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 SeptemberJune 30, 20172021
☐ 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) |
555 Capitol Mall, Suite 1255, Sacramento, California |
|
(Address of principal executive offices) | (Zip Code) |
|
|
Registrant’sRegistrant’s telephone number, including area code: (800) 421-2575
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | BOCH | NASDAQ |
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 ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer | Non-accelerated filer
| Smaller reporting company | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ☐ No ☒
Outstanding shares of Common Stock, no par value, as of October July 26, 2017: 16,271,5632021: 16,894,391
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
ItemItem 1. Financial Statements
ConsolidatedConsolidated Balance Sheets (Unaudited)
September 30, 2017 and December 31, 2016
September 30, | December 31, | |||||||
(Amounts in thousands, except share information) | 2017 | 2016 | ||||||
Assets: | ||||||||
Cash and due from banks | $ | 19,929 | $ | 16,419 | ||||
Interest-bearing deposits in other banks | 65,702 | 51,988 | ||||||
Total cash and cash equivalents | 85,631 | 68,407 | ||||||
Securities available-for-sale, at fair value | 232,494 | 175,174 | ||||||
Securities held-to-maturity, at amortized cost | 30,724 | 31,187 | ||||||
Loans, net of deferred fees and costs | 826,644 | 805,535 | ||||||
Allowance for loan and lease losses | (11,692 | ) | (11,544 | ) | ||||
Net loans | 814,952 | 793,991 | ||||||
Premises and equipment, net | 15,039 | 16,226 | ||||||
Other real estate owned | 699 | 759 | ||||||
Life insurance | 21,764 | 23,098 | ||||||
Deferred tax asset, net | 8,751 | 9,542 | ||||||
Goodwill and core deposit intangible, net | 2,086 | 2,252 | ||||||
Other assets | 19,741 | 20,356 | ||||||
Total assets | $ | 1,231,881 | $ | 1,140,992 | ||||
Liabilities and shareholders' equity: | ||||||||
Liabilities: | ||||||||
Demand - noninterest-bearing | $ | 316,814 | $ | 270,398 | ||||
Demand - interest-bearing | 433,466 | 405,569 | ||||||
Savings | 111,962 | 113,309 | ||||||
Certificates of deposit | 200,543 | 215,390 | ||||||
Total deposits | 1,062,785 | 1,004,666 | ||||||
Term debt: | ||||||||
Principal | 17,700 | 18,917 | ||||||
Less unamortized debt issuance costs | (150 | ) | (184 | ) | ||||
Net term debt | 17,550 | 18,733 | ||||||
Junior subordinated debentures | 10,310 | 10,310 | ||||||
Other liabilities | 12,831 | 13,177 | ||||||
Total liabilities | 1,103,476 | 1,046,886 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Shareholders' equity: | ||||||||
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 16,264,561 as of September 30, 2017 and 13,440,422 as of December 31, 2016 | 51,755 | 24,547 | ||||||
Retained earnings | 76,179 | 70,218 | ||||||
Accumulated other comprehensive income (loss), net of tax | 471 | (659 | ) | |||||
Total shareholders' equity | 128,405 | 94,106 | ||||||
Total liabilities and shareholders' equity | $ | 1,231,881 | $ | 1,140,992 |
June 30, | December 31, | |||||||
(Amounts in thousands, except share information) | 2021 | 2020 | ||||||
Assets: | ||||||||
Cash and due from banks | $ | 21,011 | $ | 19,875 | ||||
Interest-bearing deposits in other banks | 156,107 | 87,111 | ||||||
Total cash and cash equivalents | 177,118 | 106,986 | ||||||
Securities available-for-sale, at fair value | 579,664 | 446,880 | ||||||
Loans, net of deferred fees and costs | 1,091,296 | 1,139,961 | ||||||
Allowance for loan and lease losses | (17,194 | ) | (16,910 | ) | ||||
Net loans | 1,074,102 | 1,123,051 | ||||||
Premises and equipment, net | 14,514 | 14,999 | ||||||
Life insurance | 24,462 | 24,206 | ||||||
Deferred tax asset, net | 5,234 | 3,954 | ||||||
Goodwill | 11,671 | 11,671 | ||||||
Other intangible assets, net | 3,661 | 4,044 | ||||||
Other assets | 26,727 | 28,163 | ||||||
Total assets | $ | 1,917,153 | $ | 1,763,954 | ||||
Liabilities and shareholders' equity: | ||||||||
Liabilities: | ||||||||
Demand - noninterest-bearing | $ | 627,911 | $ | 541,033 | ||||
Demand - interest-bearing | 306,565 | 290,251 | ||||||
Money market | 463,639 | 425,121 | ||||||
Savings | 162,325 | 150,695 | ||||||
Certificates of deposit | 136,898 | 135,679 | ||||||
Total deposits | 1,697,338 | 1,542,779 | ||||||
Term debt: | ||||||||
Federal Home Loan Bank of San Francisco ("FHLB") borrowings | 0 | 5,000 | ||||||
Other borrowings | 10,000 | 10,000 | ||||||
Net term debt | 10,000 | 15,000 | ||||||
Junior subordinated debentures | 10,310 | 10,310 | ||||||
Other liabilities | 17,368 | 18,163 | ||||||
Total liabilities | 1,735,016 | 1,586,252 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Shareholders' equity: | ||||||||
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding -16,895,783 as of June 30, 2021 and 16,800,662 as of December 31, 2020 | 59,422 | 58,988 | ||||||
Retained earnings | 118,276 | 111,226 | ||||||
Accumulated other comprehensive income, net of tax | 4,439 | 7,488 | ||||||
Total shareholders' equity | 182,137 | 177,702 | ||||||
Total liabilities and shareholders' equity | $ | 1,917,153 | $ | 1,763,954 |
See accompanying notes to consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
ConsolidatedConsolidated Statements of Income (Unaudited)
For the three and nine months ended September 30, 2017 and 2016
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Amounts in thousands, except per share information) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Interest income: | ||||||||||||||||
Interest and fees on loans | $ | 9,887 | $ | 9,007 | $ | 29,029 | $ | 26,254 | ||||||||
Interest on taxable securities | 1,049 | 689 | 2,710 | 2,281 | ||||||||||||
Interest on tax-exempt securities | 551 | 552 | 1,615 | 1,734 | ||||||||||||
Interest on interest-bearing deposits in other banks | 278 | 82 | 548 | 222 | ||||||||||||
Total interest income | 11,765 | 10,330 | 33,902 | 30,491 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on demand deposits | 196 | 136 | 528 | 388 | ||||||||||||
Interest on savings deposits | 52 | 43 | 146 | 129 | ||||||||||||
Interest on certificates of deposit | 567 | 524 | 1,641 | 1,636 | ||||||||||||
Interest on term debt | 292 | 292 | 883 | 1,369 | ||||||||||||
Interest on junior subordinated debentures | 74 | 59 | 211 | 172 | ||||||||||||
Total interest expense | 1,181 | 1,054 | 3,409 | 3,694 | ||||||||||||
Net interest income | 10,584 | 9,276 | 30,493 | 26,797 | ||||||||||||
Provision for loan and lease losses | — | — | 500 | — | ||||||||||||
Net interest income after provision for loan and lease losses | 10,584 | 9,276 | 29,993 | 26,797 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service charges on deposit accounts | 132 | 133 | 401 | 293 | ||||||||||||
ATM and point of sale fees | 273 | 287 | 827 | 714 | ||||||||||||
Fees on payroll and benefit processing | 147 | 133 | 485 | 432 | ||||||||||||
Life insurance | 134 | 152 | 915 | 461 | ||||||||||||
Gain on sale of investment securities, net | 38 | 70 | 139 | 192 | ||||||||||||
Impairment losses on investment securities | — | — | — | (546 | ) | |||||||||||
Federal Home Loan Bank of San Francisco dividends | 80 | 102 | 237 | 291 | ||||||||||||
Other income | 191 | 82 | 516 | 508 | ||||||||||||
Total noninterest income | 995 | 959 | 3,520 | 2,345 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and related benefits | 4,291 | 3,873 | 13,296 | 12,188 | ||||||||||||
Premises and equipment | 1,067 | 1,071 | 3,169 | 2,847 | ||||||||||||
Federal Deposit Insurance Corporation insurance premium | 78 | 176 | 230 | 513 | ||||||||||||
Data processing fees | 437 | 464 | 1,294 | 1,142 | ||||||||||||
Professional service fees | 276 | 303 | 1,119 | 1,209 | ||||||||||||
Telecommunications | 219 | 199 | 653 | 545 | ||||||||||||
Branch acquisition costs | — | — | — | 580 | ||||||||||||
Loss on cancellation of interest rate swap | — | — | — | 2,325 | ||||||||||||
Other expenses | 908 | 1,039 | 3,290 | 3,445 | ||||||||||||
Total noninterest expense | 7,276 | 7,125 | 23,051 | 24,794 | ||||||||||||
Income before provision for income taxes | 4,303 | 3,110 | 10,462 | 4,348 | ||||||||||||
Provision for income taxes | 1,427 | 744 | 3,125 | 1,386 | ||||||||||||
Net income | $ | 2,876 | $ | 2,366 | $ | 7,337 | $ | 2,962 | ||||||||
Earnings per share - basic | $ | 0.18 | $ | 0.18 | $ | 0.49 | $ | 0.22 | ||||||||
Weighted average shares - basic | 16,191 | 13,369 | 14,884 | 13,366 | ||||||||||||
Earnings per share - diluted | $ | 0.18 | $ | 0.18 | $ | 0.49 | $ | 0.22 | ||||||||
Weighted average shares - diluted | 16,288 | 13,439 | 14,984 | 13,412 |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Amounts in thousands, except per share information) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Interest income: | ||||||||||||||||
Interest and fees on loans | $ | 12,429 | $ | 13,224 | $ | 25,644 | $ | 25,562 | ||||||||
Interest on taxable securities | 1,697 | 1,329 | 3,182 | 2,911 | ||||||||||||
Interest on tax-exempt securities | 575 | 423 | 1,086 | 694 | ||||||||||||
Interest on interest-bearing deposits in other banks | 27 | 21 | 56 | 175 | ||||||||||||
Total interest income | 14,728 | 14,997 | 29,968 | 29,342 | ||||||||||||
Interest expense: | ||||||||||||||||
Interest on demand - interest-bearing | 55 | 85 | 113 | 185 | ||||||||||||
Interest on money market | 180 | 317 | 375 | 720 | ||||||||||||
Interest on savings | 41 | 95 | 89 | 213 | ||||||||||||
Interest on certificates of deposit | 303 | 467 | 641 | 931 | ||||||||||||
Interest on FHLB | 0 | 5 | 0 | 5 | ||||||||||||
Interest on other borrowings | 138 | 184 | 275 | 368 | ||||||||||||
Interest on junior subordinated debentures | 47 | 61 | 93 | 151 | ||||||||||||
Total interest expense | 764 | 1,214 | 1,586 | 2,573 | ||||||||||||
Net interest income | 13,964 | 13,783 | 28,382 | 26,769 | ||||||||||||
Provision for loan and lease losses | 0 | 1,300 | 0 | 4,150 | ||||||||||||
Net interest income after provision for loan and lease losses | 13,964 | 12,483 | 28,382 | 22,619 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service charges on deposit accounts | 160 | 152 | 308 | 321 | ||||||||||||
ATM and point of sale fees | 401 | 263 | 719 | 531 | ||||||||||||
Payroll and benefit processing fees | 160 | 143 | 329 | 313 | ||||||||||||
Life insurance | 123 | 148 | 244 | 271 | ||||||||||||
Gain on sale of investment securities, net | 64 | 140 | 71 | 224 | ||||||||||||
FHLB dividends | 126 | 36 | 219 | 166 | ||||||||||||
Legal settlement | 0 | 0 | 221 | 0 | ||||||||||||
Other income | 97 | 73 | 183 | 21 | ||||||||||||
Total noninterest income | 1,131 | 955 | 2,294 | 1,847 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and related benefits | 5,205 | 4,965 | 10,844 | 10,852 | ||||||||||||
Premises and equipment | 973 | 826 | 1,932 | 1,680 | ||||||||||||
FDIC insurance premium | 124 | 90 | 234 | 126 | ||||||||||||
Data processing | 546 | 585 | 1,094 | 1,116 | ||||||||||||
Professional services | 278 | 469 | 579 | 803 | ||||||||||||
Telecommunications | 145 | 156 | 315 | 327 | ||||||||||||
Merger costs | 817 | 0 | 817 | 0 | ||||||||||||
Other expenses | 1,191 | 1,179 | 2,361 | 3,149 | ||||||||||||
Total noninterest expense | 9,279 | 8,270 | 18,176 | 18,053 | ||||||||||||
Income before provision for income taxes | 5,816 | 5,168 | 12,500 | 6,413 | ||||||||||||
Provision for income taxes | 1,677 | 1,321 | 3,441 | 1,650 | ||||||||||||
Net income | $ | 4,139 | $ | 3,847 | $ | 9,059 | $ | 4,763 | ||||||||
Earnings per share - basic | $ | 0.25 | $ | 0.23 | $ | 0.54 | $ | 0.28 | ||||||||
Weighted average shares - basic | 16,736 | 16,660 | 16,721 | 17,178 | ||||||||||||
Earnings per share - diluted | $ | 0.25 | $ | 0.23 | $ | 0.54 | $ | 0.28 | ||||||||
Weighted average shares - diluted | 16,823 | 16,689 | 16,803 | 17,217 |
See accompanying notes to consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
ConsolidatedConsolidated Statements of Comprehensive Income (Unaudited)
For the three and nine months ended September 30, 2017 and 2016
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income | $ | 2,876 | $ | 2,366 | $ | 7,337 | $ | 2,962 | ||||||||
Available-for-sale securities: | ||||||||||||||||
Unrealized (losses) gains arising during the period | (13 | ) | (306 | ) | 2,114 | 294 | ||||||||||
Income taxes | 5 | 126 | (870 | ) | (121 | ) | ||||||||||
Change in unrealized gains, net of tax | (8 | ) | (180 | ) | 1,244 | 173 | ||||||||||
Reclassification adjustment for realized gains included in net income | (40 | ) | (48 | ) | (141 | ) | (171 | ) | ||||||||
Income taxes | 16 | 19 | 58 | 70 | ||||||||||||
Realized gains, net of tax | (24 | ) | (29 | ) | (83 | ) | (101 | ) | ||||||||
Reclassification adjustment for other than temporary impairment included in net income | — | — | — | 546 | ||||||||||||
Income taxes | — | — | — | (225 | ) | |||||||||||
Realized impairment, net of tax | — | — | — | 321 | ||||||||||||
Net (decrease) increase in unrealized gains on available-for-sale securities | (32 | ) | (209 | ) | 1,161 | 393 | ||||||||||
Held-to-maturity securities: | ||||||||||||||||
Amortization of held-to-maturity fair value adjustment | (16 | ) | (22 | ) | (52 | ) | (79 | ) | ||||||||
Income taxes | 7 | 9 | 21 | 33 | ||||||||||||
Net change in fair value adjustment on held-to-maturity securities | (9 | ) | (13 | ) | (31 | ) | (46 | ) | ||||||||
Derivatives: | ||||||||||||||||
Unrealized losses arising during the period | — | — | — | (348 | ) | |||||||||||
Income taxes | — | — | — | 143 | ||||||||||||
Change in unrealized losses, net of tax | — | — | — | (205 | ) | |||||||||||
Reclassification adjustments for net losses on derivatives included in net income | — | — | — | 2,721 | ||||||||||||
Income taxes | — | — | — | (1,120 | ) | |||||||||||
Reclassification adjustments for net losses included in net income, net of tax | — | — | — | 1,601 | ||||||||||||
Net change in unrealized losses on derivatives | — | — | — | 1,396 | ||||||||||||
Other comprehensive (loss) income | (41 | ) | (222 | ) | 1,130 | 1,743 | ||||||||||
Comprehensive income – Bank of Commerce Holdings | $ | 2,835 | $ | 2,144 | $ | 8,467 | $ | 4,705 |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Net income | $ | 4,139 | $ | 3,847 | $ | 9,059 | $ | 4,763 | ||||||||
Available-for-sale securities: | ||||||||||||||||
Changes in unrealized gains (losses) arising during the period | 2,415 | 1,845 | (4,258 | ) | 6,678 | |||||||||||
Income taxes | (714 | ) | (544 | ) | 1,259 | (1,973 | ) | |||||||||
Change in unrealized gains (losses), net of tax | 1,701 | 1,301 | (2,999 | ) | 4,705 | |||||||||||
Reclassification adjustment for realized gains included in net income | (64 | ) | (140 | ) | (71 | ) | (224 | ) | ||||||||
Income taxes | 19 | 40 | 21 | 66 | ||||||||||||
Realized gains, net of tax | (45 | ) | (100 | ) | (50 | ) | (158 | ) | ||||||||
Net change in unrealized gains (losses) on available-for-sale securities | 1,656 | 1,201 | (3,049 | ) | 4,547 | |||||||||||
Other comprehensive income (loss) | 1,656 | 1,201 | (3,049 | ) | 4,547 | |||||||||||
Comprehensive income | $ | 5,795 | $ | 5,048 | $ | 6,010 | $ | 9,310 |
See accompanying notes to consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Consolidated Statements of Shareholders’Shareholders’ Equity (Unaudited)
For the twelve months ended December 31, 2016 and nine months ended September 30, 2017 (Unaudited)
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common | Comprehensive | |||||||||||||||||||
Common | Stock | Retained | (Loss) | |||||||||||||||||
(Amounts in thousands except per share information) | Shares | Amount | Earnings | Net of Tax | Total | |||||||||||||||
Balance at January 1, 2016 | 13,342 | $ | 24,214 | $ | 66,562 | $ | (254 | ) | $ | 90,522 | ||||||||||
Net income | — | — | 5,259 | — | 5,259 | |||||||||||||||
Other comprehensive loss, net of tax | — | — | — | (405 | ) | (405 | ) | |||||||||||||
Comprehensive income | — | — | — | — | 4,854 | |||||||||||||||
Dividend on common stock ($0.12 per share) | — | — | (1,603 | ) | — | (1,603 | ) | |||||||||||||
Common stock issued under employee plans | 29 | 84 | — | — | 84 | |||||||||||||||
Stock options exercised | 2 | 10 | — | — | 10 | |||||||||||||||
Compensation expense associated with stock options | — | 24 | — | — | 24 | |||||||||||||||
Compensation expense associated with restricted stock | — | 215 | — | — | 215 | |||||||||||||||
Balance at December 31, 2016 (1) | 13,373 | $ | 24,547 | $ | 70,218 | $ | (659 | ) | $ | 94,106 |
|
Accumulated Other | ||||||||||||||||||||
Common | Comprehensive | |||||||||||||||||||
Common | Stock | Retained | Income | |||||||||||||||||
(Amounts in thousands except per share information) | Shares | Amount | Earnings | Net of Tax | Total | |||||||||||||||
Balance at December 31, 2019 | 18,137 | $ | 71,311 | $ | 100,566 | $ | 2,601 | $ | 174,478 | |||||||||||
Net income | — | 0 | 916 | 0 | 916 | |||||||||||||||
Other comprehensive income, net of tax | — | 0 | 0 | 3,346 | 3,346 | |||||||||||||||
Dividend declared on common stock ($0.05 per share) | — | 0 | (838 | ) | 0 | (838 | ) | |||||||||||||
Repurchase of common stock | (1,352 | ) | (12,230 | ) | 0 | 0 | (12,230 | ) | ||||||||||||
Restricted stock granted, net of forfeitures | 22 | 0 | 0 | 0 | 0 | |||||||||||||||
Shares surrendered for tax-withholding purposes | (11 | ) | (120 | ) | 0 | 0 | (120 | ) | ||||||||||||
Compensation expense associated with restricted stock | — | 106 | 0 | 0 | 106 | |||||||||||||||
Balance at March 31, 2020 | 16,796 | $ | 59,067 | $ | 100,644 | $ | 5,947 | $ | 165,658 | |||||||||||
Net income | — | 0 | 3,847 | 0 | 3,847 | |||||||||||||||
Other comprehensive income, net of tax | — | 0 | 0 | 1,201 | 1,201 | |||||||||||||||
Dividend declared on common stock ($0.05 per share) | — | 0 | (833 | ) | 0 | (833 | ) | |||||||||||||
Repurchase of common stock | (57 | ) | (423 | ) | 0 | 0 | (423 | ) | ||||||||||||
Compensation expense associated with restricted stock | — | 105 | 0 | 0 | 105 | |||||||||||||||
Balance at June 30, 2020 | 16,739 | $ | 58,749 | $ | 103,658 | $ | 7,148 | $ | 169,555 | |||||||||||
Net income | — | 0 | 4,329 | 0 | 4,329 | |||||||||||||||
Other comprehensive income, net of tax | — | 0 | 0 | 176 | 176 | |||||||||||||||
Dividend declared on common stock ($0.05 per share) | — | 0 | (833 | ) | 0 | (833 | ) | |||||||||||||
Restricted stock granted, net of forfeitures | 53 | 0 | 0 | 0 | 0 | |||||||||||||||
Compensation expense associated with restricted stock | — | 123 | 0 | 0 | 123 | |||||||||||||||
Balance at September 30, 2020 | 16,792 | $ | 58,872 | $ | 107,154 | $ | 7,324 | $ | 173,350 | |||||||||||
Net income | — | 0 | 5,072 | 0 | 5,072 | |||||||||||||||
Other comprehensive income, net of tax | — | 0 | 0 | 164 | 164 | |||||||||||||||
Dividend declared on common stock ($0.06 per share) | — | 0 | (1,000 | ) | 0 | (1,000 | ) | |||||||||||||
Restricted stock granted, net of forfeitures | 10 | 0 | 0 | 0 | 0 | |||||||||||||||
Shares surrendered for tax-withholding purposes | (1 | ) | (9 | ) | 0 | 0 | (9 | ) | ||||||||||||
Compensation expense associated with restricted stock | — | 125 | 0 | 0 | 125 | |||||||||||||||
Balance at December 31, 2020 | 16,801 | $ | 58,988 | $ | 111,226 | $ | 7,488 | $ | 177,702 |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity (Unaudited) (Continued)
Accumulated | ||||||||||||||||||||
Other | ||||||||||||||||||||
Common | Comprehensive | |||||||||||||||||||
Common | Stock | Retained | (Loss) Income | |||||||||||||||||
(Amounts in thousands except per share information) | Shares | Amount | Earnings | Net of Tax | Total | |||||||||||||||
Balance at January 1, 2017 | 13,373 | $ | 24,547 | $ | 70,218 | $ | (659 | ) | $ | 94,106 | ||||||||||
Net income | — | — | 7,337 | — | 7,337 | |||||||||||||||
Other comprehensive income, net of tax | — | — | — | 1,130 | 1,130 | |||||||||||||||
Comprehensive income | — | — | — | — | 8,467 | |||||||||||||||
Dividend on common stock ($0.09 per share) | — | — | (1,376 | ) | — | (1,376 | ) | |||||||||||||
Stock issued pursuant to public offering, net of underwriting discounts and expenses of $1.7 million | 2,738 | 26,778 | — | — | 26,778 | |||||||||||||||
Common stock issued under employee plans | 31 | 41 | — | — | 41 | |||||||||||||||
Stock options exercised | 52 | 247 | — | — | 247 | |||||||||||||||
Compensation expense associated with stock options | — | 18 | — | — | 18 | |||||||||||||||
Compensation expense associated with restricted stock | — | 124 | — | — | 124 | |||||||||||||||
Balance at September 30, 2017 (1) | 16,194 | $ | 51,755 | $ | 76,179 | $ | 471 | $ | 128,405 |
|
Accumulated Other | ||||||||||||||||||||
Common | Comprehensive | |||||||||||||||||||
Common | Stock | Retained | Income (Loss) | |||||||||||||||||
(Amounts in thousands except per share information) | Shares | Amount | Earnings | Net of Tax | Total | |||||||||||||||
Balance at December 31, 2020 | 16,801 | $ | 58,988 | $ | 111,226 | $ | 7,488 | $ | 177,702 | |||||||||||
Net income | — | 0 | 4,920 | 0 | 4,920 | |||||||||||||||
Other comprehensive loss, net of tax | — | 0 | 0 | (4,705 | ) | (4,705 | ) | |||||||||||||
Dividend declared on common stock ($0.06 per share) | — | 0 | (1,004 | ) | 0 | (1,004 | ) | |||||||||||||
Restricted stock granted, net of forfeitures | 43 | 0 | 0 | 0 | 0 | |||||||||||||||
Stock options exercised | 41 | 197 | 0 | 0 | 197 | |||||||||||||||
Shares surrendered for tax-withholding purposes | (9 | ) | (97 | ) | 0 | 0 | (97 | ) | ||||||||||||
Compensation expense associated with restricted stock | — | 127 | 0 | 0 | 127 | |||||||||||||||
Balance at March 31, 2021 | 16,876 | $ | 59,215 | $ | 115,142 | $ | 2,783 | $ | 177,140 | |||||||||||
Net income | — | 0 | 4,139 | 0 | 4,139 | |||||||||||||||
Other comprehensive income, net of tax | — | 0 | 0 | 1,656 | 1,656 | |||||||||||||||
Dividend declared on common stock ($0.06 per share) | — | 0 | (1,005 | ) | 0 | (1,005 | ) | |||||||||||||
Stock options exercised | 20 | 81 | 0 | 0 | 81 | |||||||||||||||
Shares surrendered for tax-withholding purposes | 0 | (6 | ) | 0 | 0 | (6 | ) | |||||||||||||
Compensation expense associated with restricted stock | — | 132 | 0 | 0 | 132 | |||||||||||||||
Balance at June 30, 2021 | 16,896 | $ | 59,422 | $ | 118,276 | $ | 4,439 | $ | 182,137 |
See accompanying notes to consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2017 and September 30, 2016(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
(Amounts in thousands) | 2017 | 2016 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 7,337 | $ | 2,962 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan and lease losses | 500 | — | ||||||
Provision for depreciation and amortization | 1,555 | 1,397 | ||||||
Amortization of core deposit intangible | 166 | 130 | ||||||
Amortization of debt issuance costs | 34 | 30 | ||||||
Compensation expense associated with stock options | 18 | 18 | ||||||
Compensation expense associated with restricted stock | 124 | 163 | ||||||
Tax benefits from vesting of restricted stock | (47 | ) | — | |||||
Net gain on sale or call of securities | (139 | ) | (192 | ) | ||||
Other than temporary impairment on investment securities | — | 546 | ||||||
Amortization of investment premiums and accretion of discounts, net | 1,502 | 1,256 | ||||||
Amortization of held-to-maturity fair value adjustments | (52 | ) | (79 | ) | ||||
Loss on cancellation of interest rate swap | — | 2,325 | ||||||
Loss on disposal of fixed assets | 1 | 2 | ||||||
Write-down of other real estate owned | 52 | 76 | ||||||
(Gain) loss on sale of other real estate owned | (22 | ) | 119 | |||||
Decrease in deferred income taxes | — | 363 | ||||||
Increase in cash surrender value of life insurance | (413 | ) | (461 | ) | ||||
Life insurance death benefit | (502 | ) | — | |||||
Increase (decrease) in deferred compensation and salary continuation plans | 38 | (26 | ) | |||||
Increase in deferred loan fees and costs | (446 | ) | (285 | ) | ||||
Decrease (increase) in other assets | 887 | (796 | ) | |||||
Decrease in other liabilities | (330 | ) | (1,059 | ) | ||||
Net cash provided by operating activities | 10,263 | 6,489 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities and payments of available-for-sale securities | 16,560 | 25,660 | ||||||
Proceeds from sale of available-for-sale securities | 47,892 | 46,699 | ||||||
Purchases of available-for-sale securities | (121,616 | ) | (70,892 | ) | ||||
Proceeds from maturities and payments of held-to-maturity securities | 679 | 4,310 | ||||||
Investment in qualified affordable housing partnerships | (18 | ) | (688 | ) | ||||
Net purchase of Federal Home Loan Bank of San Francisco stock | (72 | ) | — | |||||
Loan originations, net of principal repayments | (27,189 | ) | (74,008 | ) | ||||
Net repayment on loan pools | 5,228 | 12,316 | ||||||
Purchase of premises and equipment | (369 | ) | (2,067 | ) | ||||
Proceeds from the sale of other real estate owned | 1,067 | 545 | ||||||
Proceeds from life insurance policy | 2,249 | — | ||||||
Payments to derivative counterparties for the termination of interest rate swaps | — | (2,578 | ) | |||||
Acquisition of branches, net of cash paid | — | 142,411 | ||||||
Net cash (used) provided by investing activities | (75,589 | ) | 81,708 |
For the Six Months Ended | ||||||||
June 30, | ||||||||
(Amounts in thousands) | 2021 | 2020 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 9,059 | $ | 4,763 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan and lease losses | 0 | 4,150 | ||||||
Provision for unfunded commitments | 0 | 105 | ||||||
Provision for depreciation and amortization | 741 | 598 | ||||||
Amortization of core deposit intangible | 383 | 383 | ||||||
Amortization of debt issuance costs | 0 | 24 | ||||||
Compensation expense associated with restricted stock | 259 | 211 | ||||||
Net gain on sale or call of securities | (71 | ) | (224 | ) | ||||
Amortization of premiums and accretion of discounts on investment securities, net | 1,417 | 636 | ||||||
Amortization of premiums and accretion of discounts on acquired loans, net | (425 | ) | (711 | ) | ||||
Loss on disposal of fixed assets | 0 | 132 | ||||||
Write-down of other real estate owned | 8 | 0 | ||||||
Loss on sale of OREO | 0 | 23 | ||||||
Increase in cash surrender value of life insurance | (244 | ) | (271 | ) | ||||
Deferred compensation and salary continuation plan payments | (410 | ) | (439 | ) | ||||
Increase in deferred compensation and salary continuation plans | 389 | 426 | ||||||
(Decrease) increase in deferred loan fees and costs | (322 | ) | 3,765 | |||||
Decrease (increase) in other assets | 1,768 | (1,923 | ) | |||||
(Decrease) increase in other liabilities | (405 | ) | 1,022 | |||||
Net cash provided by operating activities | 12,147 | 12,670 | ||||||
Cash flows from investing activities: | ||||||||
Proceeds from maturities of and payments on available-for-sale investment securities | 49,862 | 37,121 | ||||||
Proceeds from sale of available-for-sale investment securities | 39,066 | 49,761 | ||||||
Purchases of available-for-sale investment securities | (227,577 | ) | (73,692 | ) | ||||
Investment in low income housing tax credit partnerships | (374 | ) | (7 | ) | ||||
Net purchase of FHLB stock | (84 | ) | 0 | |||||
Loan principal repayments, net of (originations) | 38,962 | (182,677 | ) | |||||
Net repayment on loan pools | 10,734 | 9,651 | ||||||
Purchase of premises and equipment | (334 | ) | (303 | ) | ||||
Proceeds from the sale of OREO | 0 | 12 | ||||||
Net cash used in investing activities | (89,745 | ) | (160,134 | ) |
See accompanying notes to consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||
September 30, | June 30, | |||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2021 | 2020 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Net increase in demand deposits and savings accounts | $ | 72,966 | $ | 54,607 | ||||||||||||
Net decrease in certificates of deposit | (14,847 | ) | (31,896 | ) | ||||||||||||
Net increase in demand, money market and savings deposits | $ | 153,340 | $ | 241,275 | ||||||||||||
Net increase (decrease) in certificates of deposit | 1,219 | (14,139 | ) | |||||||||||||
Advances on term debt | 30,259 | 55,000 | 0 | 50,000 | ||||||||||||
Repayment of term debt | (31,476 | ) | (130,772 | ) | (5,000 | ) | (40,000 | ) | ||||||||
Proceeds from stock options exercised | 245 | 4 | 278 | 0 | ||||||||||||
Net proceeds from issuance of common stock | 26,778 | — | ||||||||||||||
Cash paid when directly withholding shares for tax-withholding purposes | (85 | ) | — | |||||||||||||
Repurchase of common stock | 0 | (12,653 | ) | |||||||||||||
Cash paid for restricted shares surrendered for tax-withholding purposes | (103 | ) | (120 | ) | ||||||||||||
Cash dividends paid on common stock | (1,290 | ) | (1,202 | ) | (2,004 | ) | (1,741 | ) | ||||||||
Net cash provided by (used) in financing activities | 82,550 | (54,259 | ) | |||||||||||||
Net cash provided by financing activities | 147,730 | 222,622 | ||||||||||||||
Net increase in cash and cash equivalents | 17,224 | 33,938 | 70,132 | 75,158 | ||||||||||||
Cash and cash equivalents at beginning of year | 68,407 | 51,192 | 106,986 | 80,604 | ||||||||||||
Cash and cash equivalents at end of period | $ | 85,631 | $ | 85,130 | $ | 177,118 | $ | 155,762 |
For the Six Months Ended | ||||||||
June 30, | ||||||||
(Amounts in thousands) | 2021 | 2020 | ||||||
Supplemental disclosures of cash flow activity: | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 3,330 | $ | 1,008 | ||||
Interest | $ | 1,592 | $ | 2,593 | ||||
Operating leases | $ | 488 | $ | 480 | ||||
Supplemental disclosures of non-cash investing activities: | ||||||||
Transfer of loans to other real estate owned | $ | 0 | $ | 8 | ||||
Investment in low income housing tax credit partnerships | $ | 0 | $ | 1,000 | ||||
Unrealized (loss) gain on investment securities available-for-sale, net of gains included in net income | $ | (4,329 | ) | $ | 6,454 | |||
Changes in net deferred tax asset related to changes in net unrealized gain on investment securities available-for-sale | 1,280 | (1,907 | ) | |||||
Changes in accumulated other comprehensive income due to net unrealized (loss) gain on investment securities available-for-sale | $ | (3,049 | ) | $ | 4,547 | |||
Supplemental disclosures of non-cash financing activities: | ||||||||
Cash dividend declared on common shares and payable after period-end | $ | 1,005 | $ | 833 |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (Unaudited) (Continued)
For the nine months ended September 30, 2017 and September 30, 2016
For the Nine Months Ended | ||||||||
September 30, | ||||||||
(Amounts in thousands) | 2017 | 2016 | ||||||
Supplemental disclosures of cash flow activity: | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 2,521 | $ | 3,444 | ||||
Interest | $ | 3,233 | $ | 3,884 | ||||
Supplemental disclosures of non cash investing activities: | ||||||||
Transfer of loans to other real estate owned | $ | 946 | $ | 110 | ||||
Unrealized gain on investment securities available-for-sale | $ | 1,973 | $ | 669 | ||||
Changes in net deferred tax asset related to changes in unrealized gain on investment securities available-for-sale | (812 | ) | (276 | ) | ||||
Changes in accumulated other comprehensive income due to changes in unrealized gain on investment securities available-for-sale | $ | 1,161 | $ | 393 | ||||
Accretion of held-to-maturity investment securities from other comprehensive income to interest income | $ | (52 | ) | $ | (79 | ) | ||
Changes in deferred tax related to accretion of held-to-maturity investment securities | 21 | 33 | ||||||
Changes in accumulated other comprehensive income due to accretion of held-to-maturity investment securities | $ | (31 | ) | $ | (46 | ) | ||
Changes in unrealized loss on derivatives | $ | — | $ | (348 | ) | |||
Changes in net deferred tax asset related to changes in unrealized loss on derivatives | — | 143 | ||||||
Changes in accumulated other comprehensive income due to changes in unrealized loss on derivatives | $ | — | $ | (205 | ) | |||
Reclassification of losses on derivatives | $ | — | $ | 2,721 | ||||
Changes in net deferred tax asset related to reclassification of losses on derivatives | — | (1,120 | ) | |||||
Changes in accumulated other comprehensive income due to reclassification of losses on derivatives | $ | — | $ | 1,601 | ||||
Supplemental disclosures of non cash financing activities: | ||||||||
Vested restricted stock issued under employee plans | $ | 41 | $ | 84 | ||||
Cash dividend declared on common shares and payable after period-end | $ | 486 | $ | 401 | ||||
Transactions Related to Acquisition: | ||||||||
Assets acquired - fair value | $ | — | $ | 155,230 | ||||
Goodwill | $ | — | $ | 665 | ||||
Liabilities assumed - fair value | $ | — | $ | 149,239 |
See accompanying notes to consolidated financial statements.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”), is a 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”) with its principal offices in Sacramento, California. The Holding Company’s principal business is to serve as a holding company for ReddingMerchants Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce) and for Bank of Commerce Mortgage (inactive). The Company hasBank, which previously operated under three separate names, changed its name for all operations to Merchants Bank of Commerce effective May 20, 2019. As previously announced, we entered into an Agreement and Plan of Merger with Columbia Banking System, Inc. with Columbia as the surviving entity. The transaction is expected to close during the fourth quarter of 2021. See Note 11Merger in the Notes to Consolidated Financial Statements in this document. We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The consolidatedConsolidated Balance Sheets as of September 30, 2017 and December 31, 2016 are derived from the unaudited interim consolidated financial statements andas of June 30, 2021 or the audited consolidated financial statements as of December 31, 2020, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The Company believes that all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and the disclosures made are adequate to make the information not misleading.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with prevailing practices within the banking and securities industries. In preparing such consolidated financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the Consolidated Balance Sheets and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the valuation and impairment of investments and impairments ofinvestment securities, the determination of the allowance for loan and lease losses (“ALLL”), income taxes, the valuation of goodwill and Other Real Estate Owned (“OREO”), and fair value measurements. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation. The results of reclassifications are not considered material and have no effect on previously reported net income or shareholders' equity. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 20162020 Annual Report on Form 10-K.10-K. The consolidated results of operations and cash flows for the 20172021 interim periodsperiod 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 SeptemberJune 30, 2017 2021 and December 31, 2016, 2020, the Company had one wholly-owned trust (“Trust”) formed in 2005 to issue trust-preferredtrust preferred securities and related common securities. The Company has We have not consolidated the accounts of the Trust in its Consolidated Financial Statementsour consolidated financial statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”) ASC 810,, Consolidation (“ASC 810”). We are not considered the primary beneficiary of the Trust (variable interest entity). As a result, the junior subordinated debentures issued by the Holding Company to the Trust are reflected on the Company’s Consolidated Balance Sheets.
