period applicable to:

                               

Commercial

  $ 3,419       31

%

  $ 3,503       33

%

Commercial real estate:

                               

Real estate - construction and land development

    382       4       388       4  

Real estate - commercial non-owner occupied

    2,714       25       2,741       25  

Real estate - commercial owner occupied

    2,127       20       1,746       16  

Residential real estate:

                               

Real estate - residential - ITIN

    572       5       836       8  

Real estate - residential - 1-4 family mortgage

    157       1       150       1  

Real estate - residential - equity lines

    536       5       684       6  

Consumer and other

    603       6       450       4  

Unallocated

    381       3       322       3  

Total ALLL

  $ 10,891       100

%

  $ 10,820       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 rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2015, the unallocated allowance amount represented 3% of the ALLL, compared to 3% at December 31, 2014. The ALLL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge offs may occur.

 

 

Deposits

 

Total deposits as of September 30, 2015 were $779.5 million compared to $789.0 million at December 31, 2014, a decrease of $9.5 million. The following table presents the deposit balances by major category as of September 30, 2015, and December 31, 2014.

 

 

   

September 30, 2015

   

December 31, 2014

 

(Amounts in thousands)

 

Amount

   

Percentage

   

Amount

   

Percentage

 

Noninterest-bearing demand

  $ 162,437       21

%

  $ 157,557       20

%

Interest-bearing demand

    295,209       37       298,160       38  

Savings

    93,367       12       88,569       11  

Time, $100,000 or greater

    193,363       25       204,103       26  

Time, less than $100,000

    35,129       5       40,646       5  

Total

  $ 779,505       100

%

  $ 789,035       100

%

 

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

The following table sets forth the distribution of our year to date average daily balances and their respective rate as of September 30, 2015, and December 31, 2014.

 

 

   

September 30, 2015

   

December 31, 2014

 

(Amounts in thousands)

 

Average Balance

   

Rate

   

Average Balance

   

Rate

 

Interest-bearing demand

  $ 141,872       0.16

%

  $ 138,547       0.16

%

Money market accounts

    134,574       0.17

%

    133,836       0.19

%

Savings

    92,565       0.23

%

    91,108       0.25

%

Certificates of deposit

    242,569       0.98

%

    259,445       1.01

%

Interest-bearing deposits

    611,580       0.50

%

    622,936       0.53

%

Noninterest-bearing demand

    151,567               139,792          

Average total deposits

  $ 763,147             $ 762,728          
                                 

Federal Home Loan Bank of San Francisco borrowings (1)

  $ 91,941       1.73

%

  $ 77,534       0.54

%

Junior subordinated debentures

    10,310       1.85

%

    15,239       2.38

%

Average total borrowings

  $ 102,251       1.74

%

  $ 92,773       0.85

%

(1) Borrowing rate on Federal Home Loan Bank of San Francisco borrowings includes impact of interest rate swaps

 

 

 

Deposit Maturity Schedule

 

The following table sets forth the remaining maturities of certificates of deposit in amounts of $100,000 or more as of September 30, 2015.

 

 

   

September 30,

 

(Amounts in thousands)

 

2015

 

Maturing in:

       

Three months or less

  $ 25,699  

Three through six months

    20,323  

Six through twelve months

    31,369  

Over twelve months

    115,972  

Total

  $ 193,363  

 

 

The Company has an agreement with Promontory Interfinancial Network LLC (“Promontory”) allowing our Bank to provide FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. Promontory’s Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) use a deposit-matching program to exchange Bank deposits in excess of the current deposit insurance limits for excess balances at other participating banks, on a dollar-for-dollar basis, that would be fully insured at the Bank. These products are designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers. CDARS deposits can be reciprocal or one-way, and ICS deposits can only be reciprocal. All of the Bank’s CDARS and ICS deposits are reciprocal.

 

In accordance with regulatory Call Report instructions, the Bank has filed quarterly Call Reports which listed brokered deposits of $85.3 million, and $97.9 million at September 30, 2015 and December 31, 2014, respectively. These amounts include deposits obtained through the CDARS and ICS programs of $67.8 million and $90.3 million, respectively which management does not consider to be brokered.

 

BORROWINGS

 

At September 30, 2015, the Bank had term debt outstanding with a carrying value of $75.0 million compared to $75.0 million at December 31, 2014. Advances from the Federal Home Loan Bank of San Francisco amounted to 100% of the total term debt and are secured by commercial real estate and residential mortgage loans. At September 30, 2015, the Company had one variable rate advance for $75.0 million at 0.30% that matures in 2016.