Allowance for Credit Losses
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13,Measurement of Credit Losses on Financial Instruments. The ASU introduces a new impairment model based on current expected credit losses (“CECL”) in substitution for our current “incurred loss” methodology. Amendments to ASU 2016-13 permit us to delay implementation of CECL until January 1, 2023. As discussed in Note 11Merger in the Notes to Consolidated Financial Statements, the Company has entered into an Agreement and Plan of Merger with Columbia Banking System, Inc. with Columbia as the surviving entity. The transaction is expected to close during the fourth quarter of 2021; therefore, we do not anticipate adopting ASU No.2016-13.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in Other Assets and Other Liabilitiesin our Consolidated Balance Sheets. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an incremental borrowing rate, we use borrowing rates available under our existing line of credit with the FHLB for periods similar to the lease terms as our incremental borrowing rate to determine the present value of future lease payments. Our lease terms may include options to extend or terminate the lease which we recognize when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Application
In January of 2017, the Company adopted the Financial Accounting Standards Board's (“FASB”) Accounting Standard Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09, seeks to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the consolidated statement of cash flows. By applying this ASU, the Company no longer adjusts common stock for the tax impact of shares released, instead the tax impact is recognized as tax expense in the period the shares are released. This simplifies the tracking of the tax benefits and deficiencies, but could cause volatility in tax expense for the periods presented. The consolidated statement of cash flows has been adjusted to reflect the provisions of this ASU. The application of this ASU did not have a material impact on the financial statements.
NOTE 2. COMMON STOCK OUTSTANDING AND EARNINGS PER SHARE
On May 10, 2017, the Company announced the closing of its underwritten public offering, at the public offering price of $10.50 per share. The total number of shares of common stock sold by the Company was 2,738,096 shares. Net proceeds raised in the offering, after underwriting discounts and expenses of the offering, were $26.8 million.
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted averageweighted-average number of common shares outstanding for the period, excluding unvested restricted stock awards which do not have voting rights or share in dividends. Diluted earnings per share reflects the potential dilution that couldwould 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 subsequentlythen shared in the earnings of the Holding Company. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following is a computation of basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 2017 2021 and 2016.2020.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
(Amounts in thousands, except per share information) | September 30, | September 30, | ||||||||||||||
Earnings Per Share | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerators: | ||||||||||||||||
Net income | $ | 2,876 | $ | 2,366 | $ | 7,337 | $ | 2,962 | ||||||||
Denominators: | ||||||||||||||||
Weighted average number of common shares outstanding - basic | 16,191 | 13,369 | 14,884 | 13,366 | ||||||||||||
Effect of potentially dilutive common shares (1) | 97 | 70 | 100 | 46 | ||||||||||||
Weighted average number of common shares outstanding - diluted | 16,288 | 13,439 | 14,984 | 13,412 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.18 | $ | 0.18 | $ | 0.49 | $ | 0.22 | ||||||||
Diluted | $ | 0.18 | $ | 0.18 | $ | 0.49 | $ | 0.22 | ||||||||
Anti-dilutive options not included in diluted earnings per share calculation | 70 | 74 | 74 | 111 | ||||||||||||
Anti-dilutive restricted shares not included in diluted earnings per share calculation | 42 | — | 43 | 41 |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Amounts in thousands, except per share information) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Earnings Per Share: | ||||||||||||||||
Numerators: | ||||||||||||||||
Net income | $ | 4,139 | $ | 3,847 | $ | 9,059 | $ | 4,763 | ||||||||
Denominators: | ||||||||||||||||
Weighted average number of common shares outstanding - basic (1) | 16,736 | 16,660 | 16,721 | 17,178 | ||||||||||||
Effect of potentially dilutive common shares (2) | 87 | 29 | 82 | 39 | ||||||||||||
Weighted average number of common shares outstanding - diluted | 16,823 | 16,689 | 16,803 | 17,217 | ||||||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.25 | $ | 0.23 | $ | 0.54 | $ | 0.28 | ||||||||
Diluted | $ | 0.25 | $ | 0.23 | $ | 0.54 | $ | 0.28 | ||||||||
Anti-dilutive options not included in diluted earnings per share calculation | 0 | 76 | 0 | 60 |
|
(2) Represents the effects of the assumed exercise of stock options and vesting of non-participating restricted shares. |
In late 2020, we announced a new share repurchase program to repurchase up to 1.0 million shares of common stock over a period ending December 31, 2021. As of June 30, 2021, 0 shares have been repurchased under this program. Given the recent announcement of the merger with Columbia, management will not be purchasing shares under the program.
In late 2019, we announced a program to repurchase 1.0 million shares of common stock, which was later increased to 1.5 million shares of common stock. Between October of 2019 and April of 2020, all 1.5 million shares were repurchased at a total cost of $13.6 million including commissions, or an average of $9.11 per share.
NOTE 3. SECURITIES
The following table presentstables present the amortized costs, unrealized gains, unrealized losses and estimated fair values of our investment securities as of SeptemberJune 30, 2017, 2021, and December 31, 2016.2020.
As of September 30, 2017 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
(Amounts in thousands) | Cost | Gain | Loss | Fair Value | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. government & agencies | $ | 36,437 | $ | 122 | $ | (85 | ) | $ | 36,474 | |||||||
Obligations of state and political subdivisions | 52,609 | 1,343 | (102 | ) | 53,850 | |||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 105,755 | 165 | (696 | ) | 105,224 | |||||||||||
Corporate securities | 6,945 | 97 | (74 | ) | 6,968 | |||||||||||
Commercial mortgage-backed securities | 26,272 | 29 | (153 | ) | 26,148 | |||||||||||
Other asset-backed securities | 3,846 | 6 | (22 | ) | 3,830 | |||||||||||
Total | $ | 231,864 | $ | 1,762 | $ | (1,132 | ) | $ | 232,494 | |||||||
Held-to-maturity securities: | ||||||||||||||||
Obligations of state and political subdivisions | $ | 30,724 | $ | 1,238 | $ | (80 | ) | $ | 31,882 |
As of June 30, 2021 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
(Amounts in thousands) | Costs | Gains | Losses | Fair Values | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. government & agencies | $ | 28,903 | $ | 822 | $ | (34 | ) | $ | 29,691 | |||||||
Obligations of state and political subdivisions | 132,675 | 4,366 | (574 | ) | 136,467 | |||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 317,157 | 2,697 | (2,012 | ) | 317,842 | |||||||||||
Commercial mortgage-backed securities | 52,484 | 532 | (298 | ) | 52,718 | |||||||||||
Other asset-backed securities | 42,143 | 804 | (1 | ) | 42,946 | |||||||||||
Total | $ | 573,362 | $ | 9,221 | $ | (2,919 | ) | $ | 579,664 |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
As of December 31, 2016 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
(Amounts in thousands) | Cost | Gain | Loss | Fair Value | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. government & agencies | $ | 10,427 | $ | 10 | $ | (83 | ) | $ | 10,354 | |||||||
Obligations of state and political subdivisions | 58,847 | 1,001 | (420 | ) | 59,428 | |||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 71,068 | 33 | (1,497 | ) | 69,604 | |||||||||||
Corporate securities | 16,153 | 103 | (140 | ) | 16,116 | |||||||||||
Commercial mortgage-backed securities | 15,786 | 9 | (281 | ) | 15,514 | |||||||||||
Other asset-backed securities | 4,237 | 8 | (87 | ) | 4,158 | |||||||||||
Total | $ | 176,518 | $ | 1,164 | $ | (2,508 | ) | $ | 175,174 | |||||||
Held-to-maturity securities: | ||||||||||||||||
Obligations of state and political subdivisions | $ | 31,187 | $ | 710 | $ | (523 | ) | $ | 31,374 |
As of December 31, 2020 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
(Amounts in thousands) | Costs | Gains | Losses | Fair Values | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. government & agencies | $ | 32,164 | $ | 838 | $ | (8 | ) | $ | 32,994 | |||||||
Obligations of state and political subdivisions | 103,424 | 4,971 | (29 | ) | 108,366 | |||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 236,829 | 3,895 | (246 | ) | 240,478 | |||||||||||
Commercial mortgage-backed securities | 27,455 | 637 | (18 | ) | 28,074 | |||||||||||
Other asset-backed securities | 36,377 | 592 | (1 | ) | 36,968 | |||||||||||
Total | $ | 436,249 | $ | 10,933 | $ | (302 | ) | $ | 446,880 |
The following table presents the expectedcontractual maturities of investment securities at SeptemberJune 30, 2017.2021. Actual maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.
Available-For-Sale | Held-To-Maturity | Available-For-Sale | ||||||||||||||||||||||
(Amounts in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Costs | Estimated | ||||||||||||||||||
Amounts maturing in: | ||||||||||||||||||||||||
One year or less | $ | 1,379 | $ | 1,382 | $ | 95 | $ | 98 | $ | 12,527 | $ | 12,780 | ||||||||||||
After one year through five years | 75,268 | 75,183 | 9,834 | 10,354 | 109,467 | 111,792 | ||||||||||||||||||
After five years through ten years | 72,459 | 72,951 | 7,656 | 7,838 | 222,288 | 222,274 | ||||||||||||||||||
After ten years | 82,758 | 82,978 | 13,139 | 13,592 | 229,080 | 232,818 | ||||||||||||||||||
Total | $ | 231,864 | $ | 232,494 | $ | 30,724 | $ | 31,882 | $ | 573,362 | $ | 579,664 |
The amortized costcosts and fair valuevalues of residential mortgage-backed securities, collateralized mortgage obligations and commercial mortgage securities are presented by their expected average life, rather than contractual maturity, because the underlying loans may be repaid without prepayment penalties.
At September 30, 2017 and December 31, 2016 securities with a fair value of $65.6 million and $39.2 million, respectively, were pledged as collateral to secure public fund deposits, Federal Home Loan Bank of San Francisco borrowings and for other purposes as required by law.
The following table presents the cash proceeds from sales of investment securities and the associated gross realized gains and gross realized losses that have been included in earnings for the three and ninesix months ended SeptemberJune 30, 2017 2021 and 2016.2020.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Proceeds from sales of securities | $ | 20,640 | $ | 12,310 | $ | 47,892 | $ | 46,699 | ||||||||
Gross realized gains on sales of securities: | ||||||||||||||||
U.S. government & agencies | $ | — | $ | 9 | $ | — | $ | 17 | ||||||||
Obligations of state and political subdivisions | 31 | 25 | 112 | 136 | ||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 16 | 12 | 53 | 14 | ||||||||||||
Corporate securities | 20 | 29 | 30 | 105 | ||||||||||||
Commercial mortgage-backed securities | 3 | — | 3 | 4 | ||||||||||||
Other asset-backed securities | — | 1 | — | 14 | ||||||||||||
Total gross realized gains on sales of securities | 70 | 76 | 198 | 290 | ||||||||||||
Gross realized losses on sales of securities: | ||||||||||||||||
U.S. government & agencies | — | — | — | (4 | ) | |||||||||||
Obligations of state and political subdivisions | (10 | ) | (3 | ) | (10 | ) | (3 | ) | ||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | (22 | ) | — | (46 | ) | (64 | ) | |||||||||
Corporate securities | — | (2 | ) | (3 | ) | (27 | ) | |||||||||
Commercial mortgage-backed securities | — | (1 | ) | — | — | |||||||||||
Other asset-backed securities | — | — | — | — | ||||||||||||
Total gross realized losses on sales of securities | (32 | ) | (6 | ) | (59 | ) | (98 | ) | ||||||||
Gain on investment securities, net | $ | 38 | $ | 70 | $ | 139 | $ | 192 |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Investment Securities: | ||||||||||||||||
Proceeds from sales of investment securities | $ | 27,176 | $ | 20,422 | $ | 39,066 | $ | 49,761 | ||||||||
Gross realized gains on sales of investment securities: | ||||||||||||||||
Obligations of state and political subdivisions | $ | 227 | $ | 43 | $ | 227 | $ | 91 | ||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 81 | 143 | 135 | 226 | ||||||||||||
Commercial mortgage-backed securities | 0 | 1 | 0 | 38 | ||||||||||||
Other asset-backed securities | 7 | 0 | 7 | 0 | ||||||||||||
Total gross realized gains on sales of investment securities | 315 | 187 | 369 | 355 | ||||||||||||
Gross realized losses on sales of investment securities: | ||||||||||||||||
U.S. government & agencies | 0 | (14 | ) | 0 | (14 | ) | ||||||||||
Obligations of state and political subdivisions | 0 | (1 | ) | 0 | (5 | ) | ||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | (231 | ) | (32 | ) | (278 | ) | (112 | ) | ||||||||
Commercial mortgage-backed securities | (20 | ) | 0 | (20 | ) | 0 | ||||||||||
Total gross realized losses on sales of investment securities | (251 | ) | (47 | ) | (298 | ) | (131 | ) | ||||||||
Gain on sale of investment securities, net | $ | 64 | $ | 140 | $ | 71 | $ | 224 |
Investment securities that were in an unrealized loss position as of SeptemberJune 30, 2017 2021 and December 31, 2016 2020 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.
As of June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
As of September 30, 2017 | Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | Estimated | Estimated | Estimated | |||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Value | Losses | Value | Losses | Value | Losses | Values | Losses | Values | Losses | Values | Losses | ||||||||||||||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government & agencies | $ | 15,565 | $ | (85 | ) | $ | — | $ | — | $ | 15,565 | $ | (85 | ) | $ | 2,920 | $ | (32 | ) | $ | 286 | $ | (2 | ) | $ | 3,206 | $ | (34 | ) | |||||||||||||||||||
Obligations of states and political subdivisions | 7,535 | (39 | ) | 4,644 | (63 | ) | 12,179 | (102 | ) | |||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 36,685 | (574 | ) | 0 | 0 | 36,685 | (574 | ) | ||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 57,273 | (293 | ) | 23,194 | (403 | ) | 80,467 | (696 | ) | 185,745 | (2,007 | ) | 283 | (5 | ) | 186,028 | (2,012 | ) | ||||||||||||||||||||||||||||||
Corporate securities | 2,029 | (14 | ) | 940 | (60 | ) | 2,969 | (74 | ) | |||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 10,481 | (48 | ) | 9,672 | (105 | ) | 20,153 | (153 | ) | 25,891 | (298 | ) | 0 | 0 | 25,891 | (298 | ) | |||||||||||||||||||||||||||||||
Other asset-backed securities | 2,163 | (20 | ) | 1,268 | (2 | ) | 3,431 | (22 | ) | 1,787 | (1 | ) | 0 | 0 | 1,787 | (1 | ) | |||||||||||||||||||||||||||||||
Total temporarily impaired securities | $ | 95,046 | $ | (499 | ) | $ | 39,718 | $ | (633 | ) | $ | 134,764 | $ | (1,132 | ) | $ | 253,028 | $ | (2,912 | ) | $ | 569 | $ | (7 | ) | $ | 253,597 | $ | (2,919 | ) | ||||||||||||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | $ | 1,019 | $ | (3 | ) | $ | 1,965 | $ | (77 | ) | $ | 2,984 | $ | (80 | ) |
As of December 31, 2020 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
(Amounts in thousands) | Values | Losses | Values | Losses | Values | Losses | ||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||
U.S. government & agencies | $ | 0 | $ | 0 | $ | 1,615 | $ | (8 | ) | $ | 1,615 | $ | (8 | ) | ||||||||||
Obligations of state and political subdivisions | 7,291 | (29 | ) | 0 | 0 | 7,291 | (29 | ) | ||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 68,512 | (241 | ) | 249 | (5 | ) | 68,761 | (246 | ) | |||||||||||||||
Commercial mortgage-backed securities | 5,400 | (18 | ) | 0 | 0 | 5,400 | (18 | ) | ||||||||||||||||
Other asset-backed securities | 2,106 | 0 | 930 | (1 | ) | 3,036 | (1 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 83,309 | $ | (288 | ) | $ | 2,794 | $ | (14 | ) | $ | 86,103 | $ | (302 | ) |
As of December 31, 2016 | ||||||||||||||||||||||||
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 | $ | 9,139 | $ | (83 | ) | $ | — | $ | — | $ | 9,139 | $ | (83 | ) | ||||||||||
Obligations of states and political subdivisions | 20,329 | (420 | ) | — | — | 20,329 | (420 | ) | ||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 52,345 | (1,396 | ) | 4,108 | (101 | ) | 56,453 | (1,497 | ) | |||||||||||||||
Corporate securities | 8,908 | (140 | ) | — | — | 8,908 | (140 | ) | ||||||||||||||||
Commercial mortgage-backed securities | 12,041 | (191 | ) | 2,849 | (90 | ) | 14,890 | (281 | ) | |||||||||||||||
Other asset-backed securities | 2,280 | (28 | ) | 1,346 | (59 | ) | 3,626 | (87 | ) | |||||||||||||||
Total temporarily impaired securities | $ | 105,042 | $ | (2,258 | ) | $ | 8,303 | $ | (250 | ) | $ | 113,345 | $ | (2,508 | ) | |||||||||
Held-to-maturity securities: | ||||||||||||||||||||||||
Obligations of states and political subdivisions | $ | 11,639 | $ | (425 | ) | $ | 933 | $ | (98 | ) | $ | 12,572 | $ | (523 | ) |
At SeptemberJune 30, 2017 2021 and December 31, 2016, 2020, the number of securities were in an unrealized loss position was 99113 and 119,47, respectively. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. Our investment policy requires securities at the time of purchase to be rated A3/A- or higher by Moody’s, S&P and Fitch rating agencies. Management monitors the published credit ratings of our available-for-sale investment securities portfolio for material rating or outlook changes. For all private-label securities collateralized by mortgages, management also monitors the credit characteristics of the underlying mortgages to identify potential credit losses, if any, in the portfolio. Because the decline in fair value is not due to credit quality concerns, and because we have no plans to sell the securities before the recovery of their amortized cost, and we believebecause the bankBank has the ability to hold the securities to maturity, these investments are not considered other-than-temporarily impaired.
Our Investment Policy requires that at the time of purchase, securities purchased to be rated A3/A- or higher by Moody’s, S&P and Fitch rating agencies.
The following table presents the characteristics of our securities that arewere in unrealized loss positions at SeptemberJune 30, 2017 2021 and December 31, 2016.2020.
Characteristics of securities in unrealized loss positions | ||
Available-for-sale |
| |
U.S. government & | Direct obligations of the U.S. | |
Obligations of | General obligation issuances or revenue securities | |
Residential mortgage-backed securities and collateralized mortgage | Obligations | |
|
| |
Commercial mortgage-backed | Obligations | |
Other asset-backed | Obligations issued by non-governmental issuers secured by high quality loans with good credit |
Pledged Securities
Other-Than-Temporary Impairment
For the nine months ended SeptemberAt June 30, 2017, we did not recognize any other-than-temporary impairment losses. We recognized one impairment loss of $546 thousand during the second quarter of 2016 related to our investment in AgriBank 2021 and there were no other impairment losses recognized during the year ended December 31, 2016.2020, securities with a fair value of $95.7 million and $67.8 million, respectively, were pledged as collateral to secure public fund deposits, FHLB borrowings and for other purposes as required by law.
NOTE 4. LOANS
Outstanding loan balances consistedconsisted of the following at SeptemberJune 30, 2017, 2021, and December 31, 2016.2020.
June 30, | December 31, | |||||||||||||||
(Amounts in thousands) | September 30, | December 31, | 2021 | 2020 | ||||||||||||
Loan Portfolio | 2017 | 2016 | ||||||||||||||
Loan Portfolio: | ||||||||||||||||
Commercial | $ | 147,212 | $ | 153,844 | $ | 93,650 | $ | 115,559 | ||||||||
Paycheck Protection Program ("PPP") | 59,058 | 130,814 | ||||||||||||||
Commercial real estate: | ||||||||||||||||
Real estate - construction and land development | 14,700 | 36,792 | ||||||||||||||
Real estate - commercial non-owner occupied | 333,766 | 292,615 | ||||||||||||||
Real estate - commercial owner occupied | 183,424 | 167,335 | ||||||||||||||
Construction and land development | 30,494 | 44,549 | ||||||||||||||
Non-owner occupied | 626,819 | 550,020 | ||||||||||||||
Owner occupied | 168,296 | 172,967 | ||||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - Individual Tax Identification Number (“ITIN”) | 42,063 | 45,566 | ||||||||||||||
Real estate - residential - 1-4 family mortgage | 21,119 | 20,425 | ||||||||||||||
Real estate - residential - equity lines | 31,158 | 35,953 | ||||||||||||||
Individual Tax Identification Number (“ITIN”) | 26,912 | 29,035 | ||||||||||||||
1-4 family mortgage | 50,259 | 55,925 | ||||||||||||||
Equity lines | 17,827 | 18,894 | ||||||||||||||
Consumer and other | 51,432 | 51,681 | 17,430 | 21,969 | ||||||||||||
Gross loans | 824,874 | 804,211 | 1,090,745 | 1,139,732 | ||||||||||||
Deferred fees and costs | 1,770 | 1,324 | 551 | 229 | ||||||||||||
Loans, net of deferred fees and costs | 826,644 | 805,535 | 1,091,296 | 1,139,961 | ||||||||||||
Allowance for loan and lease losses | (11,692 | ) | (11,544 | ) | (17,194 | ) | (16,910 | ) | ||||||||
Net loans | $ | 814,952 | $ | 793,991 | $ | 1,074,102 | $ | 1,123,051 |
Gross loan balances in the table above include discounts on purchased loans and fair value adjustments made to acquired loans using the acquisition method of accounting.
Discounts on purchased loans - Gross loan balances include net purchase discounts of $680 thousand and $879 thousand as of June 30, 2021, and December 31, 2020, respectively. When we purchase loans, they are typically purchased at a discount to enhance yield and compensate for credit risk. We have no purchased credit impaired loans as of June 30, 2021, and December 31, 2020.
Fair value adjustment -Gross loan balances in the table above include a net purchase discountsfair value discount of $2.9 million as of September$694 thousand and $920 thousand at June 30, 2017, 2021 and December 31, 2016.2020, respectively, for loans acquired in conjunction with our acquisition of Merchants National Bank of Sacramento during the first quarter of 2019. We recorded $115 thousand and $216 thousand in accretion of the discount for these loans during the three months ended June 30, 2021 and 2020, respectively. We recorded $225 thousand and $379 thousand in accretion of the discount for these loans during the six months ended June 30, 2021 and 2020, respectively.
An age analysisPledged Loans
Certain loans are pledged as collateral for lines of credit with the FHLB and the Federal Reserve Bank. Pledged loans totaled $616.8 million and $523.5 million at June 30, 2021 and December 31, 2020, respectively.
Short-Term Loan Modifications
At June 30, 2021, payment deferrals were extant for 16 loans totaling $4.1 million compared to 82 loans totaling $9.5 million at December 31, 2020. In accordance with the CARES Act and regulatory guidance, these modified loans are not troubled debt restructurings and are not considered to be past due or non-performing. We have granted payment deferrals ranging from one to six months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19. For some borrowers who were initially granted a payment deferral of less than six months, we have granted an additional payment deferral period on a case-by-case basis. Without these deferrals, past due loan totals might have been higher at June 30, 2021.
Past Due Loans
Past due loans (gross), segregated by class,loan portfolio were as follows, as of SeptemberJune 30, 2017, 2021, and December 31, 2016, was as follows.2020.
Greater | Recorded | |||||||||||||||||||||||||||
(Amounts in thousands) | 30-59 | 60-89 | Than 90 | Investment > | ||||||||||||||||||||||||
Past Due Loans at | Days Past | Days Past | Days Past | Total Past | 90 Days and | |||||||||||||||||||||||
September 30, 2017 | Due | Due | Due | Due | Current | Total | Accruing | |||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 147,212 | $ | 147,212 | $ | — | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Real estate - construction and land development | — | — | — | — | 14,700 | 14,700 | — | |||||||||||||||||||||
Real estate - commercial non-owner occupied | — | — | — | — | 333,766 | 333,766 | — | |||||||||||||||||||||
Real estate - commercial owner occupied | 142 | — | — | 142 | 183,282 | 183,424 | — | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Real estate - residential - ITIN | 458 | 77 | 672 | 1,207 | 40,856 | 42,063 | — | |||||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 125 | 196 | — | 321 | 20,798 | 21,119 | — | |||||||||||||||||||||
Real estate - residential - equity lines | 113 | 46 | — | 159 | 30,999 | 31,158 | — | |||||||||||||||||||||
Consumer and other | 202 | 80 | — | 282 | 51,150 | 51,432 | — | |||||||||||||||||||||
Total | $ | 1,040 | $ | 399 | $ | 672 | $ | 2,111 | $ | 822,763 | $ | 824,874 | $ | — |
Recorded | ||||||||||||||||||||||||||||
30-59 | 60-89 | 90 or Greater | Investment > | |||||||||||||||||||||||||
Days Past | Days Past | Days Past | Total Past | 90 Days and | ||||||||||||||||||||||||
(Amounts in thousands) | Due | Due | Due | Due | Current | Total | Accruing | |||||||||||||||||||||
Past Due Loans at June 30, 2021 | ||||||||||||||||||||||||||||
Commercial | $ | 89 | $ | 0 | $ | 1,413 | $ | 1,502 | $ | 92,148 | $ | 93,650 | $ | 0 | ||||||||||||||
PPP | 0 | 0 | 0 | 0 | 59,058 | 59,058 | 0 | |||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction and land development | 0 | 0 | 0 | 0 | 30,494 | 30,494 | 0 | |||||||||||||||||||||
Non-owner occupied | 0 | 0 | 0 | 0 | 626,819 | 626,819 | 0 | |||||||||||||||||||||
Owner occupied | 0 | 0 | 0 | 0 | 168,296 | 168,296 | 0 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
ITIN | 171 | 0 | 122 | 293 | 26,619 | 26,912 | 0 | |||||||||||||||||||||
1-4 family mortgage | 0 | 0 | 0 | 0 | 50,259 | 50,259 | 0 | |||||||||||||||||||||
Equity lines | 0 | 0 | 0 | 0 | 17,827 | 17,827 | 0 | |||||||||||||||||||||
Consumer and other | 62 | 17 | 0 | 79 | 17,351 | 17,430 | 0 | |||||||||||||||||||||
Total | $ | 322 | $ | 17 | $ | 1,535 | $ | 1,874 | $ | 1,088,871 | $ | 1,090,745 | $ | 0 |
Recorded | ||||||||||||||||||||||||||||
30-59 | 60-89 | 90 or Greater | Investment > | |||||||||||||||||||||||||
Days Past | Days Past | Days Past | Total Past | 90 Days and | ||||||||||||||||||||||||
(Amounts in thousands) | Due | Due | Due | Due | Current | Total | Accruing | |||||||||||||||||||||
Past Due Loans at December 31, 2020 | ||||||||||||||||||||||||||||
Commercial | $ | 0 | $ | 0 | $ | 1,413 | $ | 1,413 | $ | 114,146 | $ | 115,559 | $ | 0 | ||||||||||||||
PPP | 0 | 0 | 0 | 0 | 130,814 | 130,814 | 0 | |||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction and land development | 0 | 0 | 0 | 0 | 44,549 | 44,549 | 0 | |||||||||||||||||||||
Non-owner occupied | 640 | 0 | 0 | 640 | 549,380 | 550,020 | 0 | |||||||||||||||||||||
Owner occupied | 0 | 0 | 2,993 | 2,993 | 169,974 | 172,967 | 0 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
ITIN | 40 | 0 | 169 | 209 | 28,826 | 29,035 | 0 | |||||||||||||||||||||
1-4 family mortgage | 0 | 0 | 0 | 0 | 55,925 | 55,925 | 0 | |||||||||||||||||||||
Equity lines | 60 | 0 | 0 | 60 | 18,834 | 18,894 | 0 | |||||||||||||||||||||
Consumer and other | 82 | 17 | 0 | 99 | 21,870 | 21,969 | 0 | |||||||||||||||||||||
Total | $ | 822 | $ | 17 | $ | 4,575 | $ | 5,414 | $ | 1,134,318 | $ | 1,139,732 | $ | 0 |
Greater | Recorded | |||||||||||||||||||||||||||
(Amounts in thousands) | 30-59 | 60-89 | Than 90 | Investment > | ||||||||||||||||||||||||
Past Due Loans at | Days Past | Days Past | Days Past | Total Past | 90 Days and | |||||||||||||||||||||||
December 31, 2016 | Due | Due | Due | Due | Current | Total | Accruing | |||||||||||||||||||||
Commercial | $ | 51 | $ | — | $ | — | $ | 51 | $ | 153,793 | $ | 153,844 | $ | — | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Real estate - construction and land development | — | — | — | — | 36,792 | 36,792 | — | |||||||||||||||||||||
Real estate - commercial non-owner occupied | — | — | 1,196 | 1,196 | 291,419 | 292,615 | — | |||||||||||||||||||||
Real estate - commercial owner occupied | — | — | 114 | 114 | 167,221 | 167,335 | — | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Real estate - residential - ITIN | 567 | 80 | 1,149 | 1,796 | 43,770 | 45,566 | — | |||||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 147 | — | 856 | 1,003 | 19,422 | 20,425 | — | |||||||||||||||||||||
Real estate - residential - equity lines | 68 | 36 | 48 | 152 | 35,801 | 35,953 | — | |||||||||||||||||||||
Consumer and other | 166 | 70 | 11 | 247 | 51,434 | 51,681 | — | |||||||||||||||||||||
Total | $ | 999 | $ | 186 | $ | 3,374 | $ | 4,559 | $ | 799,652 | $ | 804,211 | $ | — |
Nonaccrual Loans
Nonaccrual loans, segregated by loan class,portfolio, were as follows as of SeptemberJune 30, 2017 2021 and December 31, 2016.2020.
(Amounts in thousands) | September 30, | December 31, | ||||||||||||||
Nonaccrual Loans | 2017 | 2016 | ||||||||||||||
June 30, | December 31, | |||||||||||||||
(Amounts in thousands) | 2021 | 2020 | ||||||||||||||
Nonaccrual Loans: | ||||||||||||||||
Commercial | $ | 2,309 | $ | 2,749 | $ | 1,506 | $ | 1,535 | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - commercial non-owner occupied | — | 1,196 | ||||||||||||||
Real estate - commercial owner occupied | 617 | 784 | ||||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 3,201 | 3,576 | ||||||||||||||
Real estate - residential - 1-4 family mortgage | 626 | 1,914 | ||||||||||||||
Real estate - residential - equity lines | 815 | 917 | ||||||||||||||
Consumer and other | 37 | 250 | ||||||||||||||
Total | $ | 7,605 | $ | 11,386 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Non-owner occupied | 606 | 640 | ||||||||||||||
Owner occupied | 89 | 3,094 | ||||||||||||||
Residential real estate: | ||||||||||||||||
ITIN | 1,463 | 1,585 | ||||||||||||||
1-4 family mortgage | 133 | 141 | ||||||||||||||
Consumer and other | 16 | 18 | ||||||||||||||
Total | $ | 3,813 | $ | 7,013 |
Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, as shown in the following table.
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Nonaccrual Loans: | ||||||||||||||||
Interest income, net of tax | $ | 46 | $ | 84 | $ | 89 | $ | 140 |
Impaired Loans
A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. The following tables summarize impaired loans by loan classportfolio as of SeptemberJune 30, 2017, 2021 and December 31, 2016.2020.
As of June 30, 2021 | ||||||||||||||||||||||||
As of September 30, 2017 | Unpaid | |||||||||||||||||||||||
Unpaid | Recorded | Principal | Related | |||||||||||||||||||||
(Amounts in thousands) | Recorded | Principal | Related | Investment | Balance | Allowance | ||||||||||||||||||
Impaired Loans | Investment | Balance | Allowance | |||||||||||||||||||||
Impaired Loans: | ||||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial | $ | 1,322 | $ | 2,170 | $ | — | $ | 1,541 | $ | 1,899 | $ | — | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Real estate - commercial non-owner occupied | — | — | — | |||||||||||||||||||||
Real estate - commercial owner occupied | 617 | 671 | — | |||||||||||||||||||||
Non-owner occupied | 606 | 652 | — | |||||||||||||||||||||
Owner occupied | 89 | 93 | — | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Real estate - residential - ITIN | 6,347 | 8,111 | — | |||||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 626 | 1,130 | — | |||||||||||||||||||||
Real estate - residential - equity lines | 815 | 1,316 | — | |||||||||||||||||||||
ITIN | 4,836 | 6,206 | — | |||||||||||||||||||||
1-4 family mortgage | 134 | 197 | — | |||||||||||||||||||||
Total with no related allowance recorded | $ | 9,727 | $ | 13,398 | $ | — | $ | 7,206 | $ | 9,047 | $ | — | ||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial | $ | 1,658 | $ | 1,701 | $ | 453 | $ | 395 | $ | 395 | $ | 99 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Real estate - commercial non-owner occupied | 805 | 805 | 79 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Real estate - residential - ITIN | 1,509 | 1,549 | 154 | |||||||||||||||||||||
Real estate - residential - equity lines | 441 | 441 | 220 | |||||||||||||||||||||
Equity lines | 112 | 112 | 56 | |||||||||||||||||||||
Consumer and other | 37 | 37 | 12 | 16 | 16 | 4 | ||||||||||||||||||
Total with an allowance recorded | $ | 4,450 | $ | 4,533 | $ | 918 | $ | 523 | $ | 523 | $ | 159 | ||||||||||||
By loan class: | ||||||||||||||||||||||||
By loan portfolio: | ||||||||||||||||||||||||
Commercial | $ | 2,980 | $ | 3,871 | $ | 453 | $ | 1,936 | $ | 2,294 | $ | 99 | ||||||||||||
Commercial real estate | 1,422 | 1,476 | 79 | 695 | 745 | 0 | ||||||||||||||||||
Residential real estate | 9,738 | 12,547 | 374 | 5,082 | 6,515 | 56 | ||||||||||||||||||
Consumer and other | 37 | 37 | 12 | 16 | 16 | 4 | ||||||||||||||||||
Total impaired loans | $ | 14,177 | $ | 17,931 | $ | 918 | $ | 7,729 | $ | 9,570 | $ | 159 |
As of December 31, 2016 | ||||||||||||
(Amounts in thousands) | Recorded | Principal | Related | |||||||||
Impaired Loans | Investment | Balance | Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,573 | $ | 2,438 | $ | — | ||||||
Commercial real estate: | ||||||||||||
Real estate - commercial non-owner occupied | 1,196 | 1,196 | — | |||||||||
Real estate - commercial owner occupied | 784 | 841 | — | |||||||||
Residential real estate: | ||||||||||||
Real estate - residential - ITIN | 6,047 | 7,685 | — | |||||||||
Real estate - residential - 1-4 family mortgage | 1,914 | 2,722 | — | |||||||||
Real estate - residential - equity lines | 917 | 1,342 | — | |||||||||
Consumer and other | 210 | 216 | — | |||||||||
Total with no related allowance recorded | $ | 12,641 | $ | 16,440 | $ | — | ||||||
With an allowance recorded: | ||||||||||||
Commercial | $ | 1,952 | $ | 1,957 | $ | 641 | ||||||
Commercial real estate: | ||||||||||||
Real estate - commercial non-owner occupied | 808 | 808 | 21 | |||||||||
Real estate - commercial owner occupied | 337 | 337 | 64 | |||||||||
Residential real estate: | ||||||||||||
Real estate - residential - ITIN | 2,562 | 2,617 | 494 | |||||||||
Real estate - residential - equity lines | 454 | 454 | 227 | |||||||||
Consumer and other | 40 | 40 | 14 | |||||||||
Total with an allowance recorded | $ | 6,153 | $ | 6,213 | $ | 1,461 | ||||||
By loan class: | ||||||||||||
Commercial | $ | 3,525 | $ | 4,395 | $ | 641 | ||||||
Commercial real estate | 3,125 | 3,182 | 85 | |||||||||
Residential real estate | 11,894 | 14,820 | 721 | |||||||||
Consumer and other | 250 | 256 | 14 | |||||||||
Total impaired loans | $ | 18,794 | $ | 22,653 | $ | 1,461 |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
As of December 31, 2020 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
(Amounts in thousands) | Investment | Balance | Allowance | |||||||||
Impaired Loans: | ||||||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,577 | $ | 1,932 | $ | — | ||||||
Commercial real estate: | ||||||||||||
Non-owner occupied | 640 | 654 | — | |||||||||
Owner occupied | 3,094 | 3,206 | — | |||||||||
Residential real estate: | ||||||||||||
ITIN | 4,876 | 6,500 | — | |||||||||
1-4 family mortgage | 141 | 202 | — | |||||||||
Total with no related allowance recorded | $ | 10,328 | $ | 12,494 | $ | — | ||||||
With an allowance recorded: | ||||||||||||
Commercial | $ | 456 | $ | 456 | $ | 114 | ||||||
Residential real estate: | ||||||||||||
ITIN | 175 | 175 | 11 | |||||||||
Equity lines | 126 | 126 | 63 | |||||||||
Consumer and other | 18 | 18 | 4 | |||||||||
Total with an allowance recorded | $ | 775 | $ | 775 | $ | 192 | ||||||
By loan portfolio: | ||||||||||||
Commercial | $ | 2,033 | $ | 2,388 | $ | 114 | ||||||
Commercial real estate | 3,734 | 3,860 | 0 | |||||||||
Residential real estate | 5,318 | 7,003 | 74 | |||||||||
Consumer and other | 18 | 18 | 4 | |||||||||
Total impaired loans | $ | 11,103 | $ | 13,269 | $ | 192 |
The following tabletables summarizes our average recorded investment and interest income recognized on impaired loans by loan classportfolio for the three and ninesix months ended SeptemberJune 30, 2017 2021 and 2016.2020.
For the Three Months Ended | ||||||||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | Average | Interest | Average | Interest | |||||||||||||||||||||||||||
Average | Interest | Average | Interest | Recorded | Income | Recorded | Income | |||||||||||||||||||||||||
(Amounts in thousands) | Recorded | Income | Recorded | Income | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||||
Average Recorded Investment and Interest Income | Investment | Recognized | Investment | Recognized | ||||||||||||||||||||||||||||
Average Recorded Investment and Interest Income: | ||||||||||||||||||||||||||||||||
Commercial | $ | 3,140 | $ | 9 | $ | 2,601 | $ | 10 | $ | 1,972 | $ | 7 | $ | 613 | $ | 9 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Real estate - commercial non-owner occupied | 1,381 | 12 | 2,010 | 12 | ||||||||||||||||||||||||||||
Real estate - commercial owner occupied | 624 | — | 1,147 | 6 | ||||||||||||||||||||||||||||
Non-owner occupied | 613 | 0 | 926 | 0 | ||||||||||||||||||||||||||||
Owner occupied | 91 | 0 | 3,066 | 0 | ||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||
Real estate - residential - ITIN | 7,907 | 40 | 8,831 | 42 | ||||||||||||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 634 | — | 1,808 | — | ||||||||||||||||||||||||||||
Real estate - residential - equity lines | 1,291 | 5 | 1,661 | 7 | ||||||||||||||||||||||||||||
ITIN | 4,869 | 32 | 5,440 | 34 | ||||||||||||||||||||||||||||
1-4 family mortgage | 135 | 0 | 181 | 0 | ||||||||||||||||||||||||||||
Equity lines | 115 | 2 | 222 | 4 | ||||||||||||||||||||||||||||
Consumer and other | 38 | — | 257 | — | 16 | 0 | 38 | 0 | ||||||||||||||||||||||||
Total | $ | 15,015 | $ | 66 | $ | 18,315 | $ | 77 | $ | 7,811 | $ | 41 | $ | 10,486 | $ | 47 |
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
(Amounts in thousands) | Recorded | Income | Recorded | Income | ||||||||||||
Average Recorded Investment and Interest Income | Investment | Recognized | Investment | Recognized | ||||||||||||
Commercial | $ | 3,249 | $ | 29 | $ | 2,551 | $ | 14 | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - commercial non-owner occupied | 1,796 | 35 | 2,015 | 35 | ||||||||||||
Real estate - commercial owner occupied | 692 | 2 | 1,333 | 19 | ||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 8,080 | 120 | 9,037 | 124 | ||||||||||||
Real estate - residential - 1-4 family mortgage | 1,155 | — | 1,774 | — | ||||||||||||
Real estate - residential - equity lines | 1,330 | 14 | 1,558 | 20 | ||||||||||||
Consumer and other | 83 | — | 133 | — | ||||||||||||
Total | $ | 16,385 | $ | 200 | $ | 18,401 | $ | 212 |
For the Six Months Ended | ||||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
Recorded | Income | Recorded | Income | |||||||||||||
(Amounts in thousands) | Investment | Recognized | Investment | Recognized | ||||||||||||
Average Recorded Investment and Interest Income: | ||||||||||||||||
Commercial | $ | 1,996 | $ | 14 | $ | 626 | $ | 17 | ||||||||
Commercial real estate: | ||||||||||||||||
Non-owner occupied | 622 | 0 | 463 | 0 | ||||||||||||
Owner occupied | 1,091 | 0 | 3,084 | 0 | ||||||||||||
Residential real estate: | ||||||||||||||||
ITIN | 4,926 | 64 | 5,698 | 72 | ||||||||||||
1-4 family mortgage | 137 | 0 | 184 | 0 | ||||||||||||
Equity lines | 119 | 4 | 225 | 7 | ||||||||||||
Consumer and other | 17 | 0 | 39 | 0 | ||||||||||||
Total | $ | 8,908 | $ | 82 | $ | 10,319 | $ | 96 |
The impaired loans on which these interest income amounts were recognized are primarily accruing troubled debt restructured loans. Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly,, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement.
At SeptemberThe recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $106 thousand and $80 thousand at June 30, 2017 2021 and December 31, 2016, 2020, respectively.
Troubled Debt Restructurings
As of June 30, 2021, we had $5.8 million in troubled debt restructurings compared to $6.1 million as of December 31, 2020. Troubled debt restructurings represented 0.53% of gross loans as of June 30, 2021 and December 31, 2020. As of June 30, 2021, 89 loans were classified as troubled debt restructurings, of which 88 were performing according to their restructured terms. Of the 89 troubled debt restructurings, 81 were ITIN loans totaling $4.6 million which are serviced by a third party. At June 30, 2021 and December 31, 2020, impaired loans of $6.6$3.9 million and $7.1$4.1 million, respectively, were classified as performing troubled debt restructured loans.
For a troubled debt restructured loan to be on accrual status, the loan’sloan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. As of SeptemberJune 30, 2017, 2021andDecember 31, 2020, we had one restructured commercial line of credit in nonaccrual status that had $261 thousand in available credit. We had no obligations to lend additional funds on any troubled debt restructured loans as of December 31, 2016.
As of September 30, 2017, we had $11.0 million inloans. We do not have any new troubled debt restructurings compared to $12.1 million as of December 31, 2016. As of Septemberfor the six months ended June 30, 2017, we had 118 loans that qualified as2021. There was one new troubled debt restructurings, of which 111 loans were performing accordingrestructuring on one $654 thousand commercial real estate loan during the six months ended June 30, 2020. The borrower was impacted by COVID-19 but the loan did not qualify to their restructured terms. Troubled debt restructurings represented 1.33% of gross loans as of September 30, 2017, compared to 1.50% at December 31, 2016.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)be exempt from TDR status under the new TDR guidance issued by the financial institution regulators or under the CARES Act.
The types of modifications offered can generally be described in the following categories:
Rate – A modification in which the interest rate is changed.
Maturity – A modification in which the maturity date is changed.
Payment deferral – A modification in which a portion of the principal is deferred.
Principal reduction – A modification in which a portion of the owing principal is decreased.
The following tables present the period end balances of newly restructured loans and the types of modifications that occurred during the three and ninesix months ended SeptemberJune 30, 2017 and 2016.2020.
Modification Types For the Three Months Ended June 30, 2020 | Modification Types For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||
(Amounts in thousands) | Maturity | Payment Deferral | Total | Maturity | Payment Deferral | Total | ||||||||||||||||||
Troubled Debt Restructurings: | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Non-owner occupied | $ | 0 | $ | 654 | $ | 654 | $ | 0 | $ | 654 | $ | 654 | ||||||||||||
Total | $ | 0 | $ | 654 | $ | 654 | $ | 0 | $ | 654 | $ | 654 |
For the Three Months Ended | For the Three Months Ended | |||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Rate & | |||||||||||||||||||||||||||||||||||
Troubled Debt Restructuring | Rate & Maturity | Payment Deferral | Payment Deferral | Total | Maturity | Rate & Maturity | Principal Reduction | Payment Deferral | Total | |||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 139 | $ | — | $ | — | $ | — | $ | 139 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||
Real estate - residential - ITIN | — | — | — | — | — | — | 82 | — | 82 | |||||||||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 139 | $ | — | $ | 82 | $ | — | $ | 221 |
For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Rate & | |||||||||||||||||||||||||||||||||||
Troubled Debt Restructuring | Rate & Maturity | Payment Deferral | Payment Deferral | Total | Maturity | Rate & Maturity | Principal Reduction | Payment Deferral | Total | |||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | — | $ | 139 | $ | 951 | $ | — | $ | — | $ | 1,090 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||
Real estate - residential - ITIN | — | 61 | — | 61 | — | — | 82 | 118 | 200 | |||||||||||||||||||||||||||
Total | $ | — | $ | 61 | $ | — | $ | 61 | $ | 139 | $ | 951 | $ | 82 | $ | 118 | $ | 1,290 |
For the three and nine months ended September 30, 2017 and 2016, the tables below provide information regarding the number of loans where the contractual terms have been restructured.
For the Three Months Ended September 30, 2017 | For the Three Months Ended September 30, 2016 | |||||||||||||||||||||||
Pre- | Post- | Pre- | Post- | |||||||||||||||||||||
Modification | Modification | Modification | Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
(Amounts in thousands) | Number of | Recorded | Recorded | Number of | Recorded | Recorded | ||||||||||||||||||
Troubled Debt Restructurings | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Commercial | — | $ | — | $ | — | 1 | $ | 135 | $ | 147 | ||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Real estate - residential - ITIN | — | — | — | 1 | 97 | 82 | ||||||||||||||||||
Total | — | $ | — | $ | — | 2 | $ | 232 | $ | 229 |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
For the Nine Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
Pre- | Post- | Pre- | Post- | |||||||||||||||||||||
Modification | Modification | Modification | Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
(Amounts in thousands) | Number of | Recorded | Recorded | Number of | Recorded | Recorded | ||||||||||||||||||
Troubled Debt Restructurings | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Commercial | — | $ | — | $ | — | 2 | $ | 1,262 | $ | 1,273 | ||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Real estate - residential - ITIN | 1 | 81 | 61 | 2 | 267 | 252 | ||||||||||||||||||
Total | 1 | $ | 81 | $ | 61 | 4 | $ | 1,529 | $ | 1,525 |
For the Three Months Ended June 30, 2020 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||
Pre- | Post- | Pre- | Post- | |||||||||||||||||||||
Modification | Modification | Modification | Modification | |||||||||||||||||||||
Outstanding | Outstanding | Outstanding | Outstanding | |||||||||||||||||||||
Number of | Recorded | Recorded | Number of | Recorded | Recorded | |||||||||||||||||||
(Dollars in thousands) | Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||||||||
Troubled Debt Restructurings: | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Non-owner occupied | 1 | $ | 654 | $ | 654 | 1 | $ | 654 | $ | 654 | ||||||||||||||
Total | 1 | $ | 654 | $ | 654 | 1 | $ | 654 | $ | 654 |
There were no0 loans modified as a troubled debt restructuring duringwithin the 12previous twelve months ended September 30, 2017 and 2016, for which there was a subsequent payment default (after restructuring) during the three and ninesix months ended SeptemberJune 30, 2017 and 2016.2021 or 2020.
The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $374 thousand at September 30, 2017.Performing and Nonperforming Loans
We define a performing loan as a loan where any installment of principal or interest is not90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, or is 90 days past due and still accruing, or has been restructured and does not comply with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain.
Performing and nonperforming loans, segregated by class of loans,loan portfolio, were as follows at SeptemberJune 30, 2017 2021 and December 31, 2016.2020.
(Amounts in thousands) | September 30, 2017 | |||||||||||
Performing and Nonperforming Loans | Performing | Nonperforming | Total | |||||||||
Commercial | $ | 144,903 | $ | 2,309 | $ | 147,212 | ||||||
Commercial real estate: | ||||||||||||
Real estate - construction and land development | 14,700 | — | 14,700 | |||||||||
Real estate - commercial non-owner occupied | 333,766 | — | 333,766 | |||||||||
Real estate - commercial owner occupied | 182,807 | 617 | 183,424 | |||||||||
Residential real estate: | ||||||||||||
Real estate - residential - ITIN | 38,862 | 3,201 | 42,063 | |||||||||
Real estate - residential - 1-4 family mortgage | 20,493 | 626 | 21,119 | |||||||||
Real estate - residential - equity lines | 30,343 | 815 | 31,158 | |||||||||
Consumer and other | 51,395 | 37 | 51,432 | |||||||||
Total | $ | 817,269 | $ | 7,605 | $ | 824,874 |
June 30, 2021 | ||||||||||||
(Amounts in thousands) | Performing | Nonperforming | Total | |||||||||
Performing and Nonperforming Loans: | ||||||||||||
Commercial | $ | 92,144 | $ | 1,506 | $ | 93,650 | ||||||
PPP | 59,058 | 0 | 59,058 | |||||||||
Commercial real estate: | ||||||||||||
Construction and land development | 30,494 | 0 | 30,494 | |||||||||
Non-owner occupied | 626,213 | 606 | 626,819 | |||||||||
Owner occupied | 168,207 | 89 | 168,296 | |||||||||
Residential real estate: | ||||||||||||
ITIN | 25,449 | 1,463 | 26,912 | |||||||||
1-4 family mortgage | 50,126 | 133 | 50,259 | |||||||||
Equity lines | 17,827 | 0 | 17,827 | |||||||||
Consumer and other | 17,414 | 16 | 17,430 | |||||||||
Total | $ | 1,086,932 | $ | 3,813 | $ | 1,090,745 |
December 31, 2020 | ||||||||||||
(Amounts in thousands) | Performing | Nonperforming | Total | |||||||||
Performing and Nonperforming Loans: | ||||||||||||
Commercial | $ | 114,024 | $ | 1,535 | $ | 115,559 | ||||||
PPP | 130,814 | 0 | 130,814 | |||||||||
Commercial real estate: | ||||||||||||
Construction and land development | 44,549 | 0 | 44,549 | |||||||||
Non-owner occupied | 549,380 | 640 | 550,020 | |||||||||
Owner occupied | 169,873 | 3,094 | 172,967 | |||||||||
Residential real estate: | ||||||||||||
ITIN | 27,450 | 1,585 | 29,035 | |||||||||
1-4 family mortgage | 55,784 | 141 | 55,925 | |||||||||
Equity lines | 18,894 | 0 | 18,894 | |||||||||
Consumer and other | 21,951 | 18 | 21,969 | |||||||||
Total | $ | 1,132,719 | $ | 7,013 | $ | 1,139,732 |
(Amounts in thousands) | December 31, 2016 | |||||||||||
Performing and Nonperforming Loans | Performing | Nonperforming | Total | |||||||||
Commercial | $ | 151,095 | $ | 2,749 | $ | 153,844 | ||||||
Commercial real estate: | ||||||||||||
Real estate - construction and land development | 36,792 | — | 36,792 | |||||||||
Real estate - commercial non-owner occupied | 291,419 | 1,196 | 292,615 | |||||||||
Real estate - commercial owner occupied | 166,551 | 784 | 167,335 | |||||||||
Residential real estate: | ||||||||||||
Real estate - residential - ITIN | 41,990 | 3,576 | 45,566 | |||||||||
Real estate - residential - 1-4 family mortgage | 18,511 | 1,914 | 20,425 | |||||||||
Real estate - residential - equity lines | 35,036 | 917 | 35,953 | |||||||||
Consumer and other | 51,431 | 250 | 51,681 | |||||||||
Total | $ | 792,825 | $ | 11,386 | $ | 804,211 |
Credit Quality Ratings
Management assigns a credit quality rating (risk grade) to each loan. The foundation or primary factor in determining the appropriate credit quality rating is the degree of a debtor’sdebtor’s willingness and ability to perform as agreed. In conjunction with evaluating the performing versus nonperforming nature of our loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (rating) for each loan class:
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)portfolio:
Pass Grade: A Pass loan is a strong credit with no existing or known weaknesses that may require management’s close attention. Some pass loans require short-term enhanced monitoring to determine when the credit relationship would merit either an upgrade or a downgrade. Loans classified as Pass Grade specifically demonstrate:
● | Strong Cash Flows – borrower’s cash flows must meet or exceed our minimum debt service coverage ratio. |
● | Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin. |
● | Qualitative Factors – in addition to meeting our minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a Pass Grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character. |
Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral.
Watch Grade: The credit is acceptable but the borrower has experienced a temporary setback or adverse information has been received, and may exhibit one or more of the characteristics shown in the list below. This risk grade could apply to credits on a temporary basis pending a full review. Credits with this risk grade will require more handling time and increased management. The list below contains characteristics of this risk grade, but individually do not automatically cause the loan to be assigned a Watch Grade.
● | The primary source of repayment may be weakening causing greater reliance on the secondary source of repayment or |
● | The primary source of repayment is adequate, but the secondary source of repayment |
|
|
● | In-depth financial analysis would compare to the lower quartile in two or more of the major components of the |
● |
|
|
● | Management decisions may be called into question |
● | Delinquencies in bank credits or other financial/trade creditors |
● |
|
|
|
● | Significant change in management/ownership |
Special Mention Grade: Credits in this grade are potentially weak and deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the credit. Special Mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. The list below exhibits the characteristics of this grade, but individually do not automatically cause the borrower to be assigned a grade of Special Mention:
● |
|
|
● | Credit is structured in a manner in which the timing of the repayment source does not match the payment schedule or maturity, materially jeopardizing repayment |
● | Current economic or market conditions exist which mayaffect the borrower's ability to perform or affect the |
● | Adverse trends in the borrower's operations or continued deterioration in the |
● | The borrower is less than cooperative or unable to produce current and adequate financial information |
Substandard Grade: A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be graded as impaired.
The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade:
● | Sustained or substantial deteriorating financial trends, |
● |
|
|
|
● | 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, |
● |
|
|
|
● | Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the |
● | Fraud committed by the borrower, |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
● |
|
● |
|
● |
|
● |
|
| Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the |
Doubtful Grade: A Doubtful loan has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to:
● | Proposed merger(s), |
● |
|
● |
|
● |
|
|
|
● | Refinancing plans. |
Generally, a Doubtful Grade does not remain outstanding for a period greater than six months. Within six months, the pending events should have been resolved. Based on resolution of the pending events, the credit grade should have improved or the principalprincipal balance charged against the ALLL.
The following table summarizestables summarize loans by internal risk grades and by loan classportfolio as of SeptemberJune 30, 2017 2021 and December 31, 2016. 2020.
As of September 30, 2017 | As of June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Special | Special | |||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Pass | Watch | Mention | Substandard | Doubtful | Total | Pass | Watch | Mention | Substandard | Doubtful | Total | ||||||||||||||||||||||||||||||||||||
Loan Portfolio: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 112,623 | $ | 27,420 | $ | 2,633 | $ | 4,536 | $ | — | $ | 147,212 | $ | 82,919 | $ | 8,667 | $ | 0 | $ | 2,064 | $ | 0 | $ | 93,650 | ||||||||||||||||||||||||
PPP | 59,058 | 0 | 0 | 0 | 0 | 59,058 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - construction and land development | 14,700 | — | — | — | — | 14,700 | ||||||||||||||||||||||||||||||||||||||||||
Real estate - commercial non-owner occupied | 322,650 | 9,332 | 395 | 1,389 | — | 333,766 | ||||||||||||||||||||||||||||||||||||||||||
Real estate - commercial owner occupied | 171,315 | 10,027 | 142 | 1,940 | — | 183,424 | ||||||||||||||||||||||||||||||||||||||||||
Construction and land development | 30,183 | 114 | 0 | 197 | 0 | 30,494 | ||||||||||||||||||||||||||||||||||||||||||
Non-owner occupied | 538,752 | 48,037 | 33,285 | 6,745 | 0 | 626,819 | ||||||||||||||||||||||||||||||||||||||||||
Owner occupied | 150,116 | 11,372 | 0 | 6,808 | 0 | 168,296 | ||||||||||||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - residential - ITIN | 35,480 | — | — | 6,583 | — | 42,063 | ||||||||||||||||||||||||||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 19,696 | 797 | — | 626 | — | 21,119 | ||||||||||||||||||||||||||||||||||||||||||
Real estate - residential - equity lines | 27,922 | 2,015 | 65 | 1,156 | — | 31,158 | ||||||||||||||||||||||||||||||||||||||||||
ITIN | 23,605 | 0 | 0 | 3,307 | 0 | 26,912 | ||||||||||||||||||||||||||||||||||||||||||
1-4 family mortgage | 49,017 | 0 | 0 | 1,242 | 0 | 50,259 | ||||||||||||||||||||||||||||||||||||||||||
Equity lines | 17,827 | 0 | 0 | 0 | 0 | 17,827 | ||||||||||||||||||||||||||||||||||||||||||
Consumer and other | 51,369 | — | 3 | 60 | — | 51,432 | 17,414 | 0 | 0 | 16 | 0 | 17,430 | ||||||||||||||||||||||||||||||||||||
Total | $ | 755,755 | $ | 49,591 | $ | 3,238 | $ | 16,290 | $ | — | $ | 824,874 | $ | 968,891 | $ | 68,190 | $ | 33,285 | $ | 20,379 | $ | 0 | $ | 1,090,745 |
As of December 31, 2020 | ||||||||||||||||||||||||
Special | ||||||||||||||||||||||||
(Amounts in thousands) | Pass | Watch | Mention | Substandard | Doubtful | Total | ||||||||||||||||||
Loan Portfolio: | ||||||||||||||||||||||||
Commercial | $ | 102,067 | $ | 8,549 | $ | 540 | $ | 4,403 | $ | 0 | $ | 115,559 | ||||||||||||
PPP | 130,814 | 0 | 0 | 0 | 0 | 130,814 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction and land development | 41,767 | 2,782 | 0 | 0 | 0 | 44,549 | ||||||||||||||||||
Non-owner occupied | 456,725 | 79,845 | 12,810 | 640 | 0 | 550,020 | ||||||||||||||||||
Owner occupied | 152,623 | 13,945 | 414 | 5,985 | 0 | 172,967 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
ITIN | 25,558 | 0 | 0 | 3,477 | 0 | 29,035 | ||||||||||||||||||
1-4 family mortgage | 54,288 | 195 | 0 | 1,442 | 0 | 55,925 | ||||||||||||||||||
Equity lines | 18,894 | 0 | 0 | 0 | 0 | 18,894 | ||||||||||||||||||
Consumer and other | 21,952 | 0 | 0 | 17 | 0 | 21,969 | ||||||||||||||||||
Total | $ | 1,004,688 | $ | 105,316 | $ | 13,764 | $ | 15,964 | $ | 0 | $ | 1,139,732 |
As of December 31, 2016 | ||||||||||||||||||||||||
Special | ||||||||||||||||||||||||
(Amounts in thousands) | Pass | Watch | Mention | Substandard | Doubtful | Total | ||||||||||||||||||
Commercial | $ | 124,089 | $ | 21,684 | $ | 4,570 | $ | 3,501 | $ | — | $ | 153,844 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Real estate - construction and land development | 36,782 | 10 | — | — | — | 36,792 | ||||||||||||||||||
Real estate - commercial non-owner occupied | 284,099 | 5,398 | 1,321 | 1,797 | — | 292,615 | ||||||||||||||||||
Real estate - commercial owner occupied | 157,064 | 7,301 | 496 | 2,474 | — | 167,335 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Real estate - residential - ITIN | 38,279 | — | — | 7,287 | — | 45,566 | ||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 17,696 | 815 | — | 1,914 | — | 20,425 | ||||||||||||||||||
Real estate - residential - equity lines | 33,828 | 858 | — | 1,267 | — | 35,953 | ||||||||||||||||||
Consumer and other | 51,398 | 2 | — | 281 | — | 51,681 | ||||||||||||||||||
Total | $ | 743,235 | $ | 36,068 | $ | 6,387 | $ | 18,521 | $ | — | $ | 804,211 |
Allowance for Loan and Lease Losses
The following tables summarize the ALLL by portfolio for the three and ninesix months ended SeptemberJune 30, 2017 2021 and 2016.2020.