 

Junior Subordinate Debentures

Bank of Commerce Holdings Trust

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

During March 2003, the Holding Company participated in a private $5.0 million placement of fixed rate trust preferred securities (the “Trust Preferred Securities”) through a newly formed wholly-owned Delaware trust affiliate, Bank of Commerce Holdings Trust (the “Trust”). The Trust simultaneously issued $155 thousand common securities to the Holding Company. The Trust Preferred Securities paid distributions on a quarterly basis at three month LIBOR plus 3.30%. The rate increase was capped at 2.75% annually and the lifetime cap was 12.5%. The final maturity on the Trust Preferred Securities was April 7, 2033, and the covenants allowed for redemption after five years on the quarterly payment date.

 

The proceeds from the sale of the Trust Preferred Securities were used by the Trust to purchase from the Holding Company the aggregate principal amount of $5.2 million of the Holding Company’s junior subordinate debentures (the "Notes"). The net proceeds to the Holding Company from the sale of the Notes to the Trust were distributed to the Bank for general corporate purposes, including funding the growth of the Bank’s various financial services. The proceeds from the Notes qualified as Tier 1 capital under Federal Reserve Board guidelines.

 

During December 2014, the Company paid $4.6 million in complete satisfaction of the Notes. Simultaneously, the Trust redeemed the Trust Preferred Securities by distributing $4.6 million to the institutional investor. The transaction resulted in a gain of $406 thousand and a $155 thousand reduction of the Holding Company’s common stock investment in the Trust.

 

Bank of Commerce Holdings Trust II

 

During July 2005, the Holding Company participated in a $10.0 million private placement of fixed rate trust preferred securities (the "Trust Preferred Securities") through a newly formed wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). Trust II simultaneously issued $310 thousand common securities to the Holding Company. Rates paid on the Trust Preferred Securities have transitioned from fixed to floating and are now paid on a quarterly basis at three month LIBOR plus 1.58%. The effective interest rate at September 30, 2015, was 1.92%. The final maturity on the Trust Preferred Securities is September 15, 2035, and the covenants allow for redemption at the Holding Company’s option during any quarter until maturity.

 

The proceeds from the sale of the Trust Preferred Securities were used by the Trust II to purchase from the Holding Company the aggregate principal amount of $10.3 million of the Holding Company’s junior subordinate debentures (the "Notes"). The net proceeds to the Holding Company from the sale of the Notes to the Trust II were partially distributed to the Bank for general corporate purposes, including funding the growth of the Bank’s various financial services. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.

 

LIQUIDITY AND CASH FLOW

 

Redding Bank of Commerce

 

The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs.

 

We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. The Bank may be required to collateralize a portion of public deposits that exceed FDIC insurance limitations based on the state of California’s risk assessment of the Bank. Public deposits represent 3% of total deposits at September 30, 2015 and December 31, 2014. In addition to liquidity from core deposits, loan repayments and maturities of securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities, borrow on a secured basis from the Federal Home Loan Bank of San Francisco, or issue brokered certificates of deposit.

 

The Bank had available lines of credit with the Federal Home Loan Bank of San Francisco totaling $221.9 million as of September 30, 2015; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with the Federal Reserve totaling $23.0 million subject to certain collateral requirements, namely the amount of certain pledged loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $40.0 million at September 30, 2015. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Bank of Commerce Holdings

 

The Holding Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Holding Company's cash flows are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company. As of January 1, 2015, the Bank is required to obtain regulatory approval from the California Department of Business Oversight for payment of a dividend or other distribution to the Holding Company. We believe that such restrictions will not have an adverse impact on the ability of the Holding Company to fund its quarterly cash dividend distributions to common shareholders and meet its ongoing cash obligations, which consist principally of debt service on the $10.3 million (issued amount) of outstanding junior subordinated debentures. The Bank received approval from the California Department of Business Oversight and paid $2.0 million in dividends to the Holding Company during the nine months ended September 30, 2015. As of September 30, 2015, the Holding Company did not have any other borrowing arrangements of its own.

 

Consolidated Statements of Cash Flows

 

As disclosed in the Consolidated Statements of Cash Flows, net cash of 7.6 million was provided by operating activities for the nine months ended September 30, 2015. The material differences between cash provided by operating activities and net income consisted of non-cash items including: $1.4 million of net amortization of investment premiums and accretion of discounts, and $1.1 million in provision for depreciation and amortization.

 

Net cash of $30.0 million used for investing activities consisted principally of $34.8 million in purchase of loan pools and $26.5 million in net loan originations partially offset by $18.3 million in proceeds from maturities and payments from available-for-sale investment securities and $9.2 million in net proceeds from purchase and sales of available-for-sale investment securities.