For the Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Paycheck | ||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended September 30, 2017 | Protection | Commercial | Residential | |||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Residential | Commercial | Program (1) | Real Estate | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||||||
ALLL by Loan Class | Commercial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||
ALLL by Loan Portfolio: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,850 | $ | 6,072 | $ | 1,197 | $ | 1,137 | $ | 432 | $ | 11,688 | $ | 2,366 | $ | 0 | $ | 12,253 | $ | 1,221 | $ | 557 | $ | 630 | $ | 17,027 | ||||||||||||||||||||||||||
Charge-offs | — | — | (86 | ) | (159 | ) | — | (245 | ) | 0 | 0 | 0 | (18 | ) | (54 | ) | 0 | (72 | ) | |||||||||||||||||||||||||||||||||
Recoveries | 148 | — | 13 | 88 | — | 249 | (5 | ) | 0 | 0 | 158 | 86 | 0 | 239 | ||||||||||||||||||||||||||||||||||||||
Provision | (354 | ) | 232 | 60 | 134 | (72 | ) | — | (522 | ) | 0 | 659 | (201 | ) | (120 | ) | 184 | 0 | ||||||||||||||||||||||||||||||||||
Ending balance | $ | 2,644 | $ | 6,304 | $ | 1,184 | $ | 1,200 | $ | 360 | $ | 11,692 | $ | 1,839 | $ | 0 | $ | 12,912 | $ | 1,160 | $ | 469 | $ | 814 | $ | 17,194 |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
For the Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
Paycheck | ||||||||||||||||||||||||||||
Protection | Commercial | Residential | ||||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Program (1) | Real Estate | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||||
ALLL by Loan Portfolio: | ||||||||||||||||||||||||||||
Beginning balance | $ | 2,483 | $ | 0 | $ | 9,899 | $ | 1,281 | $ | 972 | $ | 432 | $ | 15,067 | ||||||||||||||
Charge-offs | 0 | 0 | (145 | ) | (29 | ) | (182 | ) | 0 | (356 | ) | |||||||||||||||||
Recoveries | 14 | 0 | 0 | 18 | 46 | 0 | 78 | |||||||||||||||||||||
Provision | (97 | ) | 0 | 1,182 | 36 | 34 | 145 | 1,300 | ||||||||||||||||||||
Ending balance | $ | 2,400 | $ | 0 | $ | 10,936 | $ | 1,306 | $ | 870 | $ | 577 | $ | 16,089 |
For the Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Residential | ||||||||||||||||||||||
ALLL by Loan Class | Commercial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||
Beginning balance | $ | 2,591 | $ | 6,029 | $ | 1,871 | $ | 763 | $ | 610 | $ | 11,864 | ||||||||||||
Charge-offs | — | — | (130 | ) | (227 | ) | — | (357 | ) | |||||||||||||||
Recoveries | 305 | — | 18 | 19 | — | 342 | ||||||||||||||||||
Provision | (491 | ) | 512 | 45 | 171 | (237 | ) | — | ||||||||||||||||
Ending balance | $ | 2,405 | $ | 6,541 | $ | 1,804 | $ | 726 | $ | 373 | $ | 11,849 |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
For the Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Paycheck | ||||||||||||||||||||||||||||||||||||||||||||||||||||
For the Nine Months Ended September 30, 2017 | Protection | Commercial | Residential | |||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Residential | Commercial | Program (1) | Real Estate | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||||||
ALLL by Loan Class | Commercial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||
ALLL by Loan Portfolio: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 2,849 | $ | 5,578 | $ | 1,716 | $ | 955 | $ | 446 | $ | 11,544 | $ | 2,402 | $ | 0 | $ | 11,895 | $ | 1,324 | $ | 683 | $ | 606 | $ | 16,910 | ||||||||||||||||||||||||||
Charge-offs | (50 | ) | — | (370 | ) | (631 | ) | — | (1,051 | ) | 0 | 0 | 0 | (40 | ) | (122 | ) | 0 | (162 | ) | ||||||||||||||||||||||||||||||||
Recoveries | 383 | 27 | 107 | 182 | — | 699 | 5 | 0 | 110 | 183 | 148 | 0 | 446 | |||||||||||||||||||||||||||||||||||||||
Provision | (538 | ) | 699 | (269 | ) | 694 | (86 | ) | 500 | (568 | ) | 0 | 907 | (307 | ) | (240 | ) | 208 | 0 | |||||||||||||||||||||||||||||||||
Ending balance | $ | 2,644 | $ | 6,304 | $ | 1,184 | $ | 1,200 | $ | 360 | $ | 11,692 | $ | 1,839 | $ | 0 | $ | 12,912 | $ | 1,160 | $ | 469 | $ | 814 | $ | 17,194 |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
For the Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
Paycheck | ||||||||||||||||||||||||||||
Protection | Commercial | Residential | ||||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Program (1) | Real Estate | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||||
ALLL by Loan Portfolio: | ||||||||||||||||||||||||||||
Beginning balance | $ | 1,822 | $ | 0 | $ | 8,096 | $ | 1,032 | $ | 933 | $ | 348 | $ | 12,231 | ||||||||||||||
Charge-offs | 0 | 0 | (145 | ) | (35 | ) | (345 | ) | 0 | (525 | ) | |||||||||||||||||
Recoveries | 22 | 0 | 0 | 62 | 149 | 0 | 233 | |||||||||||||||||||||
Provision | 556 | 0 | 2,985 | 247 | 133 | 229 | 4,150 | |||||||||||||||||||||
Ending balance | $ | 2,400 | $ | 0 | $ | 10,936 | $ | 1,306 | $ | 870 | $ | 577 | $ | 16,089 |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
For the Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Residential | ||||||||||||||||||||||
ALLL by Loan Class | Commercial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||
Beginning balance | $ | 2,493 | $ | 5,784 | $ | 1,577 | $ | 770 | $ | 556 | $ | 11,180 | ||||||||||||
Charge-offs | (1,106 | ) | (37 | ) | (680 | ) | (575 | ) | — | (2,398 | ) | |||||||||||||
Recoveries | 383 | 2,481 | 104 | 99 | — | 3,067 | ||||||||||||||||||
Provision | 635 | (1,687 | ) | 803 | 432 | (183 | ) | — | ||||||||||||||||
Ending balance | $ | 2,405 | $ | 6,541 | $ | 1,804 | $ | 726 | $ | 373 | $ | 11,849 |
While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ. The unallocated portion of the 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 June 30, 2021, the unallocated allowance amount represented 5% of the ALLL compared to 4% at December 31, 2020. The following tables summarize the ALLL and the recorded investment in loans and leases as of SeptemberJune 30, 2017 2021 and December 31, 2016.2020.
As of June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
As of September 30, 2017 | Paycheck | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Residential | Protection | Commercial | Residential | ||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Real Estate | Real Estate | Consumer | Unallocated | Total | Commercial | Program (1) | Real Estate | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||||||||||||||||||||||
ALLL: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 453 | $ | 79 | $ | 374 | $ | 12 | $ | — | $ | 918 | $ | 99 | $ | 0 | $ | 0 | $ | 56 | $ | 4 | $ | 0 | $ | 159 | ||||||||||||||||||||||||||
Collectively evaluated for impairment | 2,191 | 6,225 | 810 | 1,188 | 360 | 10,774 | 1,740 | 0 | 12,912 | 1,104 | 465 | 814 | 17,035 | |||||||||||||||||||||||||||||||||||||||
Total | $ | 2,644 | $ | 6,304 | $ | 1,184 | $ | 1,200 | $ | 360 | $ | 11,692 | $ | 1,839 | $ | 0 | $ | 12,912 | $ | 1,160 | $ | 469 | $ | 814 | $ | 17,194 | ||||||||||||||||||||||||||
Gross loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,980 | $ | 1,422 | $ | 9,738 | $ | 37 | $ | — | $ | 14,177 | $ | 1,936 | $ | 0 | $ | 695 | $ | 5,082 | $ | 16 | $ | 0 | $ | 7,729 | ||||||||||||||||||||||||||
Collectively evaluated for impairment | 144,232 | 530,468 | 84,602 | 51,395 | — | 810,697 | 91,714 | 59,058 | 824,914 | 89,916 | 17,414 | 0 | 1,083,016 | |||||||||||||||||||||||||||||||||||||||
Total gross loans | $ | 147,212 | $ | 531,890 | $ | 94,340 | $ | 51,432 | $ | — | $ | 824,874 | $ | 93,650 | $ | 59,058 | $ | 825,609 | $ | 94,998 | $ | 17,430 | $ | 0 | $ | 1,090,745 |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
As of December 31, 2020 | ||||||||||||||||||||||||||||
Paycheck | ||||||||||||||||||||||||||||
Protection | Commercial | Residential | ||||||||||||||||||||||||||
(Amounts in thousands) | Commercial | Program (1) | Real Estate | Real Estate | Consumer | Unallocated | Total | |||||||||||||||||||||
ALLL: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 114 | $ | 0 | $ | 0 | $ | 74 | $ | 4 | $ | 0 | $ | 192 | ||||||||||||||
Collectively evaluated for impairment | 2,288 | 0 | 11,895 | 1,250 | 679 | 606 | 16,718 | |||||||||||||||||||||
Total | $ | 2,402 | $ | 0 | $ | 11,895 | $ | 1,324 | $ | 683 | $ | 606 | $ | 16,910 | ||||||||||||||
Gross loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,033 | $ | 0 | $ | 3,734 | $ | 5,318 | $ | 18 | $ | 0 | $ | 11,103 | ||||||||||||||
Collectively evaluated for impairment | 113,526 | 130,814 | 763,802 | 98,536 | 21,951 | 0 | 1,128,629 | |||||||||||||||||||||
Total gross loans | $ | 115,559 | $ | 130,814 | $ | 767,536 | $ | 103,854 | $ | 21,969 | $ | 0 | $ | 1,139,732 |
As of December 31, 2016 | ||||||||||||||||||||||||
Commercial | Residential | |||||||||||||||||||||||
(Amounts in thousands) | Commercial | Real Estate | Real Estate | Consumer | Unallocated | Total | ||||||||||||||||||
ALLL: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 641 | $ | 85 | $ | 721 | $ | 14 | $ | — | $ | 1,461 | ||||||||||||
Collectively evaluated for impairment | 2,208 | 5,493 | 995 | 941 | 446 | 10,083 | ||||||||||||||||||
Total | $ | 2,849 | $ | 5,578 | $ | 1,716 | $ | 955 | $ | 446 | $ | 11,544 | ||||||||||||
Gross loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3,525 | $ | 3,125 | $ | 11,894 | $ | 250 | $ | — | $ | 18,794 | ||||||||||||
Collectively evaluated for impairment | 150,319 | 493,617 | 90,050 | 51,431 | — | 785,417 | ||||||||||||||||||
Total gross loans | $ | 153,844 | $ | 496,742 | $ | 101,944 | $ | 51,681 | $ | — | $ | 804,211 |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
The ALLL totaled $11.7$17.2 million or 1.42%1.58% of total gross loans at SeptemberJune 30, 2017 2021 and $11.5$16.9 million or 1.44%1.48% of total gross loans at December 31, 2016. 2020. As of SeptemberJune 30, 2017 2021 and December 31, 2016, 2020, we had commitments to extend credit of $231.0$301.8 million and $229.4$267.8 million, respectively. The reserve for unfunded commitments recorded in Other Liabilities in the Consolidated Balance Sheets at SeptemberJune 30, 2017 2021 and December 31, 2016 2020 was $695$800 thousand.
We believe that the ALLL was adequate as of June 30, 2021. 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 future charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.
ALLL Methodology
We have lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. We review and approve these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.
We formally assess the adequacy of the ALLL on a quarterly basis. The ALLL is based upon estimates of future loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan and lease portfolio. Our ALLL methodology incorporates management’smanagement’s current judgments, and reflects management’smanagement’s estimate of future loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 Contingencies(“ASC 450”)and ASC Topic 310 Receivables.Receivables (“ASC 310”).
Management’s assessment of the ALLL is based on our continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provides the foundation for the four major components of the ALLL:
(1) | Historical valuation allowances established in accordance with ASC 450, for groups of similarly situated loan pools. |
(2) | General valuation allowances established in accordance with ASC 450, that are based on qualitative credit risk factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Loss estimation factors are based on analysis of local economic factors. 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. |
(3) | Specific valuation allowances established in accordance with ASC 310, that are based on estimated probable losses on specific impaired loans. |
(4) | Unallocated valuation allowances established in accordance with ASC 310 and ASC 450, that are based on credit losses inherent in the loan portfolio but not contemplated in the credit loss factors. |
All four components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge-off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.
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’sborrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess
Our assessment of the adequacy of the ALLL on a monthly basis. These assessments includeincludes the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially rated when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation
Our loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans. In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge-offs or recoveries, among other relevant credit risk factors. We periodically review and update our historical loss ratios based on net charge-off experience for each loan and lease class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.
General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, changes in economic conditions, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to 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.loan portfolio.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)Impaired loans
Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.
Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole.
We believe that the ALLL was adequate as of September 30, 2017. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.
As of September 30, 2017, approximately 76% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. Deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.
All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. For collateral dependent loans, this can be accomplished by charging off the impaired portion of the loan based on the underlying value of the collateral. For non-collateral dependent loans, we establish a specific component within the ALLL based on the present value of the future cash flows. If we determine the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged offcharged-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
We have lending policiesRisk Characteristics and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. We review and approve these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.Underwriting
The following is a brief summary, by loan type, of management’smanagement’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.change.
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.
PPP Loans - The Paycheck Protection Program (“PPP”) was launched in April of 2020 to provide small businesses assistance in the form of forgivable 100% guaranteed U.S. SBA loans. We have actively participated in the PPP and at June 30, 2021, we have 281 loans totaling $59.1 million. This financial support of our customers’ businesses may help moderate other Commercial and Commercial Real Estate (“CRE”loan losses. The loans are underwritten following the guidelines and approval process from the SBA and pose essentially no credit risk to the loan portfolio.
Commercial Real Estate (“CRE”) Loans – CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions.
The properties securing the CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce our exposure to adverse economic events that affect any single industry. We monitor and evaluate CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Generally, CRE loans are made 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.
Residential Real Estate Loans – We do not originate consumer real estate mortgage loans. The majority of our loans secured by non owner occupied residential real estate are made either as part of a commercial relationship and subject to similar underwriting standards and processes as the CRE portfolio, or loans that were purchased in a prior year as part of a pool of loans. Purchased loan pools are evaluated based on risk characteristics established for each segmented group 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. Residential equity lines of credit are included in the discussion of consumer loans below.
We originate some single-family residence construction loans. The loan amounts are no greater than $1 million and are short-term real estate secured financing for the construction of a single-family residence to be occupied by the owner. The loans have a draw down feature with interest only payments, and a balloon payment at the 12-month maturity. All of these loans are refinanced and paid-off by the borrower’s permanent mortgage lender who provided the initial pre-approved mortgage financing. These loans are underwritten utilizing financial analysis of the borrower and are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. The loan disbursement and monitoring process is controlled utilizing similar processes as our CRE construction loans.
Consumer Loans– Our consumer loan originations are generally limited to home equity loans with nominal originations in unsecured personal loans. The portfolio also includes unsecured consumer home improvement loans and residential solar panel loans secured by UCC filings. We are highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.
Concentrations of Credit Risk
As of June 30, 2021, approximately 84% of our gross loan portfolio (89% excluding PPP loans) is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. Deterioration in economic conditions particularly in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.
Credit review
Confirmation of the quality of our loan 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. We maintain an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors, Loan Committee and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provides the foundation for the three major components of the ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge-off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.
Our loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans. In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge-offs or recoveries, among other relevant credit risk factors. We periodically review and update our historical loss ratios based on net charge-off experience for each loan and lease class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.
General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of our loan portfolio.
NOTE 5. QUALIFIED AFFORDABLE HOUSING PARTNERSHIP INVESTMENTS
Our investments in Qualified Affordable Housing Partnerships that generate Low Income Housing Tax Credits (“LIHTC”) and deductible operating losses totaled $3.7 million at September 30, 2017. These investments are recorded in Other Assets with a corresponding funding obligation of $467 thousand recorded in Other Liabilities in our Consolidated Balance Sheets. We have invested in four separate LIHTC partnerships, which provide the Company with CRA credit. Additionally, the investments in LIHTC partnerships provide us with tax credits and with operating loss tax benefits over an approximately 18-year period. None of the original investments will be repaid. The tax credits and the operating loss tax benefits that are generated by each of the properties are expected to exceed the total value of the investments we made and provide returns on the investments of between 5% and 8% over the life of the investment. The investments in LIHTC partnerships are being accounted for using the proportional amortization method, under which we amortize the initial cost of an investment in proportion to the amount of the tax credits and other tax benefits received, and recognize the net investment performance in the Consolidated Statements of Income as a component of income tax expense.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at September 30, 2017 and December 31, 2016. In addition, the table reflects the tax credits and tax benefits, amortization of the investment and the net impact to our income tax provision for the nine months ended September 30, 2017 and the year ended December 31, 2016.
At September 30, 2017 | For the Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
Original | Current | Unfunded | Tax Credits | Amortization | Net | |||||||||||||||||||
(Amounts in thousands) | Investment | Recorded | Liability | and | of | Income Tax | ||||||||||||||||||
Qualified Affordable Housing Partnerships | Value | Investment | Obligation | Benefits | Investments | Benefit | ||||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 2,000 | $ | 1,222 | $ | 45 | $ | 168 | $ | 140 | $ | 28 | ||||||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 1,000 | 618 | 55 | 105 | 79 | 26 | ||||||||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 2,500 | 1,547 | 367 | 203 | 166 | 37 | ||||||||||||||||||
California Affordable Housing Fund | 2,454 | 318 | — | 132 | 127 | 5 | ||||||||||||||||||
Total | $ | 7,954 | $ | 3,705 | $ | 467 | $ | 608 | $ | 512 | $ | 96 |
At December 31, 2016 | For the Nine Months Ended September 30, 2016 | |||||||||||||||||||||||
Original | Current | Unfunded | Tax Credits | Amortization | Net | |||||||||||||||||||
(Amounts in thousands) | Investment | Recorded | Liability | and | of | Income Tax | ||||||||||||||||||
Qualified Affordable Housing Partnerships | Value | Investment | Obligation | Benefits | Investments | Benefit | ||||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 2,000 | $ | 1,361 | $ | 45 | $ | 178 | $ | 136 | $ | 42 | ||||||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 1,000 | 698 | 73 | 107 | 78 | 29 | ||||||||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 2,500 | 1,713 | 367 | 199 | 171 | 28 | ||||||||||||||||||
California Affordable Housing Fund | 2,454 | 445 | — | 154 | 155 | (1) | ||||||||||||||||||
Total | $ | 7,954 | $ | 4,217 | $ | 485 | $ | 638 | $ | 540 | $ | 98 |
The following table presents our generated tax credits and tax benefits from investments in qualified affordable housing partnerships for the three and nine months ended September 30, 2017 and 2016.
For the Three Months Ended | ||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
(Amounts in thousands) | Generated | Tax Benefits From | Generated | Tax Benefits from | ||||||||||||
Qualified Affordable Housing Partnerships | Tax Credits | Taxable Losses | Tax Credits | Taxable Losses | ||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 44 | $ | 12 | $ | 46 | $ | 13 | ||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 28 | 7 | 27 | 9 | ||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 54 | 14 | 51 | 15 | ||||||||||||
California Affordable Housing Fund | 31 | 13 | 40 | 12 | ||||||||||||
Total | $ | 157 | $ | 46 | $ | 164 | $ | 49 |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
For the Nine Months Ended | ||||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
(Amounts in thousands) | Generated | Tax Benefits From | Generated | Tax Benefits from | ||||||||||||
Qualified Affordable Housing Partnerships | Tax Credits | Taxable Losses | Tax Credits | Taxable Losses | ||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 132 | $ | 36 | $ | 138 | $ | 40 | ||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 85 | 20 | 80 | 27 | ||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 162 | 41 | 154 | 45 | ||||||||||||
California Affordable Housing Fund | 94 | 38 | 119 | 35 | ||||||||||||
Total | $ | 473 | $ | 135 | $ | 491 | $ | 147 |
The tax credits and benefits were partially offset by the amortization of the principal investment balances of $177 thousand and $512 thousand for the three and nine months ended September 30, 2017 respectively, compared to $180 thousand and $540 thousand for the comparable periods of 2016.
The following table reflects the anticipated net income tax benefit at September 30, 2017 that is expected to be recognized over the remaining life of the investments.
(Amounts in thousands) | Raymond James California | WNC | Merritt Community | California | ||||||||||||||||
Qualified Affordable Housing Partnerships: Anticipated income tax benefit, net less amortization of investments | Housing Opportunities Fund II | Institutional Tax Credit Fund 38, L.P. | Capital Corporation Fund XV, L.P | Affordable Housing Fund | Total Income Tax Benefit, Net | |||||||||||||||
2017 | $ | 10 | $ | 9 | $ | 9 | $ | 3 | $ | 31 | ||||||||||
2018 | 45 | 35 | 39 | 1 | 120 | |||||||||||||||
2019 | 45 | 30 | 38 | 1 | 114 | |||||||||||||||
2020 | 45 | 29 | 37 | 1 | 112 | |||||||||||||||
2021 and thereafter | 204 | 102 | 143 | 3 | 452 | |||||||||||||||
Total | $ | 349 | $ | 205 | $ | 266 | $ | 9 | $ | 829 |
NOTE 6. FEDERAL FUNDS PURCHASED AND LINES OF CREDIT
At September 30, 2017 and December 31, 2016, we had no outstanding federal funds purchased balances and no outstanding advances on any of the Bank’s lines of credit.
The Bank had the following lines of credit:
Federal Funds
We have entered into nonbinding federal funds line of credit agreements with three financial institutions to support short-term liquidity needs. The lines totaled $35.0 million at September 30, 2017 and had interest rates ranging from 1.39% to 2.04%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions. The credit arrangements are reviewed and renewed annually.
Federal Reserve Bank
We have an available line of credit with the Federal Reserve Bank of $15.3 million subject to collateral requirements, namely the amount of pledged loans.
Federal Home Loan Bank of San Francisco
We have an available line of credit with the Federal Home Loan Bank of San Francisco of $333.6 million subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The line of credit is secured by an investment in Federal Home Loan Bank of San Francisco stock, certain real estate mortgage loans that have been specifically pledged to the Federal Home Loan Bank of San Francisco pursuant to collateral requirements, and pledged securities held in the Bank’s investment securities portfolio.
As of September 30, 2017, the Bank was required to hold an investment in Federal Home Loan Bank of San Francisco stock of $4.5 million recorded in Other Assets in the Consolidated Balance Sheets. Our investments in Federal Home Loan Bank of San Francisco stock are restricted investment securities, carried at cost, evaluated for impairment, and excluded from securities accounted for under ASC Topic 320 and ASC Topic 321.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
We have pledged $383.3 million of our commercial and real estate mortgage loans as collateral for the line of credit with the Federal Home Loan Bank of San Francisco. As of September 30, 2017, we also pledged $30.4 million in securities to the Federal Home Loan Bank of San Francisco. All of the securities and loans pledged with the Federal Home Loan Bank of San Francisco were unused as collateral as of September 30, 2017.
NOTE 7. TERM DEBT
Term debt at September 30, 2017 and December 31, 2016 consisted of the following.
(Amounts in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Senior debt | $ | 7,700 | $ | 8,917 | ||||
Unamortized debt issuance costs | (8 | ) | (12 | ) | ||||
Subordinated debt | 10,000 | 10,000 | ||||||
Unamortized debt issuance costs | (142 | ) | (172 | ) | ||||
Net term debt | $ | 17,550 | $ | 18,733 |
Future contractual maturities of term debt at September 30, 2017 are as follows.
(Amounts in thousands) | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||||||||
Senior debt | $ | 167 | $ | 1,000 | $ | 1,000 | $ | 5,533 | $ | — | $ | — | $ | 7,700 | ||||||||||||||
Subordinated debt | — | — | — | — | — | 10,000 | 10,000 | |||||||||||||||||||||
Total future maturities | $ | 167 | $ | 1,000 | $ | 1,000 | $ | 5,533 | $ | — | $ | 10,000 | $ | 17,700 |
Federal Home Loan Bank of San Francisco Borrowings
The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2017 and the year ended December 31, 2016 was $403 thousand and $18.0 million, respectively. 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, 2017 and the year ended December 31, 2016 was $10.0 million and $80.0 million, respectively. There were no outstanding Federal Home Loan Bank of San Francisco advances at September 30, 2017 or December 31, 2016.
Senior Debt
In December of 2015, the Holding Company, entered into a senior debt loan agreement to borrow $10.0 million from another financial institution. The loan is payable in monthly installments of $83 thousand principal, plus accrued and unpaid interest, commencing on January 1, 2016, continuing to, and including December 10, 2020. A final scheduled payment of $4.5 million is due on the maturity date of December 10, 2020. The loan may be prepaid in whole or in part at any time without any prepayment penalty. The principal amount of the loan bears interest at a variable rate, resetting monthly that is equal to the sum of the current three-month LIBOR plus 400 basis points. In December of 2015, the Holding Company incurred senior debt issuance costs of $15 thousand, which are being amortized over the life of the loan as additional interest expense. The loan is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce.
Subordinated Debt
In December of 2015, the Holding Company issued $10.0 million in aggregate principal amount of fixed to floating rate subordinated notes due in 2025. The subordinated debt initially bears interest at 6.88% per annum for a five-year term, payable semi-annually. Thereafter, interest on the subordinated debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points, payable quarterly until the maturity date. In December of 2015, the Holding Company incurred subordinated debt issuance costs of $210 thousand, which are being amortized over the initial five-year-term as additional interest expense.
The subordinated debt is subordinate and junior in right of payment to the prior payment in full of all existing and future claims of creditors and depositors of the Holding Company and its subsidiaries, whether now outstanding or subsequently created. The subordinated debt ranks equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the subordinated debt. The subordinated debt ranks senior to all future junior subordinated debt obligations, preferred stock and common stock of the Holding Company. The subordinated debt is recorded as term debt on the Holding Company’s balance sheet; however, for regulatory purposes, it is treated as Tier 2 capital by the Holding Company.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The subordinated debt will mature on December 10, 2025 but may be prepaid at the Holding Company’s option and with regulatory approval at any time on or after five years after the Closing Date or at any time upon certain events, such as a change in the regulatory capital treatment of the subordinated debt or the interest on the subordinated debt is no longer deductible by the Holding Company for United States federal income tax purposes.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease nine sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based on predetermined escalation schedules. Substantially all of the leases include the option to extend the lease term one or more times following expiration of the initial term.
The following table sets forth rent expense and rent income for the three and nine months ended September 30, 2017 and 2016.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Rent income (1) | $ | 9 | $ | 32 | $ | 40 | $ | 52 | ||||||||
Rent expense | 218 | 221 | 612 | 516 | ||||||||||||
Net rent expense | $ | 209 | $ | 189 | $ | 572 | $ | 464 |
(1) Rental income is derived from OREO properties
The following table sets forth, as of September 30, 2017, the future minimum lease payments under non-cancelable operating leases.
(Amounts in thousands) | ||||
Amounts due in: | ||||
2017 | $ | 196 | ||
2018 | 845 | |||
2019 | 866 | |||
2020 | 884 | |||
2021 | 899 | |||
Thereafter | 2,297 | |||
Total | $ | 5,987 |
Financial Instruments with Off-Balance Sheet Risk
Our consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of our business and involve elements of credit, liquidity, and interest rate risk. In the normal course of business, we are party to financial instruments with off-balance sheet credit risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve elements of credit and interest rate risk similar to the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments.
The following table presents a summary of our commitments and contingent liabilities at September 30, 2017 and December 31, 2016.
(Amounts in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Commitments to extend credit | $ | 220,688 | $ | 224,082 | ||||
Standby letters of credit | 7,000 | 1,967 | ||||||
Affordable housing grants | 3,338 | 3,338 | ||||||
Total commitments and contingent liabilities | $ | 231,026 | $ | 229,387 |
We were not required to perform on any financial guarantees during the nine months ended September 30, 2017, or during the year ended December 31, 2016. At September 30, 2017, approximately $6.6 million of standby letters of credit expire within one year, and $357 thousand expire thereafter.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Affordable Housing Grants
In fulfilling our CRA responsibilities, we are a sponsor for various nonprofit organizations that receive cash grants from the Federal Home Loan Bank of San Francisco. Those grants require the nonprofit organization to comply with stipulated conditions of the grant over specified periods of time which typically vary from 10 to 15 years. If the nonprofit organization fails to comply, Federal Home Loan Bank of San Francisco can require us to refund the amount of the grant to Federal Home Loan Bank of San Francisco. To mitigate this contingent credit risk, Credit Administration underwrites the financial strength of the nonprofit organization and reviews their systems of internal control to determine, as best as is possible, that they will not fail to comply with the conditions of the grant.
Reserve For Unfunded Commitments
The reserve for unfunded commitments, which is included in Other Liabilities onin the Consolidated Balance Sheets, was $695$800 thousand at SeptemberJune 30, 2017 2021 and December 31, 2016. 2020. 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. When necessary, the provision expense is recorded in other noninterest expense in the Consolidated Statements of Income.
NOTE 5. LOW INCOME HOUSING TAX CREDIT PARTNERSHIPS
We have invested in five separate Low Income Housing Tax Credit (“LIHTC”) partnerships, which provide the Company with CRA credit. Additionally, the investments in LIHTC partnerships provide us with income tax credits and with operating loss tax benefits over an approximately 23-year period. The income tax credits and the operating loss tax benefits that are generated by each of the properties are expected to exceed the total value of the investments we made and provide returns on the investments of between 2% and 6% over the life of the investment.
Our investments in LIHTC partnerships totaled $2.6 million at June 30, 2021. These investments are recorded in Other Assets with a corresponding funding obligation of $945 thousand recorded in Other Liabilities in our Consolidated Balance Sheets. None of the original investments will be repaid. The investments in LIHTC partnerships are being accounted for using the proportional amortization method, under which we amortize the initial cost of an investment in proportion to the amount of the income tax credits and other tax benefits received, and recognize the net investment performance in the Consolidated Statements of Income as a component of income tax expense.
The following tables present our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at June 30, 2021 and December 31, 2020. In addition, the tables reflect the income tax credits and operating loss tax benefits, amortization of the investment and the net impact to our income tax provision for the six months ended June 30, 2021 and 2020.
At June 30, 2021 | For the Six Months Ended June 30, 2021 | |||||||||||||||||||||||
Original | Current | Unfunded | Tax Credits | Amortization | Net | |||||||||||||||||||
Investment | Recorded | Liability | and | of | Income Tax | |||||||||||||||||||
(Amounts in thousands) | Commitment | Investment | Obligation | Benefits | Investments | Benefit | ||||||||||||||||||
LIHTC Partnerships: | ||||||||||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 2,000 | $ | 588 | $ | 16 | $ | 95 | $ | 88 | $ | 7 | ||||||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 1,000 | 269 | 0 | 47 | 42 | 5 | ||||||||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 2,500 | 728 | 306 | 107 | 113 | (6 | ) | |||||||||||||||||
California Affordable Housing Fund | 2,454 | 140 | 0 | 7 | 12 | (5 | ) | |||||||||||||||||
Boston Capital | 1,000 | 902 | 623 | 56 | 45 | 11 | ||||||||||||||||||
Total | $ | 8,954 | $ | 2,627 | $ | 945 | $ | 312 | $ | 300 | $ | 12 |
At December 31, 2020 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||
Original | Current | Unfunded | Tax Credits | Amortization | Net | |||||||||||||||||||
Investment | Recorded | Liability | and | of | Income Tax | |||||||||||||||||||
(Amounts in thousands) | Commitment | Investment | Obligation | Benefits | Investments | Benefit | ||||||||||||||||||
LIHTC Partnerships: | ||||||||||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 2,000 | $ | 676 | $ | 16 | $ | 99 | $ | 90 | $ | 9 | ||||||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 1,000 | 311 | 0 | 52 | 43 | 9 | ||||||||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 2,500 | 841 | 316 | 112 | 109 | 3 | ||||||||||||||||||
California Affordable Housing Fund | 2,454 | 152 | 0 | 12 | 19 | (7 | ) | |||||||||||||||||
Boston Capital | 1,000 | 947 | 987 | 33 | 24 | 9 | ||||||||||||||||||
Total | $ | 8,954 | $ | 2,927 | $ | 1,319 | $ | 308 | $ | 285 | $ | 23 |
The following tables present our generated income tax credits and operating loss tax benefits from investments in LIHTC partnerships for the three and six months ended June 30, 2021 and 2020.
For the Three Months Ended | ||||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||
Generated | Tax Benefits From | Generated | Tax Benefits From | |||||||||||||
(Amounts in thousands) | Tax Credits | Taxable Losses | Tax Credits | Taxable Losses | ||||||||||||
LIHTC Partnerships: | ||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 43 | $ | 5 | $ | 43 | $ | 7 | ||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 21 | 3 | 22 | 4 | ||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 47 | 6 | 48 | 8 | ||||||||||||
California Affordable Housing Fund | 0 | 3 | 1 | 6 | ||||||||||||
Boston Capital | 22 | 6 | 11 | 5 | ||||||||||||
Total | $ | 133 | $ | 23 | $ | 125 | $ | 30 |
For the Six Months Ended | ||||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||
Generated | Tax Benefits From | Generated | Tax Benefits From | |||||||||||||
(Amounts in thousands) | Tax Credits | Taxable Losses | Tax Credits | Taxable Losses | ||||||||||||
LIHTC Partnerships: | ||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 85 | $ | 10 | $ | 85 | $ | 14 | ||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 42 | 5 | 44 | 8 | ||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | 95 | 12 | 96 | 16 | ||||||||||||
California Affordable Housing Fund | 0 | 7 | 1 | 11 | ||||||||||||
Boston Capital | 44 | 12 | 22 | 11 | ||||||||||||
Total | $ | 266 | $ | 46 | $ | 248 | $ | 60 |
The following table reflects as of June 30, 2021, the anticipated net income tax benefit and (expense) that is expected to be recognized over the remaining lives of the investments.
(Amounts in thousands) | ||||||||||||||||||||||||
LIHTC Partnerships: | 2025 | |||||||||||||||||||||||
Anticipated income tax benefit, net less | and | |||||||||||||||||||||||
amortization of investments | 2021 | 2022 | 2023 | 2024 | thereafter | Total | ||||||||||||||||||
Raymond James California Housing Opportunities Fund II | $ | 7 | $ | 14 | $ | 11 | $ | 6 | $ | 10 | $ | 48 | ||||||||||||
WNC Institutional Tax Credit Fund 38, L.P. | 5 | 9 | 8 | 5 | 6 | 33 | ||||||||||||||||||
Merritt Community Capital Corporation Fund XV, L.P. | (6 | ) | (13 | ) | (9 | ) | (2 | ) | (12 | ) | (42 | ) | ||||||||||||
California Affordable Housing Fund | (5 | ) | (58 | ) | 0 | 0 | 0 | (63 | ) | |||||||||||||||
Boston Capital | 11 | 24 | 23 | 23 | 148 | 229 | ||||||||||||||||||
Total income tax benefit, net | $ | 12 | $ | (24 | ) | $ | 33 | $ | 32 | $ | 152 | $ | 205 |
NOTE 6. TERM DEBT
Term debt at June 30, 2021 and December 31, 2020 consisted of the following.
June 30, | December 31, | |||||||
(Amounts in thousands) | 2021 | 2020 | ||||||
Term Debt: | ||||||||
FHLB borrowings | $ | 0 | $ | 5,000 | ||||
Subordinated Debt | 10,000 | 10,000 | ||||||
Net term debt | $ | 10,000 | $ | 15,000 |
Federal Home Loan Bank of San Francisco Borrowings
We have an available line of credit with the FHLB of $456.9 million subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The line of credit is secured by an investment in FHLB stock, certain real estate secured loans that have been specifically pledged to the FHLB pursuant to collateral requirements, and certain pledged securities held in the Bank’s investment securities portfolio.
There were 0 borrowings outstanding from the FHLB at June 30, 2021. The Bank had $5.0 million in borrowings from the FHLB at December 31, 2020 that bore no interest and were fully repaid during the first quarter of 2021. The average balance outstanding on FHLB term advances during the six months ended June 30, 2021 and year ended December 31, 2020 was $1.9 million and $8.3 million, respectively. The maximum amount outstanding from the FHLB at any month end during the six months ended June 30, 2021 and year ended December 31, 2020 was $5.0 million and $40.0 million, respectively.
As of June 30, 2021, the Bank was required to hold an investment in FHLB stock of $7.5 million recorded in Other Assets in the Consolidated Balance Sheets. Our investments in FHLB stock are restricted investment securities, carried at cost, evaluated for impairment, and excluded from securities accounted for under ASC Topic 320 and ASC Topic 321.
As of June 30, 2021, we have pledged $568.6 million of our commercial real estate and residential real estate loans and $52.6 million in securities as collateral for the line of credit with the FHLB.
Subordinated Debt
In December of 2015, the Holding Company issued $10.0 million in aggregate principal amount of fixed to floating rate Subordinated Notes due in 2025. The Subordinated Debt initially bore interest at a fixed rate of 6.88% per annum through December 19, 2020, payable semi-annually. The Subordinated Debt now bears interest at a variable rate equal to three month LIBOR plus 526 basis points, payable quarterly until the maturity date. In December of 2015, the Holding Company incurred subordinated debt issuance costs of $210 thousand, which were amortized over the initial five-year-term as additional interest expense.
The Subordinated Debt is subordinate and junior in right of payment to the prior payment in full of all existing and future claims of creditors and depositors of the Holding Company and its subsidiaries, whether now outstanding or subsequently created. The Subordinated Debt ranks equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the Subordinated Debt. The Subordinated Debt ranks senior to all preferred stock and common stock of the Holding Company and all future junior subordinated debt obligations. The Subordinated Debt is recorded as term debt on the Holding Company’s balance sheet; however, for regulatory purposes, it is treated as Tier 2 capital by the Holding Company.
The Subordinated Debt will mature on December 10, 2025 but may be repaid at the Holding Company’s option and with regulatory approval at any time.
Federal Funds
We have entered into nonbinding unsecured federal funds line of credit agreements with three financial institutions to support short-term liquidity needs. The lines totaled $75.0 million at June 30, 2021 and had interest rates ranging from 0.17% to 0.35%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions. The credit arrangements are reviewed and renewed annually. At June 30, 2021 and December 31, 2020, we had 0 outstanding advances on any of the Bank’s federal funds lines of credit.
Federal Reserve Bank
We have an available line of credit with the Federal Reserve Bank totaling $26.8 million at June 30, 2021, subject to collateral requirements, namely the amount of certain pledged loans. At June 30, 2021 and December 31, 2020, we had 0 outstanding advances on our line of credit with the Federal Reserve Bank. As of June 30, 2021, we have pledged $48.2 million of our commercial loans as collateral for the credit line with the Federal Reserve Bank.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
Our consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of our business and involve elements of credit, liquidity, and interest rate risk. In the normal course of business, we are party to financial instruments with off-balance sheet credit risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve elements of credit and interest rate risk similar to the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments.
The following table presents a summary of our commitments and contingent liabilities at June 30, 2021 and December 31, 2020.
(Amounts in thousands) | June 30, 2021 | December 31, 2020 | ||||||
Commitments: | ||||||||
Commitments to extend credit | $ | 287,492 | $ | 259,980 | ||||
Standby letters of credit | 10,863 | 4,423 | ||||||
Affordable housing grant sponsorships | 3,338 | 3,338 | ||||||
Access to housing and economic assistance for development grant sponsorships | 90 | 90 | ||||||
Total commitments and contingent liabilities | $ | 301,783 | $ | 267,831 |
We were not required to perform on any financial guarantees during the six months ended June 30, 2021 or during the year ended December 31, 2020. At June 30, 2021, approximately $10.7 million of standby letters of credit will expire within one year, and $158 thousand will expire thereafter.
Affordable Housing Grants and Access to Housing and Economic Assistance for Development Grant Sponsorships
In fulfilling our CRA responsibilities, we are a sponsor for various nonprofit organizations that receive cash grants from the FHLB. Those grants require the nonprofit organization to comply with stipulated conditions of the grant over specified periods of time which typically vary from 10 to 15 years. If the nonprofit organization fails to comply, FHLB can require us to refund the amount of the grant to FHLB. To mitigate this contingent credit risk, our Credit Administration underwrites the financial strength of the nonprofit organization and reviews their systems of internal control to determine, as best as possible, that they will comply with the conditions of the grant.
Death Benefit Agreement
The Company has entered into contractsagreements with certain employees to pay a cash benefit to designated beneficiaries following the death of the employee. The payment will be made only if, at the time of death, the deceased employee was employed by the Bank and the Bank owned a life insurance policy on the employee’semployee’s life. Depending on specific facts and circumstances, the payment amount can vary up to a maximum of $225,000$225 thousand per employee.employee and may be taxable to the beneficiary. Neither the employeesemployee nor the designated beneficiaries have a claim against the Bank’s life insurance policy on the employee’s life.
Legal Proceedings
We are involved in various pending and threatened legal actions arising in the ordinary course of business. Webusiness and if necessary, we maintain reserves for losses from legal actions, which are both probable and estimable. In our opinion, the disposition of claims currently pending will not have a material adverse effect on our financial position or results of operations.
Concentrations of Credit Risk
We grant many loans collateralized by real estate construction, commercial, and installment loans to customers throughout northern California.estate. In our judgment, a concentration exists in real estate related loans, which represented approximately 76% and 75% 84% of our gross loan portfolio (89% excluding PPP loans) and 77% of our gross loan portfolio (86% excluding PPP loans) at SeptemberJune 30, 2017 2021 and December 31, 2016, 2020, respectively. We underwrite real estate loans in accordance with loan policies that set underwriting criteria, including property types, loan-to-value limits and minimum debt service coverage ratios. We employ a variety of real estate concentration risk management tools including monitoring of limits on concentration levels, limits by property type and geography, annual property reviews including site visits and portfolio stress testing.
Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believeswe believe such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in our principal market areas in particular, could have an adverse impact on the repayment of these loans. PersonalBusiness and businesspersonal incomes, cash flows from rental operations, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.
We recognize the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to other depository institutions in aggregate or to any single correspondent,individually, we have established general standards for selecting correspondent banks as well as internal limits for allowable exposure to other depository institutions in aggregate or to any single correspondent.individually. In addition, we have an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.
NOTE 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents activity in accumulated other comprehensive income (loss) for the nine months ended September 30, 2017.
Unrealized | Accumulated Other | |||||||
(Losses) Gains on | Comprehensive | |||||||
(Amounts in thousands) | Securities | (Loss) Income | ||||||
Accumulated other comprehensive loss as of December 31, 2016 | $ | (659 | ) | $ | (659 | ) | ||
Comprehensive income three months ended March 31, 2017 | 256 | 256 | ||||||
Comprehensive income three months ended June 30, 2017 | 915 | 915 | ||||||
Comprehensive loss three months ended September 30, 2017 | (41 | ) | (41 | ) | ||||
Accumulated other comprehensive income as of September 30, 2017 | $ | 471 | $ | 471 |
NOTE 8. LEASES
We lease nine locations under non-cancelable operating leases. The leases contain various provisions for increases in rental rates based on predetermined escalation schedules. Substantially all of the leases include the option to extend or terminate the lease term one or more times following expiration of the initial term at a rental rate established in the lease. For leases where we are reasonably certain that we will exercise the option to renew the lease, we have recognized those options in our right-of-use lease asset and liability. We had no other (financing, short-term or variable) lease arrangements during the current period or the prior year.
We have recorded a liability in Other Liabilities in our Consolidated Balance Sheets representing the present value of the remaining minimum lease payments and we have recorded an offsetting right-of-use asset in Other Assets in our Consolidated Balance Sheets. The present value calculation uses a discount rate, which is based on our incremental borrowing rate. The right-of-use asset was also reduced for amounts recognized under the previous accounting requirements. The following table presents information regarding our leases as of June 30, 2021 and December 31, 2020.
June 30, | December 31, | |||||||
(Dollars in thousands) | 2021 | 2020 | ||||||
Leases: | ||||||||
Right-of-use lease asset | $ | 2,149 | $ | 2,547 | ||||
Lease liability | $ | 2,399 | $ | 2,848 | ||||
Weighted Average Remaining Lease Term (in years) | 4.05 | 4.29 | ||||||
Weighted Average Discount Rate | 2.96 | % | 2.93 | % |
Lease expenses are recorded on a straight-line basis over the life of each lease. Lease expense and cash paid on leases are presented in the following table for the periods indicated.
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Amounts in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Leases: | ||||||||||||||||
Operating lease expense | $ | 218 | $ | 212 | $ | 437 | $ | 429 | ||||||||
Cash paid for operating leases | $ | 245 | $ | 234 | $ | 488 | $ | 480 |
The following table presents activity in accumulated other comprehensive incomesets forth, as of June 30, 2021, the future minimum lease cash payments under non-cancelable operating leases and a reconciliation of the undiscounted cash flows to the operating lease liability.
(Amounts in thousands) | Amount | |||
Due in: | ||||
2021 | $ | 490 | ||
2022 | 885 | |||
2023 | 327 | |||
2024 | 280 | |||
2025 | 218 | |||
2026 | 218 | |||
Thereafter | 140 | |||
Total undiscounted future minimum lease cash payments | 2,558 | |||
Present value adjustment | (159 | ) | ||
Lease liability | $ | 2,399 |
There were no lease-related non-cash financing activities for the ninesix months ended SeptemberJune 30, 2016.
Unrealized | Unrealized | Accumulated Other | ||||||||||
Gains on | Losses on | Comprehensive | ||||||||||
(Amounts in thousands) | Securities | Derivatives | (Loss) Income | |||||||||
Accumulated other comprehensive income (loss) as of December 31, 2015 | $ | 1,142 | $ | (1,396 | ) | $ | (254 | ) | ||||
Comprehensive income three months ended March 31, 2016 | 50 | 1,396 | 1,446 | |||||||||
Comprehensive income three months ended June 30, 2016 | 519 | — | 519 | |||||||||
Comprehensive loss three months ended September 30, 2016 | (222 | ) | — | (222 | ) | |||||||
Accumulated other comprehensive income as of September 30, 2016 | $ | 1,489 | $ | — | $ | 1,489 |
2021 or 2020.
Accumulated other comprehensive income is reported net of tax. Detailed information on the tax effects of the individual components of comprehensive income are presented in the Consolidated Statements of Comprehensive Income.
NOTE 10. DERIVATIVES
During March of 2016, we paid off the $75.0 million Federal Home Loan Bank of San Francisco borrowing (the “hedged instrument”) and terminated all of our interest rate swaps (active and forward starting). Prior to the time of termination, a $2.3 million unrealized pretax loss on swaps was carried in OtherLiabilities in ourConsolidated Balance Sheets. At termination, we immediately reclassified the loss to noninterest expense.
For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which the effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposures. Any ineffective portion of the changes in cash flow of the instruments is recognized immediately into earnings.
ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheets. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument, except any ineffective portion, are recorded in accumulated other comprehensive income until earnings are impacted by the hedged instrument. No components of our hedging instruments are excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.
Classification of the gain or loss in the Consolidated Statements of Income upon release from accumulated other comprehensive income is the same as that of the underlying exposure. We discontinue the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were recorded in accumulated other comprehensive income are recognized immediately in earnings.
The following table summarizes the losses recorded during the nine months ended September 30, 2016, and their locations within the Consolidated Statements of Income.
(Amounts in thousands) | ||||||
Description | Consolidated Statement of Income Location | Nine Months Ended September 30, 2016 | ||||
Interest rate swap (1) | Interest on term debt | $ | 396 | |||
Forward starting interest rate swap - terminated(2) | Other noninterest expense | 2,325 | ||||
Total | $ | 2,721 |
| |||||
|
During the nine months ended September 30, 2016, $1.6 million in losses on derivative instruments designated as cash flow hedges recorded in accumulated other comprehensive income were reclassified into earnings.
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 we fail to maintain our status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Similarly, we could be required to settle our obligations under certain of our agreements if specific regulatory events occur, such as if we were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.
NOTE 11.9. FAIR VALUES
The following table presentstables present estimated fair values of our financial instruments as of SeptemberJune 30, 2017 2021 and December 31, 2016, 2020, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets. The table indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value.
Non-financial assets and non-financial liabilities defined by the FASB ASC 820,Fair Value Measurement,, such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the table. In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of FASB ASC 825,Financial Instruments,, such as bank-owned life insurance policies.
Carrying | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
(Amounts in thousands) | Carrying | Fair Value Measurements Using | Amounts | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||
September 30, 2017 | Amounts | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
June 30, 2021 | ||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 85,631 | $ | 85,631 | $ | — | $ | — | $ | 177,118 | $ | 177,118 | $ | 0 | $ | 0 | ||||||||||||||||
Securities available-for-sale | $ | 232,494 | $ | — | $ | 232,494 | $ | — | $ | 579,664 | $ | 0 | $ | 579,664 | $ | 0 | ||||||||||||||||
Securities held-to-maturity | $ | 30,724 | $ | — | $ | 31,882 | $ | — | ||||||||||||||||||||||||
Net loans | $ | 814,952 | $ | — | $ | — | $ | 815,987 | $ | 1,074,102 | $ | 0 | $ | 0 | $ | 1,090,134 | ||||||||||||||||
Federal Home Loan Bank of San Francisco stock | $ | 4,537 | $ | 4,537 | $ | — | $ | — | ||||||||||||||||||||||||
FHLB stock | $ | 7,463 | $ | 7,463 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||
Deposits | $ | 1,062,785 | $ | — | $ | 1,062,432 | $ | — | $ | 1,697,338 | $ | 0 | $ | 1,697,887 | $ | 0 | ||||||||||||||||
Term debt | $ | 17,550 | $ | — | $ | 17,761 | $ | — | $ | 10,000 | $ | 0 | $ | 10,043 | $ | 0 | ||||||||||||||||
Junior subordinated debenture | $ | 10,310 | $ | — | $ | 9,468 | $ | — | $ | 10,310 | $ | 0 | $ | 10,152 | $ | 0 |
(Amounts in thousands) | Carrying | Fair Value Measurements Using | ||||||||||||||
December 31, 2016 | Amounts | Level 1 | Level 2 | Level 3 | ||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 68,407 | $ | 68,407 | $ | — | $ | — | ||||||||
Securities available-for-sale | $ | 175,174 | $ | — | $ | 175,174 | $ | — | ||||||||
Securities held-to-maturity | $ | 31,187 | $ | — | $ | 31,374 | $ | — | ||||||||
Net loans | $ | 793,991 | $ | — | $ | — | $ | 797,114 | ||||||||
Federal Home Loan Bank of San Francisco stock | $ | 4,465 | $ | 4,465 | $ | — | $ | — | ||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 1,004,666 | $ | — | $ | 1,004,729 | $ | — | ||||||||
Term debt | $ | 18,733 | $ | — | $ | 18,726 | $ | — | ||||||||
Junior subordinated debenture | $ | 10,310 | $ | — | $ | 9,077 | $ | — |
Carrying | Fair Value Measurements Using | |||||||||||||||
(Amounts in thousands) | Amounts | Level 1 | Level 2 | Level 3 | ||||||||||||
December 31, 2020 | ||||||||||||||||
Financial assets | ||||||||||||||||
Cash and cash equivalents | $ | 106,986 | $ | 106,986 | $ | 0 | $ | 0 | ||||||||
Securities available-for-sale | $ | 446,880 | $ | 0 | $ | 446,880 | $ | 0 | ||||||||
Net loans | $ | 1,123,051 | $ | 0 | $ | 0 | $ | 1,138,095 | ||||||||
FHLB stock | $ | 7,380 | $ | 7,380 | $ | 0 | $ | 0 | ||||||||
Financial liabilities | ||||||||||||||||
Deposits | $ | 1,542,779 | $ | 0 | $ | 1,544,009 | $ | 0 | ||||||||
Term debt | $ | 15,000 | $ | 0 | $ | 15,536 | $ | 0 | ||||||||
Junior subordinated debenture | $ | 10,310 | $ | 0 | $ | 10,552 | $ | 0 |
Fair Value Hierarchy
Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 valuations utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 valuations include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Level 3 valuations are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.
We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value:
Cash and Cash Equivalents – The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a reasonable estimate of fair value because of the relatively short term between the origination of the instrument and its expected realization. Therefore, we believe the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.
Securities – Investment securities fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices or matrix pricing, which is a mathematical technique, used widely by the industry that relies on the securities relationship to other benchmark securities, and are classified as Level 2.
Net Loans – For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on specific risk adjusted spreads to the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The ALLL is considered a reasonable estimate of loan discount for credit quality concerns. Given that there are commercial loans with specific terms that are not readily available; we believe the fair value of loans is derived from Level 3 inputs.
Federal Home Loan Bank of San Francisco stock – The carrying value of Federal Home Loan Bank of San Francisco stock approximates fair value as the shares can only be redeemed by the issuing institution at par. We measure the fair value of Federal Home Loan Bank of San Francisco stock using Level 1 inputs.
Deposits – We measure fair value of maturing deposits using Level 2 inputs. The fair values of deposits were derived by discounting their expected future cash flows based on the Federal Home Loan Bank of San Francisco yield curves, and maturities. We obtained Federal Home Loan Bank of San Francisco yield curve rates as of the measurement date, and believe these inputs fall under Level 2 of the fair value hierarchy. Deposits with no defined maturities, the fair values are the amounts payable on demand at the respective reporting date.
Term Debt – For variable rate term debt, the carrying value approximates fair value. The fair value of fixed rate term debt is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debt would be issued with similar credit ratings as ours and similar remaining maturities. We measure the fair value of term debt using Level 2 inputs.
Junior subordinated debenture – The fair value of the subordinated debenture is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debentures would be issued with similar credit ratings as ours and similar remaining maturities. At September 30, 2017, future cash flows were discounted at 3.17%. We measure the fair value of subordinated debentures using Level 2 inputs.
Commitments – Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower’s credit quality has declined, we record a reserve for these unfunded commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is not material. As such, no disclosures are made on the fair value of commitments.
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans and certain other assets including OREO or goodwill. These nonrecurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual assets.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the quantitative information about our assets and liabilities measured atused to fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of Septemberour net loans at June 30, 2017 and December 31, 2016.2021.
(Amounts in thousands) | Fair Value at September 30, 2017 | |||||||||||||||
Recurring Basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities | ||||||||||||||||
U.S. government and agencies | $ | 36,474 | $ | — | $ | 36,474 | $ | — | ||||||||
Obligations of states and political subdivisions | 53,850 | — | 53,850 | — | ||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 105,224 | — | 105,224 | — | ||||||||||||
Corporate securities | 6,968 | — | 6,968 | — | ||||||||||||
Commercial mortgage-backed securities | 26,148 | — | 26,148 | — | ||||||||||||
Other investment securities (1) | 3,830 | — | 3,830 | — | ||||||||||||
Total assets measured at fair value | $ | 232,494 | $ | — | $ | 232,494 | $ | — |
|
Quantitative Information about Level 3 Fair Value Measurements | ||||||
Unobservable Inputs | Range (Weighted Average) | |||||
Probability of Default (PD) | 0% | - | 100% | - | (2.46%) | |
Loss Given Default (LGD) | 0% | - | 75.53% | - | (12.45%) | |
Prepayment Rate | 0% | - | 27.77% | - | (11.14%) | |
Discount Rate | 1% | - | 8.57% | - | (4.01%) |
(Amounts in thousands) | Fair Value at December 31, 2016 | |||||||||||||||
Recurring Basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities | ||||||||||||||||
U.S. government and agencies | $ | 10,354 | $ | — | $ | 10,354 | $ | — | ||||||||
Obligations of states and political subdivisions | 59,428 | $ | — | 59,428 | — | |||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 69,604 | — | 69,604 | — | ||||||||||||
Corporate securities | 16,116 | — | 16,116 | — | ||||||||||||
Commercial mortgage-backed securities | 15,514 | — | 15,514 | — | ||||||||||||
Other investment securities (1) | 4,158 | — | 4,158 | — | ||||||||||||
Total assets measured at fair value | $ | 175,174 | $ | — | $ | 175,174 | $ | — |
|
RecurringRecurring Items
Debt Securities –The available-for-sale securities amount in the recurring fair value table above represents securities that have been adjusted to their fair values. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things. We have determined that the source of these fair values falls within Level 2 of the fair value hierarchy.
The following tables present information about our assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of June 30, 2021 and December 31, 2020.
(Amounts in thousands) | Fair Value at June 30, 2021 | |||||||||||||||
Recurring Basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. government and agencies | $ | 29,691 | $ | 0 | $ | 29,691 | $ | 0 | ||||||||
Obligations of state and political subdivisions | 136,467 | 0 | 136,467 | 0 | ||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 317,842 | 0 | 317,842 | 0 | ||||||||||||
Commercial mortgage-backed securities | 52,718 | 0 | 52,718 | 0 | ||||||||||||
Other asset-backed securities | 42,946 | 0 | 42,946 | 0 | ||||||||||||
Total assets measured at fair value | $ | 579,664 | $ | 0 | $ | 579,664 | $ | 0 |
(Amounts in thousands) | Fair Value at December 31, 2020 | |||||||||||||||
Recurring Basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Available-for-sale securities: | ||||||||||||||||
U.S. government and agencies | $ | 32,994 | $ | 0 | $ | 32,994 | $ | 0 | ||||||||
Obligations of state and political subdivisions | 108,366 | 0 | 108,366 | 0 | ||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 240,478 | 0 | 240,478 | 0 | ||||||||||||
Commercial mortgage-backed securities | 28,074 | 0 | 28,074 | 0 | ||||||||||||
Other asset-backed securities | 36,968 | 0 | 36,968 | 0 | ||||||||||||
Total assets measured at fair value | $ | 446,880 | $ | 0 | $ | 446,880 | $ | 0 |
Transfers Between Fair Value Hierarchy Levels
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the ninethree and six months ended SeptemberJune 30, 2017 2021 or the year ended December 31, 2016.2020.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basisitems
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment. The following three tables present information about our assets and liabilities at September 30, 2017 and December 31, 2016 measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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, 2017 | |||||||||||||||
Nonrecurring basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Collateral dependent impaired loans | $ | 830 | $ | — | $ | — | $ | 830 | ||||||||
Other real estate owned | 22 | — | — | 22 | ||||||||||||
Total assets measured at fair value | $ | 852 | $ | — | $ | — | $ | 852 |
(Amounts in thousands) | Fair Value at December 31, 2016 | |||||||||||||||
Nonrecurring basis | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Collateral dependent impaired loans | $ | 1,587 | $ | — | $ | — | $ | 1,587 | ||||||||
Other real estate owned | 219 | — | — | 219 | ||||||||||||
Total assets measured at fair value | $ | 1,806 | $ | — | $ | — | $ | 1,806 |
The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2017 and 2016 related to assets outstanding at September 30, 2017 and 2016.
(Amounts in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
Fair value adjustments | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Collateral dependent impaired loans | $ | 43 | $ | 15 | $ | 63 | $ | 1,068 | ||||||||
Other real estate owned | 35 | — | 35 | 71 | ||||||||||||
Total | $ | 78 | $ | 15 | $ | 98 | $ | 1,139 |
During the nine months ended September 30, 2017, collateral dependent impaired loans with a carrying amount of $893 thousand were written down to their fair value of $830 thousand resulting in a $63 thousand adjustment to the ALLL.
During the nine months ended September 30, 2017, one OREO property with an aggregate carrying value of $57 thousand outstanding at period end was written down to its fair value of $22 thousand, resulting in a $35 thousand adjustment to the ALLL.
Collateral Dependent Loans - The loan amounts abovebelow 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 less estimated selling costs. The carrying value of loans fully charged off is zero. When the fair value of the collateral is based on a current appraised value,an appraisal or management determines the fair value of the collateral is further impaired below the appraised valueother estimate and there is no observable market price, we record the impaired loan as nonrecurring Level 3.3 fair value. Impaired loan valuations are adjusted for estimated selling costs ranging from 8% to 10% based off the adjusted fair value of the property.
OREO - The OREO amount above representsamounts below represent impaired real estate that has been adjusted to fair value during the respective reporting period. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The determination of fair value is based on recent appraisals of the foreclosed properties, which take into account recent sales prices adjusted for unobservable inputs, such as opinions provided by local real estate brokers and other real estate experts. OREO fair values are adjusted for estimated selling costs between 8% and 34%.of 25% based off the adjusted fair value of the property. We record OREO as a nonrecurring Level 3.3 fair value.
The following tables present information about our assets and liabilities at June 30, 2021 and December 31, 2020 for which a nonrecurring change in fair value has been recorded during the reporting period. In addition, the tables reflect the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2021 and 2020 related to assets outstanding at June 30, 2021 and 2020.
For the Three Months Ended | For the Six Months Ended | |||||||||||
At June 30, 2021 | June 30, 2021 | June 30, 2021 | ||||||||||
(Amounts in thousands) | Fair Value (1) | Fair Value Adjustments | ||||||||||
Other real estate owned | $ | 0 | $ | 0 | $ | 8 | ||||||
Total assets measured at fair value | $ | 0 | $ | 0 | $ | 8 |
(1) Fair value is presented on a nonrecurring basis - Level 3. |
For the Three Months Ended | For the Six Months Ended | |||||||||||
At December 31, 2020 | June 30, 2020 | June 30, 2020 | ||||||||||
(Amounts in thousands) | Fair Value (1) | Fair Value Adjustments | ||||||||||
Collateral dependent impaired loans | $ | 2,755 | $ | 145 | $ | 145 | ||||||
Other real estate owned | 8 | 0 | 6 | |||||||||
Total assets measured at fair value | $ | 2,763 | $ | 145 | $ | 151 |
(1) Fair value is presented on a nonrecurring basis - Level 3. |
During the six months ended June 30, 2020, collateral dependent impaired loans with a carrying value of $2.5 million were written down to their fair value of $2.4 million resulting in a $145 thousand adjustment to the ALLL.
During the six months ended June 30, 2020, one loan with an aggregate carrying value of $14 thousand was written down to its fair value of $8 thousand, resulting in a $6 thousand adjustment to the ALLL when the underlying property was transferred to OREO. The property was reevaluated during the three months ended March 31, 2021 and sold in April 2021, resulting in an $8 thousand write-down of OREO.
Limitations –
Fair value estimates are made at a specific point in time, based on relevant market information and other information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time, our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based only on current on and off-balance sheet financial instruments without attempting to estimate theinstruments. Our fair value ofestimates do not include any adjustment for anticipated future business and the value of assets and liabilities that are not considered financial instruments.business. 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 12. PURCHASE OF FINANCIAL ASSETS10. GOODWILL AND OTHER INTANGIBLES
WeGoodwill and other intangibles, net consisted of the following at June 30, 2021 and December 31, 2020.
June 30, | December 31, | |||||||
(Amounts in thousands) | 2021 | 2020 | ||||||
Goodwill and Other Intangibles: | �� | |||||||
Goodwill | $ | 11,671 | $ | 11,671 | ||||
Core deposit intangibles | 6,125 | 6,125 | ||||||
Domain name | 32 | 32 | ||||||
Accumulated amortization | (2,496 | ) | (2,113 | ) | ||||
Goodwill and other intangibles, net | $ | 15,332 | $ | 15,715 |
Goodwill
Goodwill results from a business combination, and is calculated as the amount of consideration paid in excess of the fair value of the net assets acquired in a transaction. Goodwill is considered to have an ongoing agreement to purchaseindefinite life and is therefore not amortized. It is reviewed annually for impairment, or more frequently if required by circumstances known as triggering events. At June 30, 2021, goodwill totaled $11.7 million.