 

Net cash of $10.7 million used for financing activities consisted principally of a $16.3 million decrease in certificate of deposit accounts and $1.2 million in dividends on common and preferred stock partially offset by $6.7 million increase in demand deposit and savings accounts.

 

CAPITAL RESOURCES

 

We use capital to fund organic growth and pay dividends. The objective of effective capital management is to produce above market long term returns by using capital when returns are perceived to be high and issuing capital when costs are perceived to be low. Our potential sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt, senior debt or trust notes.

 

Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board of Directors on a monthly basis. The regulators of the Bank measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. Under the risk-based capital standard, assets reported on our Consolidated Balance Sheets and certain off-balance sheet items are assigned to risk categories, each of which is assigned a risk weight.

 

This standard characterizes an institution’s capital as being “Tier 1” capital (defined as principally comprising shareholders’ equity) and “Tier 2” capital (defined as principally comprising the qualifying portion of the ALLL). The minimum ratio of total risk-based capital to risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of the total risk-based capital is to be comprised of common equity; the remaining balance may consist of debt securities and a limited portion of the ALLL.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject to, as of September 30, 2015.

 

 
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 BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

As of September 30, 2015, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Holding Company and the Bank’s capital amounts and ratios as of September 30, 2015, are presented in the following table.

 

 

           

Actual

   

Well Capitalized

   

Minimum Capital

 

(Amounts in thousands)

 

Capital

   

Ratio

   

Requirement

   

Requirement

 

Holding Company:

                               

Common equity tier 1 capital ratio

  $ 89,114       9.96

%

 

n/a

      4.50

%

Tier 1 capital ratio

  $ 118,596       13.25

%

 

n/a

      6.00

%

Total capital ratio

  $ 129,788       14.50

%

 

n/a

      8.00

%

Tier 1 leverage ratio

  $ 118,596       11.98

%

 

n/a

      4.00

%

                                 

Bank:

                               

Common equity tier 1 capital ratio

  $ 118,047       13.20

%

    6.50

%

    4.50

%

Tier 1 capital ratio

  $ 118,047       13.20

%

    8.00

%

    6.00

%

Total capital ratio

  $ 129,239       14.45

%

    10.00

%

    8.00

%

Tier 1 leverage ratio

  $ 118,047       11.95

%

    5.00

%

    4.00

%

 

 

On July 2, 2013, the federal banking regulators approved the final proposed rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). The phase-in period for the final rules began for the Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.

 

The final rules, among other things, include a new common equity Tier 1 capital ("CET1") to risk-weighted assets ratio, including a capital conservation buffer, which will gradually increase from 4.5% on January 1, 2015 to 7.0% on January 1, 2019. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% on January 1, 2015 and to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.

 

The final rules also provide for a number of adjustments to and deductions from the new CET1, as well as changes to the calculation of risk-weighted assets which is expected to increase the absolute level. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, banks with $250 billion or less in total assets, may make a one-time permanent election to continue to exclude these items. The Company and Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities portfolio. In addition, deductions include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in nonconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. As of September 30, 2015 amounts in these categories did not exceed the regulatory limits.

 

Based on management’s review and analysis of Basel III, management believes that the Holding Company and the Bank will remain in excess of the "well-capitalized" standards under these new rules.

 

Total shareholders’ equity at September 30, 2015, was $108.7 million, compared to shareholder’s equity of $103.6 million reported at December 31, 2014. During the nine months ended September 30, 2015, the increase in shareholders’ equity was due to net income from operations and the exercise of stock options.

 

On September 28, 2011, the Holding Company entered into a Securities Purchase Agreement with the Secretary of the Treasury, pursuant to which the Holding Company issued and sold to the Treasury 20,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), having a liquidation preference of $1,000 per share, for aggregate proceeds net of issuance costs of $19.9 million. The issuance was pursuant to the Treasury’s SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010, which encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion.

 

The Series B Preferred Stock is entitled to receive non-cumulative dividends payable quarterly on each January 1, April 1, July 1 and October 1. The dividend rate, was calculated on the aggregate Liquidation Amount, and was initially set at 5% per annum based upon the initial level of Qualified Small Business Lending (“QSBL”) by the Bank. The dividend rate for future dividend periods was set based upon the percentage change in qualified lending between each dividend period and the baseline QSBL level established at the commencement of the Agreement. As a result of increased qualified lending, dividends on preferred stock for the SBLF program are fixed at the current rate of 1%.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management is actively considering various debt alternatives to fully fund the redemption of the $20.0 million of SBLF preferred stock and have made application to the Company’s primary regulator, the Federal Reserve Bank of San Francisco for permission to do so. If the Company’s Series B Preferred Stock remains outstanding beyond December 2015, the dividend rate will increase from its current 1% to 5%, and in April 2016 to 9%. This increase in the Series B Preferred Stock annual dividend rate could have a material adverse effect on our earnings and could also adversely affect our ability to pay dividends on our common shares.