Core Deposit Intangibles
Acquired core deposits provide value as a maximum par valuesource of $50.0 million in unsecured consumer home improvement loansbelow market rate funds and the realization of interest cost savings is a fundamental rationale for assuming these deposit liabilities. The cost savings is defined as the difference between the cost of funds on our new deposits (i.e., interest and net maintenance costs) and the cost of an equal amount of funds from an alternative source having a third party originator. The loans are purchased without recourse or servicing rights. As we receive principal payments on these purchased loans,similar term as the new loans are purchased and the outstanding par value remains at approximately $50.0 million. For the period from May 12, 2014 through September 30, 2017, we have paid aggregate cash totaling $114.6 million, and received aggregate cash repayments of $66.8 million for $47.8 million in net loans outstanding. We record the acquired loansdeposit base. Our core deposit intangibles were recorded at fair value atwhich was derived using the timeincome approach and represent the present value of the purchase.cost savings over the projected term of our new deposit base. The core deposit intangible is being amortized on a straight-line basis over an estimated eight-year life, and is evaluated annually for impairment.
The following table sets forth, as of June 30, 2021, the total estimated future amortization of intangible assets:
(Amounts in thousands) | Amount | |||
Amortization: | ||||
2021 | $ | 383 | ||
2022 | 766 | |||
2023 | 766 | |||
2024 | 581 | |||
2025 | 544 | |||
2026 and thereafter | 589 | |||
Total | $ | 3,629 |
NOTE 13. BRANCH ACQUISITION11. MERGER
On March 11, 2016, we completedPending Merger with Columbia Banking System, Inc.
As announced by the purchaseCompany on June 23, 2021 and reported in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 24, 2021 (the “Current Report”), the Company has entered into an Agreement and Plan of fiveMerger dated June 23, 2021 (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, the Company will merge with and into Columbia (the “Merger”), with Columbia as the surviving entity.
Subject to the terms and conditions of the Merger Agreement, at the date and time when the Merger becomes effective (the “Effective Time”), the Bank of America branchesCommerce shareholders will have the right to receive, in northern California.respect of each share of common stock of Bank of Commerce (“Bank of Commerce Common Stock”), a number of common shares of Columbia (“Columbia Common Stock”) equal to the Exchange Ratio (as defined below), subject to adjustments as set forth in the Merger Agreement (the “Merger Consideration”). “Exchange Ratio” means 0.40 of a share of Columbia Common Stock per each share of Bank of Commerce Common Stock subject to certain potential adjustments. Based on Columbia’s closing stock price on June 23, 2021, the aggregate merger consideration is valued at $266.0 million, which includes $265.6 million of Columbia common stock to be issued to Bank of Commerce shareholders and $400 thousand of cash to be paid to option holders. The acquired branches are located in Colusa, Willows, Orland, Corning, and Yreka. The Bank also acquired three offsite ATM locations in Williams, Orland and Corning. The Bank paid cashvalue of the merger consideration will fluctuate until closing based on the value of $6.7 million and acquired $155.2 million in assets, primarily cash and premises. The Bank assumed $149.2 million in liabilities, primarily deposits.Columbia’s stock.
The transaction provided a new sourceis expected to close in the fourth quarter of low cost core deposits2021, and allowed us to execute our plan to reconfigure our balance sheet. On March 14, 2016, we utilized a portionits completion is contingent upon approval from BOCH’s shareholders, the receipt of that new liquidity to reduce our reliance on wholesale funding sources repaying $75.0 million of Federal Home Loan Bank of San Francisco hedged term debtother customary regulatory approvals, and redeeming $17.5 million of brokered time deposits.other customary closing conditions.
The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The Bank engaged third party specialists to assist in valuing certain assets, including the real estate and the core deposit intangible that resulted from the acquisition.
The contribution of the acquired operations of the five former Bank of America offices was immaterial. Therefore, disclosure of supplemental pro forma financial information and prior period comparisons were deemed neither practical nor meaningful. Additionally, the acquired operation was not considered a “significant business combination” as defined by the Securities and Exchange Commission.
Branch acquisition costs recorded during the year ended December 31, 2016 were $580 thousand. The following table provides an assessment of the consideration transferred, assets purchased, and the liabilities assumed.
Fair Value and | ||||||||||||
As Recorded by | Other Merger | |||||||||||
Bank of | Related | As Recorded by | ||||||||||
(Amounts in thousands) | America | Adjustments | the Company | |||||||||
Consideration paid: | ||||||||||||
Cash paid | $ | 6,656 | ||||||||||
Total consideration | $ | 6,656 | ||||||||||
Assets acquired: | ||||||||||||
Cash and cash equivalents | $ | 149,067 | $ | — | $ | 149,067 | ||||||
Premises and equipment, net | 1,835 | 2,355 | 4,190 | |||||||||
Other assets | 201 | — | 201 | |||||||||
Core deposit intangible | — | 1,772 | 1,772 | |||||||||
Total assets acquired | $ | 151,103 | $ | 4,127 | $ | 155,230 | ||||||
Liabilities assumed: | ||||||||||||
Deposits | $ | 149,047 | $ | — | $ | 149,047 | ||||||
Other liabilities | 20 | 172 | 192 | |||||||||
Total liabilities assumed | $ | 149,067 | $ | 172 | $ | 149,239 | ||||||
Net identifiable assets acquired over liabilities assumed | $ | 2,036 | $ | 3,955 | $ | 5,991 | ||||||
Goodwill | $ | 665 |
ItemItem 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Risk Factors
This report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (“Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These statements are based on management’smanagement’s current beliefs and assumptions, and on information available to management as of the date of this document. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements may also include statements in which words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “considers” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” and other comparable words or phrases of a future- or forward-looking nature, are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. Except as specifically noted herein all references to the “Company” refer to Bank of Commerce Holdings, a California corporation, and its consolidated subsidiaries.
The following factors, among others, could cause our actual results to differ materially from those expressed in such forward-looking statements:
Merger Related Risks
● | The possibility that the announced merger with Columbia does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; |
● | Due to the fluctuation in market price of Columbia Banking System, Inc. common stock, the BOCH shareholders' cannot be sure of the exact value of consideration they will receive in the Merger; |
● | Negative reaction to the merger transaction by the Company’s customers, employees and counterparties; |
● | Customer and employee relationships and business operations may be disrupted by the pending merger. |
All Others
● | The strength of the United States economy in general and the strength of the local economies in California in which we conduct operations; |
● |
|
| The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve Board; |
● |
|
|
|
|
|
|
|
|
|
● | Developments and changes in Federal, state or local laws and regulations addressing the effects of the COVID-19 pandemic; |
● | The economic effects of COVID-19 or similar pandemic diseases could adversely affect our future results of operations or the market price of our stock; |
● | Changes affecting the Small Business Administration (“SBA”), including how such changes may impact the status of our outstanding Paycheck Protection Program (“PPP”) loans; |
● | Our inability to successfully manage our growth or implement our growth strategy; |
● | Volatility in the capital or credit markets; |
● | Our inability to transition from LIBOR to a substitute index; |
● | Changes in the financial performance and/or condition of our borrowers; |
● | Our concentration in real estate lending; |
● | Changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation and other third parties; |
● | Changes in consumer spending, borrowing and savings habits; |
● |
|
● | Changes in the level of our nonperforming assets and loan charge-offs; |
● | Deterioration in values of real estate in California and the United States generally, both residential and commercial; |
● | Possible other-than-temporary impairment of securities held by us; |
● |
|
● | Our inability to timely |
● | The willingness of customers to substitute |
● | Technological changes could expose us to new risks, including potential systems failures or fraud; |
● | The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters; |
● | The risks presented by |
● |
|
● | Changes in the competitive environment among financial and bank holding companies and other financial service |
● | Consolidation in the financial services industry |
● | The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels; |
● |
|
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
● | A natural disaster outside California, could negatively impact our purchased loan portfolio or our third party loan |
● | Unauthorized computer access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems; |
● | Geopolitical conditions, including acts or threats of war or terrorism, actions taken by the United States or other governments in response to acts or threats of war or terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; |
● | Our inability to manage the risks involved in the foregoing; and |
● | The effects of any reputational damage to the Company resulting from any of the foregoing. |
If our assumptions regarding one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this document and in the information incorporated by reference in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake any obligation to publicly correct, revise, or update any forward-looking statement if we later become aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties discussed in “RISK FACTORS”“RISK FACTORS” and in “MANAGEMENT’S“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”OPERATIONS”.
For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s’s Annual Report on Form 10-K for the year ended December 31, 20162020 under the heading “Risk factors”“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 significantsignificant changes and trends in the financial condition, capital resources and liquidity of the Company from December 31, 20162020 to SeptemberJune 30, 2017.2021. Also discussed are significant trends and changes in the Company’s results of operations for the ninethree and six months ended SeptemberJune 30, 2017,2021, compared to the same periodperiods in 2016.2020. The consolidated financial statements and related notes appearing elsewhere in this report are unaudited. The following discussion and analysis is intended to provide greater detail of the Company's financial condition and results.
GENERAL
Bank of Commerce Holdings (“HoldingCompany,” “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”). with its principal offices in Sacramento, California. The Holding Company’sCompany’s principal business is to serve as a holding company for ReddingMerchants Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce) and for Bank of Commerce Mortgage (inactive). The Bank changed its name for all operations to Merchants Bank of Commerce effective May 20, 2019. We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II, which was organized in 2005 connection with our prior issuance of trust-preferred securities. Our common stock is traded on the NASDAQ Global Market under the symbol “BOCH.”
We commenced banking operations in 1982 and with the completion of the purchase ofgrew organically to four branches before purchasing five Bank of America branches during the first quarter ofin 2016 and acquiring Merchants Holding Company in 2019; we now operate nineten full service facilities, one limited service facility and one loan production office in northern California. We also operate a full service “cyber office” as identified in our summary of deposits reporting filed with the FDIC. We provide a wide range of financial services and products for business and retail customers which are competitive with those traditionally offered by banks of similar size in California. As of June 30, 2021 and December 31, 2020, we operated under one primary business segment: Community Banking.
On June 23, 2021, we entered into an Agreement and Plan of Merger with Columbia Banking System, Inc. that we expect to close in the fourth quarter of 2021, subject to the satisfaction of customary closing conditions, including regulatory and shareholder approvals. See Note 11 Merger in the Notes to Consolidated Financial Statements and our press release filed on form 8-K on June 24, 2021 announcing the signing of the definitive merger agreement for additional information.
Our principal executive office is located at 555 Capitol Mall Suite 1255, Sacramento, California 95814 and the telephone number is (800) 421-2575.
EXECUTIVE OVERVIEW
Financial highlights
Significant Items for the third quarterFirst Six Months of 20172021:
● | On June 23, 2021, we entered into a Merger Agreement with Columbia Banking System, Inc. with Columbia as the surviving entity; which was previously announced. The closing of the merger transaction is expected to occur during the fourth quarter of 2021. |
● | The Bank continued to experience significant growth in deposits, which increased $155 million during the first six months of 2021. |
● | Loans, exclusive of PPP loans increased $23 million during the first six months of 2021; a reversal of the decline that occurred throughout 2020. |
● | During the first six months of 2021, we received $119.1 million in repayments on PPP loans. |
● | During the first quarter of 2021, our largest nonaccrual borrowing relationship totaling $3.0 million (43% of nonaccrual loans at December 31, 2020) was repaid. The repayment included all principal (including $110 thousand recovery for an amount previously charged-off), $251 thousand of previously unrecorded interest and $80 thousand of reimbursed legal, appraisal and title fees. |
● | The Company’s net interest margin declined to 3.30% for the six months ended June 30, 2021 compared to 3.74% for the same period a year ago. |
Financial Highlights for the Second Quarter of 2021 Compared to the same quarterSame Quarter a year ago:Year Ago:
Performance
● | Net income of |
o | $817 thousand in costs for |
o | $1.3 million provision for loan and leases losses for the second quarter of 2020. |
● | Return on average assets |
● | Return on average equity |
|
|
● | Net interest income increased |
● | Net interest margin declined to 3.16% compared to |
● | Average loans totaled $1.136 billion, a decrease of $45 million (4%) compared to average loans for the same period in the |
● | Average earning assets totaled $1.775 billion, an increase of $252 million (17%) compared to average earning assets for the same period in the prior year. |
● | Average deposits |
| Average |
| Average |
● | The Company’s efficiency ratio was 61.5% compared to 56.1% during the same period in the prior year. |
o | The Company’s efficiency ratio of 61.5% for the second quarter of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 5.4%. |
● | Book value per common share was $10.78 at June 30, 2021 compared to $10.13 at June 30, 2020. |
● | Tangible book value per common share was |
Credit Quality
● | Nonperforming assets at |
● | Net loan recoveries were |
● | There was no provision for loan and lease losses during the second quarter of 2021 compared to $1.3 million provision for loan and lease losses for the same period |
Financial highlightsHighlights for the first nine monthsFirst Six Months of 2017 compared2021 Compared to the same periodSame Period a year ago:Year Ago:
Performance
● | Net income of |
o | $817 thousand in costs during the first six months of 2021 associated with the merger with Columbia Banking System, Inc., most of which was not tax deductible. |
o | $4.2 million provision for |
o | $1.1 million in non-recurring costs during the first quarter of |
o | 1.0 million shares of common stock repurchased during the six months ended June 30, 2020. |
● | Return on average assets |
● | Return on average equity |
|
|
● | Net interest income increased |
● |
|
● | Average loans |
● | Average earning assets totaled |
● | Average deposits totaled $1.613 billion, an increase of $287 million (22%) compared to average |
o | Average non-maturing deposits totaled $1.476 billion, an increase of $295 million (25%) compared to the same period in the prior year. |
o | Average certificates of deposit totaled $137.0 million, a decrease of $8.1 million (6%) compared to the same period in the prior year. |
● | The Company’s efficiency ratio was 59.3% compared to 63.1% for the same period in the prior year. |
o | The Company’s efficiency ratio of 59.3% for the |
o | The Company’s efficiency ratio of 63.1% for the first six months of 2020 included $1.1 million of non-recurring costs, which increased the efficiency ratio by 3.9%. |
● | Book value per common share was $10.78 at June 30, 2021 compared to $10.58 at December 31, 2020. |
● | Tangible book value per common share was |
Credit Quality
● | Nonperforming assets at |
● | Net loan recoveries were $284 thousand during the first six months of 2021 compared with net loan charge-offs |
● | There was no provision for loan and lease losses during the first six months of 2021 compared |
Impacts of COVID-19:
● | During 2020, we funded 606 loans totaling $163.5 million under the first Small Business Administration Paycheck Protection Program (“PPP”). We continue to process loan forgiveness applications and, at June 30, 2021, we have 47 loans totaling $12.3 million remaining to be forgiven compared to 487 loans totaling $130.8 million at December 31, 2020. |
● | During 2021, we funded an additional 247 loans totaling $47.3 million under the second PPP. The application period for the second PPP loan program ended on May 31, 2021. We began to process loan forgiveness applications during June, and at June 30, 2021, we have 234 loans totaling $46.7 million remaining to be forgiven. |
● | We have experienced significant increases in deposit balances during the past year. All PPP loan funds were deposited into customer accounts at our bank and customer behavior has emphasized savings during the economic slowdown. |
● | During the first quarter of 2021, the SBA extended their debt relief program and resumed making principal and interest payments on all of our SBA 7(a) loans, which totaled $29.0 million at June 30, 2021. Payment assistance varies by borrower, will continue for no more than eight months and is limited to a maximum $9 thousand per borrower per month. |
● | At June 30, 2021, approximately 30% of our workforce is working remotely. |
● | As of April 12, 2021, all of our offices have returned to pre-pandemic operating hours. |
SUMMARY OF CRITICAL ACCOUNTING POLICIES & ESTIMATES
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, 20162020 filed with the SEC on March 15, 2017.5, 2021. Some of these significant accounting policies are considered critical and require management to make difficult, subjective or complex judgments or estimates. Critical accounting estimates are subject to risks and uncertainties and are susceptible to significant change that could have a material impact on the carrying value of certain assets or on income under different assumptions and conditions. Management believes that the following policies would be considered critical under the SEC’s definition.
Valuation of Investments and Impairment of Securities
At the time of purchase, we designate a security as held-to-maturity or available-for-sale, based on our investment objectives, operational needs and intent to hold. We do not engage in trading activity. Securities designated as held-to-maturity are carried at amortized cost. We have the ability and intent to hold these securities to maturity. Securities designated as available-for-sale may be sold to implement our asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as part of accumulated other comprehensive income (loss), a separate component of shareholders’shareholders’ equity. Gains or losses on sale of securities are based on the specific identification method. The market value and underlyingcredit rating of theeach security is monitored forto identify changes in asset quality.
SecuritiesSecurity values 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 costcosts are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or in the case of fixed rate investments, from changes in interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends.
When an investment is other-than-temporarily impaired, we assess whether we intend to sell the security, or it is more likely than notmore-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If we intend to sell the security or if it is more likely than notmore-likely-than-not that we will be required to sell security before recovery of the amortized cost basis, the entire amount of other-than-temporary impairment is recognized in earnings.
For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the investment’sinvestment’s amortized cost basis and the present value of its expected future cash flows.
The remaining differences between the investment’sinvestment’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. Significant judgment is required in the determination of whether other-than-temporary impairment has occurred for an investment. We follow a consistent and systematic process for determining other-than-temporary impairment loss. We have designated the ALCO responsible for the other-than-temporary evaluation process.
The ALCO’sALCO’s assessment of whether an other-than-temporary impairment loss should be recognized incorporates both quantitative and qualitative information including, but not limited to: (1) the length of time and the extent of which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, (4) whether the debtor is current on interest and principal payments, and (5) general market conditions and industry or sector specific outlook. See Note 3 Securities in the Notes to Consolidated Financial Statements in this document for further detail on other-than-temporary impairment and the securities portfolio.
Allowance for Loan and Lease Losses
The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan and lease 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 thea 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. TheyLoans are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.
Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for unimpaired loan categories are based on analysis of historical losses adjusted for changing environmental factors applicable to each loan category. Allowances for changing environmental factors are management's best estimate of the probable impact these changes would have on the loan portfolio as a whole. See Note 4 Loans in the Notes to Consolidated Financial Statements in this document for further detail on the ALLL and the loan portfolio.
Valuation of Goodwill
Goodwill results from a business combination, and is calculated as the amount of consideration paid in excess of the fair value of the net assets acquired in a transaction. Goodwill is considered to have an indefinite life and is therefore not amortized. It is reviewed annually for impairment, or more frequently if required by circumstances known as triggering events. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock.
We perform our analysis of goodwill at the reporting unit level analyzing factors that would impact the estimated fair value of the reporting unit compared to its carrying value. We first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that goodwill is impaired. If the qualitative assessment results indicate that it is more likely than not that the fair value of any reporting unit is less than its carrying amount, then the quantitative impairment test is performed. Various valuation methodologies are considered when completing the quantitative impairment test to determine the estimated fair value of the reporting unit which is then compared to its carrying value, including goodwill. If the fair value of the our Company (our only reporting unit) is less than its carrying amount, an impairment charge would be taken for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
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 notmore-likely-than-not that they will be realized. In evaluating our ability to recover the deferred tax assets, management considers all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations.
In projecting future taxable income, management develops assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. We file consolidated federal and 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,more-likely-than-not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. The measurement process is applied only after satisfying the recognition requirement and determines what amount of a tax position will be sustainable upon a potential examination or settlement. If upon measuring, the tax position produces a range of potential tax benefits, we may claim the highest tax benefit from that range as long as it is over 50% likely to be realized using a probability analysis.
We believe that all of the tax positions we have taken, meet the more likely than notmore-likely-than-not recognition threshold. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities, and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available-for-sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a nonrecurring basis, such as certain impaired loans held for investment, (“OREO”), core deposit intangible and goodwill. These nonrecurring fair value adjustments typically involve write-downs of individual assets due to application of lower of cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, we use our best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’smanagement’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 119 Fair Values in the Notes to Consolidated Financial Statements incorporated in this document.
RECENT ACCOUNTING PRONOUNCEMENTS
ASU No. 2016-13
Description - In June of 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.
The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’sorganization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
Methods and timing of adoption – The amendment is effectiveFASB has voted to delay until January 2023 the implementation of the ASU No. 2016-13 for fiscal years,smaller reporting companies as defined by the SEC. We qualify as a smaller reporting company and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
Expected financial statement impact – We are currently evaluatingin light of this delay, we have postponed the provisionsimplementation of the ASU and have formed a committee for the purpose of developing a model that is compliant with the requirements under the ASU. The committee is also gathering pertinent data, consulting with outside professionals and evaluating our IT systems. Management expectsnot determined if we will implement prior to recognize a one–time cumulative effect adjustment to the allowance for loan and lease losses as of the first reporting period in which the new standard is effective. An estimate of the magnitude of the one-time adjustmentJanuary 2023 or the overall impactfinancial impact. As discussed in Note 11 Merger in the Notes to Consolidated Financial Statements, the Company has entered into an Agreement and Plan of this standard hasMerger with Columbia Banking System, Inc. with Columbia as the surviving entity. The transaction is expected to close during the fourth quarter of 2021; therefore, we will not yet been determined.adopt ASU No. 2016-13.
ASU No. 2016-022020-04
Description -– In FebruaryMarch of 2016,2020, the FASB issued ASU No. 2016-02, 2020-04Leases (Topic 812), Reference Rate Reform (topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This Update was issuedThe amendments provide temporary optional guidance to increase transparencyease the potential burden in accounting for reference rate reform. The guidance provides optional expedients and comparability among organizations by recognizing lease assetsexceptions for applying generally accepted accounting principles to contract modifications and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The core principle of Topic 842 ishedging relationships, subject to meeting certain criteria, that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilitiesreference London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be recognized for most leases.
Methods and timing of adoption – For public companies, the amendmentsdiscontinued. The last expedient is a one-time election to sell or transfer debt securities classified as held-to-maturity. The expedients are in this update are effective for fiscal years beginning aftereffect from March 12, 2020, through December 15, 2018, including interim periods within those fiscal years.
Expected financial statement impact – Although an estimate of31, 2022. We have formed a committee to evaluate the impact of the new leasing standard has not yet been determined, the Company expects a significant new lease assetLIBOR transition and related lease liability on the balance sheet due to the number of leased properties the Company currently has that are accounted for under current operating lease guidance.
ASU No. 2016-01
Description - In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
Methods and timing of adoption – ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for certain provisions.
Expected financial statement impact – The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.
ASU No. 2014-09
Description - In May of 2014,statements and to facilitate 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.transition.
Methods and timing of adoption – 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, , or modified retrospective adoption. As a bank, key revenue sources, such as interest income have been identified as out of scope of this new guidance. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.
Expected financial statement impact – Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, we do not expect the new guidance to have a material impact on interest income. We are continuing our overall assessment of noninterest income revenue streams and reviewing contracts potentially affected by the ASU including fees on payroll and benefit processing, deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on the Company’s financial position, results of operations or cash flows.
SOURCES OF INCOME
Interest Income
We derive our income primarily from net interest income, which is the difference between the interest income we receive on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income is impacted by many factors that are beyond our control, including general economic conditions inflation, recession, and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. In recent years, we originated higher volumes of longer term fixed rate loans. These loans, combined withAside from changes in market interest rates, the structure of our investment portfolio,current net interest margin will be affected by the use of floors in the pricing of our variable rate loans and funding mix caused the Company to become slightly liability sensitive, which could negatively impact earnings in a rising interest rate environment.following:
● | The majority of our loans are fixed rate loans or variable rate loans that are already at their floor rate. This has mitigated the impact of declining interest rates on loan yields. The yield on loans, exclusive of PPP loans, has declined 27 basis points from 4.78% for the six months ended June 30, 2020 to 4.51% for the six months June 30, 2021. |
● | At June 30, 2021, we have 281 PPP loans totaling $59.1 million, which bear an interest rate of 1.00%. The yield on PPP loans is highly dependent on fees earned over the life of the loans. When PPP loans are forgiven and repaid before the end of the loan term, we accelerate recognition of the unamortized loan fee, which increases the average yield on PPP loans for the quarter of forgiveness. For the six months ended June 30, 2021, the average yield for PPP loans was 4.85%, including $2.2 million, in fees ($1.6 million of which was accelerated). At June 30, 2021, net loan fees totaling $142 thousand remain to be earned from loans in the first PPP loan program. We anticipate that most of these fees will be recognized during the third quarter of 2021. At June 30, 2021, net loan fees totaling $1.5 million remain to be earned from loans in the second PPP loan program, which have a five-year term. |
● | The impact of declining interest rates has been more immediate on our investment securities portfolio and our interest-bearing deposits in other banks. Much of our investment securities portfolio is collateralized by residential and commercial real estate mortgages. The rapid decline in interest rates during 2020 prompted the refinance of many of these mortgages, which accelerated bond repayments and accelerated amortization of bond premiums, lowering yields. Additionally, the cash flows from the investment securities portfolio were reinvested at substantially lower yields. Yield on taxable securities declined from 2.61% for the six months ended June 30, 2020 to 1.61% for the six months ended June 30, 2021. |
● | During 2020, in response to the economic effects of the COVID-19 pandemic, the Federal Reserve cut short-term interest rates by 150 to 175 basis points and has provided guidance that it expects interest rates to remain low for an extended period of time. Our average yield on interest bearing deposits in other banks decreased 49 basis points for the six months ended June 2021 compared to the six months ended June 30, 2020. We have also experienced significant increased deposit balances due to PPP loan program disbursements and changes in customer behavior, which continues to place greater emphasis on savings during the current uncertain times. During the first six months of 2021, we continued to invest our increased liquidity into our investment securities portfolio, which should enhance our net interest margin and net interest income. |
● | Cash flows from our loan and investment securities portfolio are being reinvested in the current market at significantly lower rates. Recent bond purchases have centered on longer duration investments such as longer maturity municipal bonds and lower coupon and moderate-term mortgage backed securities. |
Net interest income reflects both the amount of earning assets we hold and our net interest margin, which is the difference between the yieldyields we receive on our earning assets and the interest raterates we pay to fund those assets. As a result, changes in either our net interest margin or the amount of earning assets we hold will affect our net interest income and earnings.
Increases or decreases in interest rates could adversely affect our net interest margin. Although our asset yields and funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, and cause our net interest margin to expand or contract. Many of our assets are tied to prime rate, so they mayindexes, which adjust faster in response to changes in interest rates. As a result, when
When market interest rates fall,begin to increase in the yieldfuture, we earn onanticipate that our interest rate risk position will be neutral to moderately liability sensitive which will remain true until sufficient rate rise allows variable rate loans to move higher off their floors.
The low interest rate environment combined with excess liquidity from increased deposits being invested in lower yielding assets may fall faster thanhas contributed to our ability to reprice a large portionlower net interest margin. Because many 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-termare already priced near historic lows with little room for further reductions, if 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,decline, 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 of interest rate changes on our earnings under various simulated scenarios. The 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 andor take other strategic actions, which may result in losses or expenses.
The following table summarizes as of June 30, 2021 when loans are projected to reprice by year and by rate index.
Years 6 | ||||||||||||||||||||||||||||||||
Through | Beyond | |||||||||||||||||||||||||||||||
(Amounts in thousands) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 10 | Year 10 | Total | ||||||||||||||||||||||||
Rate Index: | ||||||||||||||||||||||||||||||||
Fixed | $ | 59,225 | $ | 67,622 | $ | 46,869 | $ | 44,062 | $ | 39,279 | $ | 217,043 | $ | 39,971 | $ | 514,071 | ||||||||||||||||
Variable: | ||||||||||||||||||||||||||||||||
Prime | 61,925 | 4,939 | 6,593 | 5,116 | 8,584 | 329 | — | 87,486 | ||||||||||||||||||||||||
5 Year Treasury | 51,583 | 70,562 | 54,639 | 95,601 | 100,033 | 50,097 | — | 422,515 | ||||||||||||||||||||||||
7 Year Treasury | 2,901 | 4,465 | 5,315 | — | — | — | — | 12,681 | ||||||||||||||||||||||||
1 Year LIBOR | 16,772 | — | — | — | — | — | — | 16,772 | ||||||||||||||||||||||||
Other Indexes | 3,432 | 2,206 | 2,063 | 10,427 | 2,183 | 12,284 | 1,363 | 33,958 | ||||||||||||||||||||||||
Total accruing variable rate loans | 136,613 | 82,172 | 68,610 | 111,144 | 110,800 | 62,710 | 1,363 | 573,412 | ||||||||||||||||||||||||
Nonaccrual | 796 | 770 | 721 | 434 | 234 | 747 | 111 | 3,813 | ||||||||||||||||||||||||
Total | $ | 196,634 | $ | 150,564 | $ | 116,200 | $ | 155,640 | $ | 150,313 | $ | 280,500 | $ | 41,445 | $ | 1,091,296 |
For variable rate loans, the following table summarizes those that were at or above their floor rate, and those that do not possess a contractual floor rate.
At June 30, 2021 | ||||||||||||||||||||
With Floors | Without | |||||||||||||||||||
(Amounts in thousands) | At Floor Rate | Above Floor Rate | Total | Floors | Total | |||||||||||||||
Variable rate loans: | ||||||||||||||||||||
Prime | $ | 43,035 | $ | 6,055 | $ | 49,090 | $ | 38,396 | $ | 87,486 | ||||||||||
5 year Treasury | 356,362 | 43,826 | 400,188 | 22,327 | 422,515 | |||||||||||||||
7 Year Treasury | 12,681 | — | 12,681 | — | 12,681 | |||||||||||||||
1 Year LIBOR | — | 701 | 701 | 16,071 | 16,772 | |||||||||||||||
Other Indexes | 16,639 | 815 | 17,454 | 16,504 | 33,958 | |||||||||||||||
Total accruing variable rate loans | $ | 428,717 | $ | 51,397 | $ | 480,114 | $ | 93,298 | 573,412 | |||||||||||
Nonaccrual | 3,813 | |||||||||||||||||||
Total variable rate loans | $ | 577,225 |
Non Interest Income
We also earn noninterest income. Sources of noninterest income include fees earned on deposit related services, ATM and point of sale fees, payroll and benefit processing fees, gain on sale of available-for-sale securities, earnings on bank-owned life insurance, gains on sale of available-for-sale investment securities, and dividends on Federal Home Loan BankFHLB stock. Most of San Francisco stock.these sources of income do not vary significantly from quarter to quarter. Possible exceptions include gains on sale of available-for-sale investment securities and death proceeds from bank-owned life insurance.
RESULTS OF OPERATIONS
OVERVIEW
ThirdSecond Quarter of 20172021 Compared With ThirdSecond Quarter of 20162020
Net income for the thirdsecond quarter of 20172021 increased $510$292 thousand compared to the thirdsecond quarter of 2016.2020. In the current quarter, net interest income was $181 thousand higher, provision for loan and lease losses was $1.3 million higherlower and noninterest income was $36$176 thousand higher. These positive changes were partially offset by noninterest expense that was $151$1.0 million higher and a provision for income taxes that was $356 thousand higher.
First Six Months of 2021 Compared With First Six Months of 2020
Net income for the first six months of 2021 increased $4.3 million compared to the first six months of 2020. In the current year, net interest income was $1.6 million higher, provision for loan and lease losses was $4.2 million lower and noninterest income was $447 thousand higher. These positive changes were partially offset by noninterest expense that was $123 thousand higher and a provision for income taxes that was $683 thousand$1.8 million higher.
First Nine Months of 2017 Compared With FirstNine Months of 2016
Net income for the first nine months of 2017 increased $4.4 million compared to the same period a year ago. Net income for the current year included life insurance death benefit proceeds of $502 thousand that were not subject to income tax. Net income for 2016 was negatively impacted by $3.0 million of branch acquisition and balance sheet restructuring costs, a $546 thousand other-than-temporary-impairment of an investment security and the write-off of a $363 thousand deferred tax asset. In the current year, net interest income was $3.7 million higher, noninterest income was $1.2 million higher and noninterest expenses were $1.7 million lower. These positive changes were offset by an increase in the provision for loan and lease losses of $500 thousand, and a provision for income taxes that was $1.7 million higher.
We continued payment of our quarterly cash dividends of $0.03 per share during the nine months ended September 30, 2017. In determining the amount of dividend to be paid, management considers capital preservation objectives, expected asset growth, projected earnings, the overall dividend pay-out ratio, and the dividend yield.
Return on Average Assets and Return on Average Total Equity and Common Shareholders' Equity
The following table presents the returnsreturn on average assets and return on average total equity for the ninethree and six months ended SeptemberJune 30, 20172021 and 2016.2020. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the Consolidated Statements of Income incorporated in this document.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Return on average assets | 0.93 | % | 0.86 | % | 0.83 | % | 0.37 | % | ||||||||
Return on average total equity | 9.01 | % | 10.10 | % | 8.80 | % | 4.30 | % |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
Return on average assets | 0.89 | % | 0.95 | % | 1.00 | % | 0.62 | % | ||||||||
Return on average equity | 9.26 | % | 9.26 | % | 10.22 | % | 5.65 | % |
NET INTEREST INCOME AND NET INTEREST MARGIN
ForDuring 2020, in response to the three months ended September 30, 2017economic effects of the COVID-19 pandemic, the Federal Reserve cut short-term interest rates by 150 to 175 basis points and has provided guidance that it expects interest rates to remain low for an extended period of time.
Our net interest margin for the second quarter of 2021 was 3.16%, a decrease of 48 basis points compared to the same period a year ago:
Netago. Our net interest income increased $1.3 million.
Interest incomemargin for the threefirst six months ended September 30, 2017 increased $1.4 million or 14% to $11.8 million. Interest and fees on loans increased $880 thousand due to increased average loan balances and increased yield on the loan portfolio. Interest on securities increased $359 thousand and interest on interest-bearing deposits due from banks increased $196 thousand.
Interest expense for the third quarter of 2017 increased $127 thousand or 12% to $1.2 million. The increase2021 was primarily caused by an increase in the average rate paid on interest-bearing deposits.
For the nine months ended September 30, 20173.30%, a decrease of 44 basis points compared to the same period a year ago:ago.
NetMaintaining our net interest margin in the future will be challenging as current market pressures are anticipated to cause our yield on interest-earning assets to continue to decline and the current margin is temporarily enhanced by accelerated PPP fees.
For the three months ended June 30, 2021 compared to the same period a year ago, net interest income increased $3.7 million.$181 thousand.
Interest income for the nine months ended September 30, 2017 increased $3.4 millionsecond quarter of 2021 decreased $269 thousand or 11%2% to $33.9$14.7 million. Interest and fees on loans increased $2.8 million due to increased average loan balances. Interest on securities increased $310 thousand due to increased average balances. Interest on interest bearing deposits due from banks increased $326 thousand due to increased average balances and increases in the rate we receive on interest bearing deposits.
Interest expense for the first nine months of 2017 decreased $285 thousand or 8% to $3.4 million. The net decrease was primarily caused by a $482 thousand decrease in interest on FHLB term debt. Late in the first quarter of 2016 all FHLB term debt was repaid and an interest rate hedge associated with $75.0 million of that debt was terminated. The decrease was partially offset by greater interest expense due to increased average balances in interest-bearing deposits.
● | During the second quarter of 2021, we recognized $588 thousand in accelerated net fee income on PPP loans forgiven and repaid during the quarter. These accelerated loan fees increased the average yield on loans for the second quarter of 2021 by 21 basis points and increased the net interest margin for the second quarter of 2021 by 13 basis points. There was no accelerated net fee income on PPP loans for the second quarter of 2020. |
● | PPP loans had an average balance of $104.0 million and yield of 4.10% (1.83% excluding accelerated fee income) for the second quarter of 2021 compared to an average balance of $132.8 million and yield of 2.46% for the same period a year ago. |
● | Excluding PPP loans, interest and fees on loans decreased $1.0 million due to a $16.7 million decrease in average loan balances and a 34 basis point decrease in average yield. |
● | Interest on investment securities increased $520 thousand due to a $265.6 million increase in average investment securities balances partially offset by a 91 basis point decrease in average yield. |
● | Interest on interest-bearing deposits due from banks increased $6 thousand due to a $31.6 million increase in average interest-bearing deposit balances partially offset by 1 basis point decrease in average yield. |
Interest expense for the second quarter of 2021 decreased $450 thousand or 37% to $764 thousand.
● | Interest expense on interest-bearing deposits decreased $385 thousand. Average interest-bearing demand and savings deposit balances increased $141.6 million, while average certificate of deposit balances decreased $3.6 million. The average rate paid on interest-bearing deposits decreased 21 basis points from 0.43% to 0.22%. |
● | Interest expense on FHLB borrowings decreased $5 thousand. There were no FHLB borrowings during the current quarter. Average FHLB borrowings were $16.0 million during the same period a year ago. During the second quarter of 2020, we took advantage of a program offered by the FHLB that bore no interest. The average rate paid on FHLB borrowings was 0.13% during the second quarter of 2020. |
● | Interest expense on other term debt decreased $46 thousand. The average debt balance was essentially unchanged, while the average rate paid decreased 188 basis points. |
● | Interest expense on junior subordinated debentures decreased $14 thousand. The average debt balance was unchanged, while the average rate paid decreased 55 basis points. |
For the six months ended June 30, 2021 compared to the same period a year ago, net interest income increased $1.6 million.
Interest income for the first six months of 2021 increased $626 thousand or 2% to $30.0 million.
● | During the first six months of 2021, we recognized $1.6 million in accelerated net fee income on PPP loans forgiven and repaid during the six months ended June 30, 2021. These accelerated loan fees increased the average yield on loans for the first six months of 2021 by 28 basis points and increased the net interest margin for the first six months of 2021 by 19 basis points. |
● | PPP loans had an average balance of $113.6 million and yield of 4.85% (2.00% excluding accelerated fee income) for the first six months of 2021 compared to an average balance of $66.4 million and yield of 2.46% for the same period a year ago. |
● | Excluding PPP loans, interest and fees on loans decreased $1.8 million due to a $16.6 million decrease in average loan balances and a 27 basis point decrease in average yield. |
● | During the first quarter of 2021, we recognized $251 thousand in interest income from repayment of a nonaccrual loan. The interest income recognized from that repayment increased the average yield on loans for the first quarter of 2021 by 9 basis points. |
● | Interest on investment securities increased $663 thousand due to a $217.2 million increase in average investment securities balances partially offset by a 92 basis point decrease in average yield. |
● | Interest on interest-bearing deposits due from banks decreased $119 thousand due to a 49 basis point decrease in average yield that was partially offset by a $47.9 million increase in average interest-bearing deposit balances. |
Interest expense for the first six months of 2021 decreased $987 thousand or 38% to $1.6 million.
● | Interest expense on interest-bearing deposits decreased $831 thousand. Average interest-bearing demand and savings deposit balances increased $170.0 million, while average certificate of deposit balances decreased $8.1 million. The average rate paid on interest-bearing deposits decreased 24 basis points from 0.48% to 0.24%. |
● | Interest expense on FHLB borrowings decreased $5 thousand due to a $6.2 million decrease in average FHLB borrowings balance and a 12 basis point decrease in average yield. During the second quarter of 2020, we took advantage of a program offered by the FHLB that bore no interest and were fully repaid during the first quarter of 2021. |
● | Interest expense on other term debt decreased $93 thousand. The average debt balance was essentially unchanged, while the average rate paid decreased 187 basis points. |
● | Interest expense on junior subordinated debentures decreased $58 thousand. The average debt balance was unchanged, while the average rate paid decreased 113 basis points. |
Average Balances, Interest Income/Expense and Yields/Rates Earned/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 ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
For the Three Months Ended | ||||||||||||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
(Dollars in thousands) | Balance | Interest (1) | Yield/ Rate (5) | Balance | Interest (1) | Yield/ Rate (5) | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans, net of PPP (2) | $ | 1,031,484 | $ | 11,366 | 4.42 | % | $ | 1,048,139 | $ | 12,411 | 4.76 | % | ||||||||||||
PPP loans | 104,037 | 1,063 | 4.10 | % | 132,776 | 813 | 2.46 | % | ||||||||||||||||
Taxable securities | 437,710 | 1,697 | 1.56 | % | 211,195 | 1,329 | 2.53 | % | ||||||||||||||||
Tax-exempt securities (3) | 97,637 | 575 | 2.36 | % | 58,540 | 423 | 2.91 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 104,152 | 27 | 0.10 | % | 72,507 | 21 | 0.12 | % | ||||||||||||||||
Average interest-earning assets | 1,775,020 | 14,728 | 3.33 | % | 1,523,157 | 14,997 | 3.96 | % | ||||||||||||||||
Cash and due from banks | 21,819 | 21,564 | ||||||||||||||||||||||
Premises and equipment, net | 14,715 | 15,428 | ||||||||||||||||||||||
Goodwill | 11,671 | 11,671 | ||||||||||||||||||||||
Other intangibles, net | 3,743 | 4,508 | ||||||||||||||||||||||
Other assets | 42,326 | 50,499 | ||||||||||||||||||||||
Average total assets | $ | 1,869,294 | $ | 1,626,827 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Demand - interest-bearing | $ | 301,052 | 55 | 0.07 | % | $ | 261,907 | 85 | 0.13 | % | ||||||||||||||
Money market | 443,067 | 180 | 0.16 | % | 365,368 | 317 | 0.35 | % | ||||||||||||||||
Savings | 163,227 | 41 | 0.10 | % | 138,500 | 95 | 0.28 | % | ||||||||||||||||
Certificates of deposit | 139,391 | 303 | 0.87 | % | 142,955 | 467 | 1.31 | % | ||||||||||||||||
Federal Home Loan Bank of San Francisco ("FHLB") borrowings | — | — | — | % | 16,044 | 5 | 0.13 | % | ||||||||||||||||
Other borrowings | 10,000 | 138 | 5.54 | % | 9,976 | 184 | 7.42 | % | ||||||||||||||||
Junior subordinated debentures | 10,310 | 47 | 1.83 | % | 10,310 | 61 | 2.38 | % | ||||||||||||||||
Average interest-bearing liabilities | 1,067,047 | 764 | 0.29 | % | 945,060 | 1,214 | 0.52 | % | ||||||||||||||||
Noninterest-bearing demand | 606,625 | 497,636 | ||||||||||||||||||||||
Other liabilities | 16,293 | 17,095 | ||||||||||||||||||||||
Shareholders’ equity | 179,329 | 167,036 | ||||||||||||||||||||||
Average liabilities and shareholders’ equity | $ | 1,869,294 | $ | 1,626,827 | ||||||||||||||||||||
Net interest income and net interest margin (4) | $ | 13,964 | 3.16 | % | $ | 13,783 | 3.64 | % |
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
(Amounts in thousands) | Balance | Interest(1) | Yield/ Rate(5) | Balance | Interest(1) | Yield/ Rate(5) | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Net loans (2) | $ | 805,144 | $ | 9,887 | 4.87 | % | $ | 769,354 | $ | 9,007 | 4.66 | % | ||||||||||||
Taxable securities | 179,362 | 1,049 | 2.32 | % | 114,578 | 689 | 2.39 | % | ||||||||||||||||
Tax-exempt securities | 77,303 | 551 | 2.83 | % | 73,952 | 552 | 2.97 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 84,323 | 278 | 1.31 | % | 61,346 | 82 | 0.53 | % | ||||||||||||||||
Average interest-earning assets | 1,146,132 | 11,765 | 4.07 | % | 1,019,230 | 10,330 | 4.03 | % | ||||||||||||||||
Cash and due from banks | 19,143 | 17,018 | ||||||||||||||||||||||
Premises and equipment, net | 15,362 | 15,941 | ||||||||||||||||||||||
Other assets | 40,263 | 41,729 | ||||||||||||||||||||||
Average total assets | $ | 1,220,900 | $ | 1,093,918 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand | $ | 436,614 | 196 | 0.18 | % | $ | 390,895 | 136 | 0.14 | % | ||||||||||||||
Savings deposits | 110,305 | 52 | 0.19 | % | 107,210 | 43 | 0.16 | % | ||||||||||||||||
Certificates of deposit | 204,044 | 567 | 1.10 | % | 221,078 | 524 | 0.94 | % | ||||||||||||||||
Net term debt | 17,804 | 292 | 6.51 | % | 19,610 | 292 | 5.92 | % | ||||||||||||||||
Junior subordinated debentures | 10,310 | 74 | 2.85 | % | 10,310 | 59 | 2.28 | % | ||||||||||||||||
Average interest-bearing liabilities | 779,077 | 1,181 | 0.60 | % | 749,103 | 1,054 | 0.56 | % | ||||||||||||||||
Noninterest-bearing demand | 303,314 | 240,418 | ||||||||||||||||||||||
Other liabilities | 11,935 | 11,159 | ||||||||||||||||||||||
Shareholders’ equity | 126,574 | 93,238 | ||||||||||||||||||||||
Average liabilities and shareholders’ equity | $ | 1,220,900 | $ | 1,093,918 | ||||||||||||||||||||
Net interest income and net interest margin (4) | $ | 10,584 | 3.66 | % | $ | 9,276 | 3.62 | % | ||||||||||||||||
Tax equivalent net interest margin (3) | 3.76 | % | 3.73 | % |
(1)Interest income on loans, | ||||||||||||||||||||||||
(2) | ||||||||||||||||||||||||
(3) | ||||||||||||||||||||||||
(4) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the three months ended June 30, 2021 and 2020 included $115 thousand and $216 thousand, respectively, in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 4 and 7 basis points, respectively. | ||||||||||||||||||||||||
(5) Yields and rates are calculated by dividing |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | For the Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
Average | Average | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Balance | Interest(1) | Yield/ Rate(5) | Balance | Interest(1) | Yield/ Rate(5) | ||||||||||||||||||||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Interest (1) | Yield/ Rate (5) | Balance | Interest (1) | Yield/ Rate (5) | ||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loans (2) | $ | 811,080 | $ | 29,029 | 4.79 | % | $ | 744,370 | $ | 26,254 | 4.71 | % | ||||||||||||||||||||||||||||||||||||
Loans, net of PPP (2) | $ | 1,024,343 | $ | 22,913 | 4.51 | % | $ | 1,040,914 | $ | 24,749 | 4.78 | % | ||||||||||||||||||||||||||||||||||||
PPP loans | 113,562 | 2,731 | 4.85 | % | 66,388 | 813 | 2.46 | % | ||||||||||||||||||||||||||||||||||||||||
Taxable securities | 153,702 | 2,710 | 2.36 | % | 119,541 | 2,281 | 2.55 | % | 398,220 | 3,182 | 1.61 | % | 224,300 | 2,911 | 2.61 | % | ||||||||||||||||||||||||||||||||
Tax-exempt securities | 74,932 | 1,615 | 2.88 | % | 76,315 | 1,734 | 3.04 | % | ||||||||||||||||||||||||||||||||||||||||
Tax-exempt securities (3) | 90,038 | 1,086 | 2.43 | % | 46,705 | 694 | 2.99 | % | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks | 66,818 | 548 | 1.10 | % | 52,930 | 222 | 0.56 | % | 107,716 | 56 | 0.10 | % | 59,820 | 175 | 0.59 | % | ||||||||||||||||||||||||||||||||
Average interest-earning assets | 1,106,532 | 33,902 | 4.10 | % | 993,156 | 30,491 | 4.10 | % | 1,733,879 | 29,968 | 3.49 | % | 1,438,127 | 29,342 | 4.10 | % | ||||||||||||||||||||||||||||||||
Cash and due from banks | 17,802 | 15,455 | 21,781 | 21,775 | ||||||||||||||||||||||||||||||||||||||||||||
Premises and equipment, net | 15,776 | 14,657 | 14,858 | 15,591 | ||||||||||||||||||||||||||||||||||||||||||||
Goodwill | 11,671 | 11,671 | ||||||||||||||||||||||||||||||||||||||||||||||
Other intangibles, net | 3,838 | 4,604 | ||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 40,040 | 40,942 | 44,062 | 48,655 | ||||||||||||||||||||||||||||||||||||||||||||
Average total assets | $ | 1,180,150 | $ | 1,064,210 | $ | 1,830,089 | $ | 1,540,423 | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand | $ | 426,365 | 528 | 0.17 | % | $ | 365,917 | 388 | 0.14 | % | ||||||||||||||||||||||||||||||||||||||
Savings deposits | 111,258 | 146 | 0.18 | % | 102,427 | 129 | 0.17 | % | ||||||||||||||||||||||||||||||||||||||||
Demand - interest-bearing | $ | 298,236 | 113 | 0.08 | % | $ | 247,641 | 185 | 0.15 | % | ||||||||||||||||||||||||||||||||||||||
Money market | 434,140 | 375 | 0.17 | % | 336,477 | 720 | 0.43 | % | ||||||||||||||||||||||||||||||||||||||||
Savings | 158,738 | 89 | 0.11 | % | 137,002 | 213 | 0.31 | % | ||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | 209,275 | 1,641 | 1.05 | % | 222,286 | 1,636 | 0.98 | % | 136,969 | 641 | 0.94 | % | 145,098 | 931 | 1.29 | % | ||||||||||||||||||||||||||||||||
Net term debt | 18,644 | 883 | 6.33 | % | 43,435 | 1,369 | 4.21 | % | ||||||||||||||||||||||||||||||||||||||||
Federal Home Loan Bank of San Francisco ("FHLB") borrowings | 1,934 | — | — | % | 8,132 | 5 | 0.12 | % | ||||||||||||||||||||||||||||||||||||||||
Other borrowings | 10,000 | 275 | 5.55 | % | 9,970 | 368 | 7.42 | % | ||||||||||||||||||||||||||||||||||||||||
Junior subordinated debentures | 10,310 | 211 | 2.74 | % | 10,310 | 172 | 2.23 | % | 10,310 | 93 | 1.82 | % | 10,310 | 151 | 2.95 | % | ||||||||||||||||||||||||||||||||
Average interest-bearing liabilities | 775,852 | 3,409 | 0.59 | % | 744,375 | 3,694 | 0.66 | % | 1,050,327 | 1,586 | 0.30 | % | 894,630 | 2,573 | 0.58 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing demand | 280,559 | 214,540 | 584,513 | 459,241 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 12,206 | 13,336 | 16,501 | 16,974 | ||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 111,533 | 91,959 | ||||||||||||||||||||||||||||||||||||||||||||||
Average liabilities and shareholders’ equity | $ | 1,180,150 | $ | 1,064,210 | ||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 178,748 | 169,578 | ||||||||||||||||||||||||||||||||||||||||||||||
Average liabilities and shareholders’ equity | $ | 1,830,089 | $ | 1,540,423 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income and net interest margin (4) | $ | 30,493 | 3.68 | % | $ | 26,797 | 3.60 | % | $ | 28,382 | 3.30 | % | $ | 26,769 | 3.74 | % | ||||||||||||||||||||||||||||||||
Tax equivalent net interest margin (3) | 3.78 | % | 3.72 | % |
(1) Interest income on loans, | ||||||||||||||||||
(2) | ||||||||||||||||||
(3) | ||||||||||||||||||
(4)Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the six months ended June 30, 2021 and 2020 included $225 thousand and $379 thousand, respectively, in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 4 and 7 basis points, respectively. | ||||||||||||||||||
(5) Yields and rates are calculated by dividing |
Analysis of Changes in Net Interest Income
The following table setstables 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 ninesix months ended SeptemberJune 30, 20172021 and 2016.2020. Changes in tax equivalent interest income and expense, which are not specifically attributable specifically to either volume or rate, are allocated proportionately between both variances. Interest income and yields on tax-exempt securities are presented on a nominal basis; not on a tax equivalent basis.
Three Months Ended September 30, 2017 Over | ||||||||||||
(Amounts in thousands) | Volume | Rate | Total | |||||||||
Increase in interest income: | ||||||||||||
Net loans | $ | 430 | $ | 450 | $ | 880 | ||||||
Taxable securities | 378 | (18 | ) | 360 | ||||||||
Tax-exempt securities (1) | (180 | ) | 179 | (1 | ) | |||||||
Interest-bearing deposits in other banks | 40 | 156 | 196 | |||||||||
Total increase | 668 | 767 | 1,435 | |||||||||
Increase (decrease) in interest expense: | ||||||||||||
Interest-bearing demand | 17 | 43 | 60 | |||||||||
Savings deposits | 1 | 8 | 9 | |||||||||
Certificates of deposit | (35 | ) | 78 | 43 | ||||||||
Net term debt | (26 | ) | 26 | — | ||||||||
Junior subordinated debentures | — | 15 | 15 | |||||||||
Total (decrease) increase | (43 | ) | 170 | 127 | ||||||||
Net increase (decrease) | $ | 711 | $ | 597 | $ | 1,308 |
Three Months Ended June 30, 2021 Over | ||||||||||||
(Amounts in thousands) | Volume | Rate | Net Change | |||||||||
Increase (decrease) in interest income: | ||||||||||||
Loans, net of PPP | $ | (195 | ) | $ | (849 | ) | $ | (1,044 | ) | |||
PPP loans | (120 | ) | 369 | 249 | ||||||||
Taxable securities | 881 | (513 | ) | 368 | ||||||||
Tax-exempt securities (1) | 211 | (59 | ) | 152 | ||||||||
Interest-bearing deposits in other banks | 8 | (2 | ) | 6 | ||||||||
Total increase (decrease) | 785 | (1,054 | ) | (269 | ) | |||||||
Increase (decrease) in interest expense: | ||||||||||||
Demand - interest-bearing | 16 | (46 | ) | (30 | ) | |||||||
Money market | 92 | (229 | ) | (137 | ) | |||||||
Savings | 21 | (75 | ) | (54 | ) | |||||||
Certificates of deposit | (11 | ) | (153 | ) | (164 | ) | ||||||
FHLB borrowings | (2 | ) | (3 | ) | (5 | ) | ||||||
Other borrowings | — | (46 | ) | (46 | ) | |||||||
Junior subordinated debentures | — | (14 | ) | (14 | ) | |||||||
Total increase (decrease) | 116 | (566 | ) | (450 | ) | |||||||
Net increase | $ | 669 | $ | (488 | ) | $ | 181 |
(1) |
Six Months Ended June 30, 2021 Over | ||||||||||||
(Amounts in thousands) | Volume | Rate | Net Change | |||||||||
Increase (decrease) in interest income: | ||||||||||||
Loans, net of PPP | $ | (388 | ) | $ | (1,446 | ) | $ | (1,834 | ) | |||
PPP loans | 812 | 1,104 | 1,916 | |||||||||
Taxable securities | 1,384 | (1,113 | ) | 271 | ||||||||
Tax-exempt securities (1) | 490 | (98 | ) | 392 | ||||||||
Interest-bearing deposits in other banks | 3,999 | (4,118 | ) | (119 | ) | |||||||
Total increase (decrease) | 6,297 | (5,671 | ) | 626 | ||||||||
Increase (decrease) in interest expense: | ||||||||||||
Demand - interest-bearing | 51 | (123 | ) | (72 | ) | |||||||
Money market | 326 | (671 | ) | (345 | ) | |||||||
Savings | 41 | (165 | ) | (124 | ) | |||||||
Certificates of deposit | (50 | ) | (240 | ) | (290 | ) | ||||||
FHLB borrowings | (2 | ) | (3 | ) | (5 | ) | ||||||
Other borrowings | 1 | (94 | ) | (93 | ) | |||||||
Junior subordinated debentures | — | (58 | ) | (58 | ) | |||||||
Total increase (decrease) | 367 | (1,354 | ) | (987 | ) | |||||||
Net increase | $ | 5,930 | $ | (4,317 | ) | $ | 1,613 |
Nine Months Ended September 30, 2017 Over | ||||||||||||
(Amounts in thousands) | Volume | Rate | Total | |||||||||
Increase (decrease) in interest income: | ||||||||||||
Net loans | $ | 2,383 | $ | 392 | $ | 2,775 | ||||||
Taxable securities | 584 | (155 | ) | 429 | ||||||||
Tax-exempt securities (1) | (47 | ) | (133 | ) | (180 | ) | ||||||
Interest-bearing deposits in other banks | 70 | 256 | 326 | |||||||||
Total increase (decrease) | 2,990 | 360 | 3,350 | |||||||||
Increase (decrease) in interest expense: | ||||||||||||
Interest-bearing demand | 69 | 71 | 140 | |||||||||
Savings deposits | 11 | 6 | 17 | |||||||||
Certificates of deposit | (43 | ) | 48 | 5 | ||||||||
Net term debt | (783 | ) | 297 | (486 | ) | |||||||
Junior subordinated debentures | — | 39 | 39 | |||||||||
Total (decrease) increase | (746 | ) | 461 | (285 | ) | |||||||
Net increase (decrease) | $ | 3,736 | $ | (101 | ) | $ | 3,635 |
(1) |
PROVISION FOR LOAN AND LEASE LOSSES
During the three months ended September 30, 2017 and the same period a year ago, the Company did not record a provision for loan and lease losses.
Due to a combination of net loan losses and loan portfolio growth, we recorded a $500 thousand provision for loan and lease losses during the nine months ended September 30, 2017. We madeThere was no provision for loan and lease losses duringfor the yearthree months ended December 31, 2016. SeeJune 30, 2021 compared to $1.3 million for the same period in the prior year. There was no provision for loan and lease losses for the six months ended June 30, 2021 compared to $4.2 million for the same period in the prior year. A detailed discussion of our provision is provided later in this filing under the heading “Allowance for Loan and Lease Losses”. Also, see Note 4 - Loans in the Notes to Consolidated Financial Statements for further discussion.information.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONINTEREST INCOME
The following table presents the key components of noninterest income for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
Change | Change | Change | Change | |||||||||||||||||||||||||||||
(Amounts in thousands) | 2017 | 2016 | Amount | Percent | 2017 | 2016 | Amount | Percent | ||||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||||||||
Service charges on deposit accounts | $ | 132 | $ | 133 | $ | (1 | ) | (1 | %) | $ | 401 | $ | 293 | $ | 108 | 37 | % | |||||||||||||||
ATM and point of sale | 273 | 287 | (14 | ) | (5 | %) | 827 | 714 | 113 | 16 | % | |||||||||||||||||||||
Payroll and benefit processing fees | 147 | 133 | 14 | 11 | % | 485 | 432 | 53 | 12 | % | ||||||||||||||||||||||
Life insurance | 134 | 152 | (18 | ) | (12 | %) | 915 | 461 | 454 | 98 | % | |||||||||||||||||||||
Gain on investment securities, net | 38 | 70 | (32 | ) | (46 | %) | 139 | 192 | (53 | ) | (28 | %) | ||||||||||||||||||||
Other than temporary impairment on investment securities | — | — | — | — | % | — | (546 | ) | 546 | 100 | % | |||||||||||||||||||||
Federal Home Loan Bank of San Francisco dividends | 80 | 102 | (22 | ) | (22 | %) | 237 | 291 | (54 | ) | (19 | %) | ||||||||||||||||||||
Insured cash sweep fees | 87 | — | 87 | 100 | % | 192 | — | 192 | 100 | % | ||||||||||||||||||||||
Other | 104 | 82 | 22 | 27 | % | 324 | 508 | (184 | ) | (36 | %) | |||||||||||||||||||||
Total noninterest income | $ | 995 | $ | 959 | $ | 36 | 4 | % | $ | 3,520 | $ | 2,345 | $ | 1,175 | 50 | % |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | Change | June 30, | Change | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | Amount | Percent | 2021 | 2020 | Amount | Percent | ||||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||||||||
Service charges on deposit accounts | $ | 160 | $ | 152 | $ | 8 | 5 | % | $ | 308 | $ | 321 | $ | (13 | ) | (4 | )% | |||||||||||||||
ATM and point of sale fees | 401 | 263 | 138 | 52 | % | 719 | 531 | 188 | 35 | % | ||||||||||||||||||||||
Payroll and benefit processing fees | 160 | 143 | 17 | 12 | % | 329 | 313 | 16 | 5 | % | ||||||||||||||||||||||
Life insurance | 123 | 148 | (25 | ) | (17 | )% | 244 | 271 | (27 | ) | (10 | )% | ||||||||||||||||||||
Gain on sale of investment securities, net | 64 | 140 | (76 | ) | (54 | )% | 71 | 224 | (153 | ) | (68 | )% | ||||||||||||||||||||
FHLB dividends | 126 | 36 | 90 | 250 | % | 219 | 166 | 53 | 32 | % | ||||||||||||||||||||||
Legal settlement | — | — | — | — | % | 221 | — | 221 | 100 | % | ||||||||||||||||||||||
Loss on disposal of equipment | — | — | — | — | % | — | (132 | ) | 132 | 100 | % | |||||||||||||||||||||
Other income | 97 | 73 | 24 | 33 | % | 183 | 153 | 30 | 20 | % | ||||||||||||||||||||||
Total noninterest income | $ | 1,131 | $ | 955 | $ | 176 | 18 | % | $ | 2,294 | $ | 1,847 | $ | 447 | 24 | % |
ForNoninterest income for the three and ninesix months ended SeptemberJune 30, 20172021 increased compared to the same period a year ago:periods in the prior year. Changes in noninterest income included the following items:
● |
|
● |
|
● |
| |
|
| |
|
NONINTEREST EXPENSE
The following table presents the key elementscomponents of noninterest expense for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020.
Three Months Ended September 30, | Nine Months Ended September 30, | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change | Change | Change | Change | June 30, | Change | June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | 2017 | 2016 | Amount | Percent | 2017 | 2016 | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | Amount | Percent | 2021 | 2020 | Amount | Percent | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest expense: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Salaries & related benefits | $ | 4,291 | $ | 3,873 | $ | 418 | 11 | % | $ | 13,296 | $ | 12,188 | $ | 1,108 | 9 | % | $ | 5,728 | $ | 6,163 | $ | (435 | ) | (7 | )% | $ | 11,914 | $ | 12,087 | $ | (173 | ) | (1 | )% | ||||||||||||||||||||||||||||||
Loan origination costs | (523 | ) | (1,198 | ) | 675 | 56 | % | (1,070 | ) | (1,649 | ) | 579 | 35 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Premises & equipment | 1,067 | 1,071 | (4 | ) | (0 | %) | 3,169 | 2,847 | 322 | 11 | % | 973 | 826 | 147 | 18 | % | 1,932 | 1,680 | 252 | 15 | % | |||||||||||||||||||||||||||||||||||||||||||
Federal Deposit Insurance Corporation insurance premium | 78 | 176 | (98 | ) | (56 | %) | 230 | 513 | (283 | ) | (55 | %) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
FDIC insurance premium | 124 | 90 | 34 | 38 | % | 234 | 126 | 108 | 86 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Data processing fees | 437 | 464 | (27 | ) | (6 | %) | 1,294 | 1,142 | 152 | 13 | % | 546 | 585 | (39 | ) | (7 | )% | 1,094 | 1,116 | (22 | ) | (2 | )% | |||||||||||||||||||||||||||||||||||||||||
Professional service fees | 276 | 303 | (27 | ) | (9 | %) | 1,119 | 1,209 | (90 | ) | (7 | %) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Professional services | 278 | 469 | (191 | ) | (41 | )% | 579 | 803 | (224 | ) | (28 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Telecommunications | 219 | 199 | 20 | 10 | % | 653 | 545 | 108 | 20 | % | 145 | 156 | (11 | ) | (7 | )% | 315 | 327 | (12 | ) | (4 | )% | ||||||||||||||||||||||||||||||||||||||||||
Branch acquisition costs | — | — | — | — | % | — | 580 | (580 | ) | (100 | %) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss on cancellation of interest rate swap | — | — | — | — | % | — | 2,325 | (2,325 | ) | (100 | %) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-recurring costs | — | — | — | — | % | — | 1,114 | (1,114 | ) | (100 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Merger costs | 817 | — | 817 | 100 | % | 817 | — | 817 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 908 | 1,039 | (131 | ) | (13 | %) | 3,290 | 3,445 | (155 | ) | (4 | %) | 1,191 | 1,179 | 12 | 1 | % | 2,361 | 2,449 | (88 | ) | (4 | )% | |||||||||||||||||||||||||||||||||||||||||
Total noninterest expense | $ | 7,276 | $ | 7,125 | $ | 151 | 2 | % | $ | 23,051 | $ | 24,794 | $ | (1,743 | ) | (7 | %) | $ | 9,279 | $ | 8,270 | $ | 1,009 | 12 | % | $ | 18,176 | $ | 18,053 | $ | 123 | 1 | % |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ForSalaries and related benefits for the three and six months ended SeptemberJune 30, 20172021 were reduced compared to the same periodperiods in the prior year as a result of decreases in the overall number of staff and decreased vacation benefit costs. During the current year, ago,employees used more of their previously accrued vacation benefits as travel restrictions imposed in response to the COVID-19 pandemic were reduced.
Loan origination costs in 2020 were higher as a result of loans originated under the PPP. In 2020, we originated 606 PPP loans compared to 247 PPP loans originated in 2021.
The first six months of 2020 included $1.1 million in non-recurring costs that consisted of $700 thousand associated with the termination of a technology management services contract and $414 thousand related to a severance agreement. Excluding the non-recurring costs, noninterest expense in 2021 increased $151 thousand. Investment$1.2 million mostly resulting from $817 thousand of merger related costs and the previously discussed change in the Company’s Sacramento business development group and in risk/compliance support caused compensation expense to increase $418 thousand while savings in recruiting, regulatory and professional fees offset much of this cost.loan origination costs.