 

Dividends on Series B Preferred Stock are not cumulative, but the Holding Company may only declare and pay dividends on its common stock (or any other equity securities junior to the Series B Preferred Stock) if it has declared and paid dividends for the current dividend period on the Series B Preferred Stock, and will be subject to other restrictions on its ability to repurchase or redeem other securities. In addition, if (1) the Holding Company has not timely declared and paid dividends on the Series B Preferred Stock for six dividend periods or more, whether or not consecutive, and (2) shares of Series B Preferred Stock with an aggregate liquidation preference of at least $20.0 million are still outstanding, the Treasury (or any successor holder of Series B Preferred Stock) may designate two additional directors to be elected to the Holding Company’s Board of Directors.

 

As more completely described in the Certificate of Designation, holders of the Series B Preferred Stock have the right to vote as a separate class on certain matters relating to the rights of holders of Series B Preferred Stock and on certain corporate transactions. Except with respect to such matters and, if applicable, the election of the additional directors described above, the Series B Preferred Stock does not have voting rights.

 

The Holding Company may redeem the shares of Series B Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the Liquidation Amount per share and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by the Holding Company’s primary federal banking regulator.

 

Periodically, the Board of Directors authorizes the Holding Company to repurchase shares. Share repurchase plans are published in press releases and SEC 8-K filings. Typically we do not give any further public notice before repurchasing shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, market conditions and legal considerations. These factors can change at any time and there can be no assurance as to the number of shares repurchased or the timing of the repurchases. Our policy has been to repurchase shares under the safe harbor conditions of Rule 10b-18 of the Exchange Act including a limitation on the daily volume of repurchases.

 

On March 20, 2014, the Company announced that its Board of Directors had authorized the purchase of up to 700,000 or 5% of its outstanding shares over a twelve-month period. The stock repurchase plan authorizes the Company to conduct open market purchases or privately negotiated transactions from time to time when, at management’s discretion, it was determined that market conditions and other factors warrant such purchases. Pursuant to the stock repurchase plan, the Company repurchased 700,000 common shares during the six months ended June 30, 2014.

  

 

Cash Dividends and Payout Ratios per Common Share

 

During the nine months ended September 30, 2015 and 2014, the Company’s Board of Directors declared a quarterly cash dividend of $0.03 per common share per quarter. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, capital preservation, expected growth, and the overall payout ratio. We expect that the dividend rate will be reassessed on a quarterly basis 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, 2015 and 2014.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Dividends declared per common share

  $ 0.03     $ 0.03     $ 0.09     $ 0.09  

Dividend payout ratio

    17

%

    33

%

    18

%

    31

%

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

Information regarding Off-Balance Sheet Arrangements is included in Note 12, Commitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.

 

CONCENTRATION OF CREDIT RISK

Information regarding Concentration of Credit Risk is included in Note 12, Commitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.

 

 
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s assessment of market risk as of September 30, 2015 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

 
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Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective.

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

 

Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and the Chief Financial Officer and implemented by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

 

The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer (whom is also our Principal Accounting Officer) of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. As of September 30, 2015, our management, including our Chief Executive Officer, and Principal Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings.

 

Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that any such changes occurred in the first nine months of 2015 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is subject to various pending and threatened legal actions arising in the ordinary course of business and maintains reserves for losses from legal actions that are both probable and estimable. There are no legal proceedings adverse to the Company that will have a material effect on the Company’s consolidated financial position or results of operations.

 

Item 1a. Risk Factors

 

There have been no significant changes in the risk factors previously disclosed in the Company’s Form 10-K for the period ended December 31, 2014, filed with the SEC on March 10, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

a)

Not Applicable

 

 

b)

Not Applicable

 

 

c)

Not Applicable

 

 

Item 3. Defaults Upon Senior Securities

Not Applicable

 

Item 4. Mine Safety Disclosures

Not Applicable

 

Item 5. Other Information

Not Applicable

 

Item 6. Exhibits

 

   

31.1

Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002

32.0

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.DEF

XBRL Taxonomy Definition Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 
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SIGNATURES

 

Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

BANK OF COMMERCE HOLDINGS

 

(Registrant)

 

 

 

   

Date: November 6, 2015

/s/ James A Sundquist

 

James A. Sundquist

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

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