ForThe Company’s efficiency ratio was 61.5% for the nine months ended September 30, 2017 compared tosecond quarter of 2021. The ratio during the same period a year ago:
Noninterest expense decreased $1.7 million.in 2020 was 56.1%. The decrease was primarily due toCompany’s efficiency ratio of 61.5% for the following:second quarter of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 5.4%.
|
|
|
|
The decreaseCompany’s efficiency ratio was 59.3% for the six months of 2021. The ratio during the same period in 2020 was 63.1%. The Company’s efficiency ratio of 59.3% for the expenses listed above was partially offsetfirst six months of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 2.7%. The Company’s efficiency ratio of 63.1% for the following increases:first six months of 2020 included $1.1 million of non-recurring costs, which increased the efficiency ratio by 3.9%.
|
|
|
|
|
|
INCOME TAXES
Our provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to our income before taxes. The following table reflects our tax provision and the related effective tax rate for the periods indicated.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||
Income Taxes: | ||||||||||||||||||||||||||||||||
Income before provision for income taxes | $ | 4,303 | $ | 3,110 | $ | 10,462 | $ | 4,348 | $ | 5,816 | $ | 5,168 | $ | 12,500 | $ | 6,413 | ||||||||||||||||
Provision for income taxes | $ | 1,427 | $ | 744 | $ | 3,125 | $ | 1,386 | $ | 1,677 | $ | 1,321 | $ | 3,441 | $ | 1,650 | ||||||||||||||||
Effective tax rate | 33.16 | % | 23.92 | % | 29.87 | % | 31.88 | % | 28.8 | % | 25.6 | % | 27.5 | % | 25.7 | % |
The income tax calculation for the second quarter of 2021 included the impact of $772 thousand of non-deductible merger costs, which increased the effective tax rate by 2.4%.
The income tax calculation for the six months ended June 30, 2021 included the impact of $772 thousand of non-deductible merger costs, which increased the effective tax rates listed in the table above and a comparison of those tax rates are impactedrate by the following items:
|
|
|
|
Management believes that the following table, which is a non-GAAP presentation, provides a helpful disclosure and comparison of our effective tax rates for the periods presented.1.1%.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
(Amounts in thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Income before provision for income taxes - GAAP | $ | 4,303 | $ | 3,110 | $ | 10,462 | $ | 4,348 | ||||||||
Life insurance death benefit - not taxable | — | — | (502 | ) | — | |||||||||||
Income before provision for income taxes and life insurance death benefit | $ | 4,303 | $ | 3,110 | $ | 9,960 | $ | 4,348 | ||||||||
Provision for income taxes - GAAP | $ | 1,427 | $ | 744 | $ | 3,125 | $ | 1,386 | ||||||||
Deferred tax asset write-off | — | — | — | (363 | ) | |||||||||||
Provision for income taxes - excluding DTA write-off | $ | 1,429 | $ | 744 | $ | 3,172 | $ | 1,023 | ||||||||
Effective tax rate - excluding life insurance death benefit and DTA write-off | 33.21 | % | 23.92 | % | 31.85 | % | 23.53 | % |
As shown in the non-GAAP table above, the Company’s effective tax rate on taxable income is approximately 31.50% for 2017 and 23.50% for 2016. The increase has occurred as the items which lower the Company’s effective tax rate (muni income, tax credits and permanent deductions arising from investments in low income housing partnerships) remain essentially unchanged in amount from year to year, but comprise a significantly smaller percentage of pre-tax income.
Amended Tax Returns
In September of 2016, we filed amended federal and state tax returns for tax years 2011, 2012, 2013, and 2014. The IRS rejected the 2011 amended tax return citing the statute for assessment had expired. Accordingly, the $988 thousand of taxes due pursuant to the 2011 amended tax return was returned to us and has been recorded in other liabilities. Management believes the full amount due will ultimately be sustained.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
CONSOLIDATEDCONSOLIDATED BALANCE SHEETS
As of SeptemberJune 30, 2017,2021, we had total consolidated assets of $1.2$1.917 billion, gross loans of $824.9 million,$1.091 billion, allowance for loan and lease losses (“ALLL”) of $11.7$17 million, total deposits of $1.1$1.697 billion, and shareholders’shareholders’ equity of $128.4$182 million.
We continued to maintain a strong liquidity position during the reporting period. As of September 30, 2017, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $20.0 million. We$21.0 million and we also held interest-bearing deposits in the amount of $65.7$156.1 million. During the first six months of 2021, we continued to invest our increased liquidity into our investment securities portfolio.
Available-for-sale investment securities totaled $232.5$579.7 million at SeptemberJune 30, 2017,2021, compared to $175.2$446.9 million at December 31, 2016. Our2020. Changes in our available-for-sale investmentsecurities portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, suchwere as loan originations.follows:
During the first nine months of 2017, we purchased 80 securities with a par value of $116.7 million and weighted average yield of 2.55% and sold 41 securities with a par value of $45.9 million and weighted average yield of 2.02%. The sales activity on available-for-sale securities resulted in $139 thousand in net realized gains for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, we also received $16.6 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.
● | Purchased securities with a par value of $221.1 million. |
● | Sold securities with a par value of $37.7 million resulting in $71 thousand in net realized gains. |
● | Received $49.9 million in proceeds from principal payments, calls and maturities. |
At SeptemberJune 30, 2017,2021, our net unrealized gains on available-for-sale investment securities were $630 thousand$6.3 million compared to net unrealized lossesgains of $1.3$10.6 million at December 31, 2016.2020. The fluctuation in net unrealized gains arising during the ninesix months ended SeptemberJune 30, 2017 were primarily driven by a narrowing of market spreads and significant2021 was due to changes in market interest rates.
We recorded gross loan balances of $824.9$1.091 billion at June 30, 2021, compared to $1.140 billion at December 31, 2020, a decrease of $49 million. Loans, exclusive of PPP increased $23 million, while PPP loans decreased $72 million during the first six months of 2021.
Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, decreased by $3.2 million to $3.8 million, or 0.35% of gross loans as of June 30, 2021, compared to $7.0 million, or 0.62% of gross loans as of December 31, 2020. The decrease resulted from repayment of a $3.0 million nonaccrual borrowing relationship during the first quarter of 2021.
Past due loans as of June 30, 2021 decreased $3.5 million to $1.9 million, compared to $5.4 million as of December 31, 2020. The decrease resulted from collection of the previously discussed $3.0 million nonaccrual loans. We believe that risk grading for past due and nonperforming loans appropriately reflects the risk associated with those loans.
In response to the COVID-19 pandemic, we granted loan payment deferrals to help many of our borrowers during 2020. At June 30, 2021, payment deferrals were extant for 16 loans totaling $4.1 million compared to 82 loans totaling $9.5 million at September 30, 2017, compared to $804.2 million at December 31, 2016; an increase2020. A detailed discussion of $20.7 million. The increasethe loan payment deferrals is provided later in gross loans occurred primarilythis document under the heading “COVID-19Troubled Debt Restructuring Guidance”.
During the first quarter of 2021, the SBA extended its debt relief program and resumed making principal and interest payments on all SBA 7(a) loans. Without these payments, past due loan totals might have been higher at June 30, 2021. A detailed discussion of program is provided later in this document under the Bank’s Sacramento marketplace and is the result of investments in our heading “SBA division and in our expanded Sacramento commercial banking group.Loan Payments”.
The ALLL at SeptemberJune 30, 20172021 increased $147$284 thousand to $11.7$17.2 million compared to $11.5$16.9 million at December 31, 2016. A combination of net loan losses and loan portfolio growth supported management’s decision to record a $500 thousand provision for loan and lease losses during the nine months ended September2020. At June 30, 2017. During the year ended December 31, 2016, there were no provisions for loan and lease losses. Net loan charge-offs were $352 thousand during the nine months ended September 30, 2017, compared to net loan loss recoveries of $669 thousand during the same period a year previous. At September 30, 2017,2021, relying on our ALLL methodology, which uses criteria such as risk weighting andcredit grading, historical loss rates, and given the ongoing improvements in asset quality,qualitative factors, we believe the ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additionalfuture charges to the provision for loan and lease losses.
Nonperforming loans, which include nonaccrual loans A detailed discussion of the ALLL is provided later in this document under the heading “Allowance for Loan and accruing loans past due over 90 days, decreased by $3.8 million to $7.6 million, or 0.92% of gross loans, as of September 30, 2017, compared to $11.4 million, or 1.42% of gross loans as of December 31, 2016. Past due loans as of September 30, 2017 decreased $2.4 million to $2.1 million, compared to $4.6 million as of December 31, 2016. The decrease in nonperforming loans and past due loans was primarily due to the repayment of a nonaccrual commercial real estate loan for $1.2 million and the transfer of a nonaccrual residential real estate loan to OREO for $803 thousand. We believe that risk grading for past due loans appropriately reflects the risk associated with the past due loans. SeeLease Losses”. Also, see Note 4 Loans in the Notes to Consolidated Financial Statements in this document for further detailinformation on the ALLL and the loan portfolio.
Premises and equipment totaled $15.0$14.5 million at SeptemberJune 30, 2017,2021, a decrease of $1.2 million$485 thousand compared to $16.2$15.0 million at December 31, 2016.2020.
OurAt June 30, 2021, we had no OREO balance at September 30, 2017 was $699 thousandproperties compared to $759$8 thousand at December 31, 2016. For2020. During the ninesix months ended SeptemberJune 30, 2017,2021, we transferred six foreclosed properties in the amount of $946 thousand to OREO and capitalized $90 thousand in costs for properties already in OREO. During the nine months ended September 30, 2017, we sold eight properties with balances of $1.1 million for a net gain of $22 thousand and recognized a write-down of $52for $8 thousand on one OREOand sold the property.
Bank-owned life insurance decreased $1.3 million increased $256 thousand during the ninesix months ended SeptemberJune 30, 20172021 to $21.8$24.5 million compared to $23.1$24.2 million at December 31, 2016. During the first quarter of 2017, we received $2.2 million from life insurance death benefit proceeds, of which $502 thousand was recorded in income. Our2020.
Goodwill and other intangible assets, net deferred tax assets were $8.7totaled $15.3 million at SeptemberJune 30, 20172021, a decrease of $383 thousand compared to $9.5$15.7 million at December 31, 2016.2020, resulting from amortization of core deposit intangibles.
Other assets, which include the Bank’sBank’s investment in low incomequalified zone academy bonds, FHLB stock, right-of-use lease asset and low-income housing tax credit partnerships and investment in Federal Home Loan Bank of San Francisco stock totaled $19.7$26.8 million at SeptemberJune 30, 20172021 compared to $20.4$28.2 million at December 31, 2016.2020.
Total deposits at SeptemberJune 30, 20172021, increased $87.3$155 million or 9%20% annualized to $1.1$1.697 billion compared to the same date a year ago and increased $58.1 million or 8% annualized compared to$1.543 at December 31, 2016.2020.
● | Total non-maturing deposits increased |
● | Certificates of deposit |
Other liabilities, which include the Bank’s income tax liabilities, supplemental executive retirement planBank’s liability for Supplemental Executive Retirement Plan (“SERP”), deferred director compensation, operating leases and the funding obligation for investments in qualified affordable housing partnershipsLIHTC, decreased $346$795 thousand to $12.8$17.4 million as of SeptemberJune 30, 20172021 compared to $13.2$18.2 million at December 31, 2016.2020.
Investment Securities
The composition of our investment securities portfolio reflects management’s investment strategymanagement’s objective of maintaining an appropriate level of liquidity while providingpursuing yield and a relatively stable source of interest income.income while maintaining an appropriate level of liquidity.
The investment securities portfolio also:
● |
|
● |
|
● | Provides a |
|
|
● | Provides a source of liquidity when pledged as collateral for lines of |
|
|
OurThe carrying value of our available-for-sale investment securities totaled $232.5$579.7 million at SeptemberJune 30, 2017,2021, compared to $175.2$446.9 million at December 31, 2016.2020. Unprecedented deposit growth during the last year as a result of PPP programs and changes in customer behavior has led to a significant increase in the size of our investment securities portfolio. During the first ninesix months of 2017,ended June 30, 2021, we deployed liquidity provided by strong organic deposit growth and the sale of common stock into loan originations, interest bearing deposits at other banks and available for sale securities.
Our held-to-maturity investment portfolio is generally utilized to hold longer-term securities that may have greater price risk, many of which are pledged as collateral for our local agency deposit program. This portfolio includespurchased securities with longer durationsa par value of $221.1 million and higher coupons thanweighted average yield of 1.54% (1.59% tax equivalent) and sold securities held in the available-for-sale securities portfolio. Held-to-maturity investment securities had amortized costswith a par value of $30.7$37.7 million at September 30, 2017, compared to $31.2 million at December 31, 2016. There were no held-to-maturity securities purchased during the nine months ended September 30, 2017.and weighted average yield of negative 0.16% and tax equivalent yield of negative 0.08%.
The following tabletable presents the carrying value of theavailable-for-sale investment securities portfolio by classification and major typeat fair value as of SeptemberJune 30, 20172021 and December 31, 2016.2020.
September 30, | December 31, | |||||||
(Amounts in thousands) | 2017 | 2016 | ||||||
Available-for-sale securities: (1) | ||||||||
U.S. government & agencies | $ | 36,474 | $ | 10,354 | ||||
Obligations of state and political subdivisions | 53,850 | 59,428 | ||||||
mortgage-backed securities and collateralized mortgage obligations | 105,224 | 69,604 | ||||||
Corporate securities | 6,968 | 16,116 | ||||||
Commercial mortgage-backed securities | 26,148 | 15,514 | ||||||
Other asset-backed securities | 3,830 | 4,158 | ||||||
Total | $ | 232,494 | $ | 175,174 | ||||
Held-to-maturity securities: (1) | ||||||||
Obligations of state and political subdivisions | $ | 30,724 | $ | 31,187 |
|
June 30, | December 31, | |||||||
(Amounts in thousands) | 2021 | 2020 | ||||||
Available-for-sale securities: | ||||||||
U.S. government & agencies | $ | 29,691 | $ | 32,994 | ||||
Obligations of state and political subdivisions | 136,467 | 108,366 | ||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 317,842 | 240,478 | ||||||
Commercial mortgage-backed securities | 52,718 | 28,074 | ||||||
Other asset-backed securities | 42,946 | 36,968 | ||||||
Total | $ | 579,664 | $ | 446,880 |
The following table presents information regarding the amortized cost, and maturity structure and average yield of the investment securities portfolio at SeptemberJune 30, 2017.2021.
Over One Through | Over Five Through | Maturities | Maturities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | Five Years | Ten Years | Over Ten Years | Total | Maturities | Over One Through | Over Five Through | Maturities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Amounts in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | Five Years | Ten Years | Over Ten Years | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities: (1) | Available-for-sale securities: (1) | Available-for-sale securities: (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government & agencies | $ | — | — | % | $ | — | — | % | $ | 2,898 | 2.43 | % | $ | 33,539 | 2.54 | % | $ | 36,437 | 2.53 | % | $ | — | — | % | $ | 857 | 2.51 | % | $ | 13,944 | 2.53 | % | $ | 14,102 | 2.08 | % | $ | 28,903 | 2.31 | % | ||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 200 | 1.15 | % | 6,739 | 3.00 | % | 22,919 | 2.94 | % | 22,751 | 2.39 | % | 52,609 | 2.70 | % | 844 | 3.25 | % | 7,933 | 3.69 | % | 18,321 | 2.35 | % | 105,577 | 2.27 | % | 132,675 | 2.37 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | 166 | 3.54 | % | 62,752 | 2.44 | % | 40,778 | 2.75 | % | 2,059 | 2.56 | % | 105,755 | 2.56 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate securities | 1,013 | 1.74 | % | 4,932 | 3.27 | % | 1,000 | 2.00 | % | — | — | % | 6,945 | 2.86 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations | 11,683 | 2.33 | % | 99,167 | 1.83 | % | 167,257 | 1.40 | % | 39,050 | 1.75 | % | 317,157 | 1.61 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | — | % | 845 | 1.29 | % | 4,864 | 2.20 | % | 20,563 | 2.37 | % | 26,272 | 2.30 | % | — | — | % | 1,510 | 2.48 | % | 22,766 | 1.66 | % | 28,208 | 1.61 | % | 52,484 | 1.66 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset-backed securities | — | — | % | — | — | % | — | — | % | 3,846 | 2.39 | % | 3,846 | 2.39 | % | — | — | % | — | — | % | — | — | % | 42,143 | 1.25 | % | 42,143 | 1.25 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,379 | 1.89 | % | $ | 75,268 | 2.53 | % | $ | 72,459 | 2.75 | % | $ | 82,758 | 2.45 | % | $ | 231,864 | 2.57 | % | $ | 12,527 | 2.39 | % | $ | 109,467 | 1.98 | % | $ | 222,288 | 1.58 | % | $ | 229,080 | 1.90 | % | $ | 573,362 | 1.80 | % | ||||||||||||||||||||||||||||||||||||||||
Held-to-maturity securities: (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 95 | 5.60 | % | $ | 9,834 | 3.28 | % | $ | 7,656 | 2.71 | % | $ | 13,139 | 3.46 | % | $ | 30,724 | 3.22 | % |
(1) The maturities for the collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis. |
Loan Portfolio
Loan Concentrations
Historically, we have concentrated our loan origination activities primarily within the California counties of El Dorado, Placer, Sacramento, and Shasta counties in California.Shasta. In recent years, our loan origination activity has expanded to include other portions of California and northern Nevada. We manage our credit risk through various diversifications (borrower industry, geography, collateral type) of our loan portfolio, the application of sound underwriting policies and procedures, and ongoing credit monitoring practices. Generally, theour loans are secured by real estate or other assets located in California. Repayment is expected from the borrower’s cash flows or cash flows from real estate investments.
The following table presents the composition of the loan portfolio as of SeptemberJune 30, 20172021 and December 31, 2016.2020.
(Amounts in thousands) | September 30, | December 31, | ||||||||||||||
Loan Portfolio | 2017 | % | 2016 | % | ||||||||||||
Commercial | $ | 147,212 | 18 | % | $ | 153,844 | 19 | % | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - construction and land development | 14,700 | 2 | 36,792 | 5 | ||||||||||||
Real estate - commercial non-owner occupied | 333,766 | 40 | 292,615 | 36 | ||||||||||||
Real estate - commercial owner occupied | 183,424 | 22 | 167,335 | 21 | ||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 42,063 | 5 | 45,566 | 6 | ||||||||||||
Real estate - residential - 1-4 family mortgage | 21,119 | 3 | 20,425 | 3 | ||||||||||||
Real estate - residential - equity lines | 31,158 | 4 | 35,953 | 4 | ||||||||||||
Consumer and other | 51,432 | 6 | 51,681 | 6 | ||||||||||||
Gross loans | 824,874 | 100 | % | 804,211 | 100 | % | ||||||||||
Deferred loan fees and costs | 1,770 | 1,324 | ||||||||||||||
Loans, net of deferred fees and costs | 826,644 | 805,535 | ||||||||||||||
Allowance for loan and lease losses | (11,692 | ) | (11,544 | ) | ||||||||||||
Net loans | $ | 814,952 | $ | 793,991 |
June 30, 2021 | December 31, 2020 | |||||||||||||||
(Dollars in thousands) | Amount | % | Amount | % | ||||||||||||
Loan Portfolio: | ||||||||||||||||
Commercial | $ | 93,650 | 9 | % | $ | 115,559 | 10 | % | ||||||||
PPP | 59,058 | 5 | 130,814 | 11 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Construction and land development | 30,494 | 3 | 44,549 | 4 | ||||||||||||
Non-owner occupied | 626,819 | 57 | 550,020 | 48 | ||||||||||||
Owner occupied | 168,296 | 15 | 172,967 | 15 | ||||||||||||
Residential real estate: | ||||||||||||||||
ITIN | 26,912 | 2 | 29,035 | 3 | ||||||||||||
1-4 family mortgage | 50,259 | 5 | 55,925 | 5 | ||||||||||||
Equity lines | 17,827 | 2 | 18,894 | 2 | ||||||||||||
Consumer and other | 17,430 | 2 | 21,969 | 2 | ||||||||||||
Gross loans | 1,090,745 | 100 | % | 1,139,732 | 100 | % | ||||||||||
Deferred fees and costs | 551 | 229 | ||||||||||||||
Loans, net of deferred fees and costs | 1,091,296 | 1,139,961 | ||||||||||||||
Allowance for loan and lease losses | (17,194 | ) | (16,910 | ) | ||||||||||||
Net loans | $ | 1,074,102 | $ | 1,123,051 |
The following table sets forth the contractual maturity and re-pricing distribution of our gross loans outstandingloan portfolio as of SeptemberJune 30, 2017, which, based on remaining scheduled repayments2021, although contractual maturities of principal, are due withinloans do not necessarily reflect the periods indicated.actual lives of the loans.
After One | After One | After Five | After | |||||||||||||||||||||||||||||||||
Within One | Through | After Five | Within One | Through | Through | Fifteen | ||||||||||||||||||||||||||||||
(Amounts in thousands) | Year | Five Years | Years | Total | Year | Five Years | Fifteen Years | Years | Total | |||||||||||||||||||||||||||
Loan Portfolio: | ||||||||||||||||||||||||||||||||||||
Commercial | $ | 42,130 | $ | 49,565 | $ | 55,517 | $ | 147,212 | $ | 38,007 | $ | 52,592 | $ | 3,051 | $ | — | $ | 93,650 | ||||||||||||||||||
PPP | 59,058 | — | — | — | 59,058 | |||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||
Real estate - construction and land development | 5,846 | 4,711 | 4,143 | 14,700 | ||||||||||||||||||||||||||||||||
Real estate - commercial non-owner occupied | 7,910 | 52,823 | 273,033 | 333,766 | ||||||||||||||||||||||||||||||||
Real estate - commercial owner occupied | 8,693 | 17,805 | 156,926 | 183,424 | ||||||||||||||||||||||||||||||||
Construction and land development | 8,359 | 2,931 | 1,675 | 17,529 | 30,494 | |||||||||||||||||||||||||||||||
Non-owner occupied | 48,294 | 229,491 | 316,010 | 33,024 | 626,819 | |||||||||||||||||||||||||||||||
Owner occupied | 17,751 | 65,397 | 84,516 | 632 | 168,296 | |||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||
Real estate - residential - ITIN | — | — | 42,063 | 42,063 | ||||||||||||||||||||||||||||||||
Real estate - residential - 1-4 family mortgage | 104 | 3,102 | 17,913 | 21,119 | ||||||||||||||||||||||||||||||||
Real estate - residential - equity lines | 48 | 3,847 | 27,263 | 31,158 | ||||||||||||||||||||||||||||||||
ITIN | 3,316 | 13,085 | 10,178 | 333 | 26,912 | |||||||||||||||||||||||||||||||
1-4 family mortgage | 3,984 | 16,720 | 26,999 | 2,556 | 50,259 | |||||||||||||||||||||||||||||||
Equity lines | 318 | 927 | 935 | 15,647 | 17,827 | |||||||||||||||||||||||||||||||
Consumer and other | 873 | 48,377 | 2,182 | 51,432 | 1,077 | 1,494 | 2 | 14,857 | 17,430 | |||||||||||||||||||||||||||
Gross loans | $ | 65,504 | $ | 180,230 | $ | 579,040 | $ | 824,874 | 180,164 | 382,637 | 443,366 | 84,578 | 1,090,745 | |||||||||||||||||||||||
Loans due after one year with: | ||||||||||||||||||||||||||||||||||||
Deferred fees and costs | — | — | — | — | 551 | |||||||||||||||||||||||||||||||
Loans, net of deferred fees and costs | $ | 180,164 | $ | 382,637 | $ | 443,366 | $ | 84,578 | $ | 1,091,296 | ||||||||||||||||||||||||||
Loans with: | ||||||||||||||||||||||||||||||||||||
Fixed rates | $ | 106,136 | $ | 191,645 | $ | 297,781 | $ | 59,224 | $ | 197,833 | $ | 255,965 | $ | 1,049 | $ | 514,071 | ||||||||||||||||||||
Variable rates | 74,094 | 387,395 | 461,489 | 120,940 | 184,804 | 187,401 | 83,529 | 576,674 | ||||||||||||||||||||||||||||
Deferred fees and costs | — | — | — | — | 551 | |||||||||||||||||||||||||||||||
Total | $ | 180,230 | $ | 579,040 | $ | 759,270 | $ | 180,164 | $ | 382,637 | $ | 443,366 | $ | 84,578 | $ | 1,091,296 |
The following table presents our fixed and variable interest rate loans at June 30, 2021.
At June 30, 2021 | ||||||||||||
(Amounts in thousands) | Fixed | Variable | Total | |||||||||
Loan Portfolio: | ||||||||||||
Commercial | $ | 56,410 | $ | 37,240 | $ | 93,650 | ||||||
PPP | 59,058 | — | 59,058 | |||||||||
Commercial real estate: | ||||||||||||
Construction and land development | 15,567 | 14,927 | 30,494 | |||||||||
Non-owner occupied | 284,631 | 342,188 | 626,819 | |||||||||
Owner occupied | 35,963 | 132,333 | 168,296 | |||||||||
Residential real estate: | ||||||||||||
ITIN | 8,155 | 18,757 | 26,912 | |||||||||
1-4 family mortgage | 36,729 | 13,530 | 50,259 | |||||||||
Equity lines | 416 | 17,411 | 17,827 | |||||||||
Consumer and other | 17,142 | 288 | 17,430 | |||||||||
Gross loans | 514,071 | 576,674 | 1,090,745 | |||||||||
Deferred fees and costs | — | 551 | 551 | |||||||||
Loans, net of deferred fees and costs | $ | 514,071 | $ | 577,225 | $ | 1,091,296 |
Loans with unique credit characteristicsUnique Credit Characteristics
In April of 2009, we completed a loan ‘swap’ transaction, which included our receipt ofITIN Loans
We own a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans, which are geographically disbursed throughout the United States and are made to legal United States residents who do not possess a social security number. The ITIN loan portfolio is serviced by a third party. The majority of the ITIN loans are variable rate loans and may have an increased default risk in a rising rate environment. WorseningAs with all loans, worsening economic conditions in the United States maycould 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, ifIf in the future, we become responsible for servicing of these ITIN loans, then we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio, which willwould adversely affect our noninterest expense. At June 30, 2021, there were 14 ITIN loans totaling $827 thousand with a COVID-19 related payment deferral. Payment deferrals are limited to no more than six months.
SFC Loans
Between May of 2014 and December of 2018, we purchased unsecured retail installment home improvement consumer loans that were originated by Service Finance Company, LLC (“SFC”). The loans were made through a network of over 8,000 approved home improvement dealers throughout the United States and Puerto Rico. Loans within the portfolio have a wide range of terms, interest rates and purchase discounts or premiums and at origination were made to borrowers with FICO scores of 750 or higher. Principal repayments on these loans totaled $3.9 million during the six months ended June 30, 2021. The loans are serviced by a third party. If in the future, we become responsible for servicing these loans, we may realize additional monitoring and servicing costs due to the geographic disbursement of the portfolio, which would adversely affect our noninterest expense. At June 30, 2021, there were no SFC loans with a COVID-19 related payment deferral.
Paycheck Protection Program (PPP) Loans
We have funded 853 loans totaling $210.8 million under the two PPP loan programs through June 30, 2021.
First PPP Loan Program - 2020
During 2020, we originated 606 loans totaling $163.5 million in the first PPP loan program. Most of the loans have subsequently been forgiven and repaid. At June 30, 2021, 47 loans totaling $12.3 million remain outstanding in the program. The majority of the first program loans have a two-year term over which the loan fee income (net of loan origination costs) is being earned. When a PPP loan is repaid prior to maturity, all unamortized fees and costs associated with the loan are accelerated into income. During the first six months of 2021, 440 loans totaling $118.5 million were repaid and we recognized $1.6 million in accelerated net fee income compared to 119 loans repaid totaling $32.7 million and $664 thousand in accelerated net fee income in the fourth quarter of 2020. At June 30, 2021, net loan fees totaling $142 thousand remain to be earned and we anticipate that most of it will be recognized during the third quarter of 2021.
Second PPP Loan Program - 2021
During the first quarter of 2021, the SBA announced a second PPP loan program. The SBA’s second PPP loan program provided first draw PPP loans to borrowers who were ineligible under the first PPP loan program (sole proprietors, ITIN business owners, small business owners with non-fraud felony convictions and small business owners who have struggled with student loan debt) and allowed second draw PPP loans to qualifying businesses that received a first draw under SBA’s first PPP loan program. The loans were available until May 31, 2021, were limited to $2 million, had a five-year term and SBA increased the lender fees for loans under $50 thousand to incentivize lenders to work with smaller borrowers.
During 2021, we have originated 247 loans totaling $47.3 million in the second PPP loan program. During the second quarter of 2021, we began to process loan forgiveness applications. At June 30, 2021, we have 234 loans totaling $46.7 million in the program. We anticipate that the loans in the second PPP loan program will have a lower yield than the first PPP loan program as net loan fee income will be recognized over a five-year term instead of the two-year term of the first program. Borrowers may submit a loan forgiveness application after using the loan proceeds and submitting an application for forgiveness of their first PPP loan. When a PPP loan is repaid prior to maturity, all unamortized fees and cost associated with the loan are accelerated into income. During the first six months of 2021, 13 loans totaling $629 thousand were repaid and we recognized $28 thousand in accelerated net fee income. At June 30, 2021, net loan fees totaling $1.5 million remain to be earned.
The following tables provide additional information on PPP loans by industry and by loan balance at June 30, 2021 for loans in both PPP loan programs.
At June 30, 2021 | ||||||||
(Dollars in thousands) | Number | Balance | ||||||
Industry: | ||||||||
Construction | 39 | $ | 15,634 | |||||
Healthcare and Social Assistance | 42 | 4,326 | ||||||
Professional, Scientific and Tech Services | 37 | 5,711 | ||||||
Accommodation and Food Services | 39 | 9,185 | ||||||
Admin, Support, Waste Management and Remediation Services | 9 | 2,064 | ||||||
Primary Metal Manufacturing | 7 | 558 | ||||||
Retail Trade | 19 | 3,340 | ||||||
Other | 89 | 18,240 | ||||||
Total | 281 | $ | 59,058 |
At June 30, 2021 | ||||||||||||
(Dollars in thousands) | Balance | Number | Average Loan Size | |||||||||
Loan Size: | ||||||||||||
$50,000 or less | $ | 2,232 | 101 | $ | 22 | |||||||
$50,001 to $150,000 | 7,047 | 83 | $ | 85 | ||||||||
$150,001 to $350,000 | 10,723 | 51 | $ | 210 | ||||||||
$350,001 to $1,999,999 | 31,884 | 43 | $ | 741 | ||||||||
$2,000,000 or greater | 7,172 | 3 | $ | 2,391 | ||||||||
Total | $ | 59,058 | 281 | $ | 210 |
The following table presents the status of our loans in the forgiveness process.
At June 30, 2021 | At December 31, 2020 | |||||||||||||||||||||||
(Dollars in thousands) | Balance | Number | Average | Balance | Number | Average | ||||||||||||||||||
First PPP loan program - 2020 | ||||||||||||||||||||||||
Borrower has not started application | $ | 314 | 7 | $ | 45 | $ | 33,459 | 185 | $ | 181 | ||||||||||||||
Borrower is working on application | 3,348 | 15 | $ | 223 | 31,277 | 136 | $ | 230 | ||||||||||||||||
Borrower has completed application and bank is reviewing it | 2,744 | 16 | $ | 172 | 43,872 | 105 | $ | 418 | ||||||||||||||||
Bank has approved application and submitted it to SBA | 5,804 | 6 | $ | 967 | 22,087 | 44 | $ | 502 | ||||||||||||||||
Loans partially repaid (1) | 137 | 3 | $ | 46 | 119 | 17 | $ | 7 | ||||||||||||||||
PPP loans not fully repaid | 12,347 | 47 | $ | 263 | 130,814 | 487 | $ | 269 | ||||||||||||||||
Repayments | 151,146 | 559 | $ | 270 | 32,679 | 119 | $ | 275 | ||||||||||||||||
Total first PPP loan program - 2020 | 163,493 | 606 | $ | 270 | 163,493 | 606 | $ | 270 | ||||||||||||||||
Second PPP loan program - 2021 | ||||||||||||||||||||||||
Borrower has not started application | 42,506 | 221 | $ | 192 | — | — | $ | — | ||||||||||||||||
Borrower is working on application | 2,224 | 6 | $ | 371 | — | — | $ | — | ||||||||||||||||
Borrower has completed application and bank is reviewing it | 1,911 | 6 | $ | 319 | — | — | $ | — | ||||||||||||||||
Bank has approved application and submitted it to SBA | 70 | 1 | $ | 70 | — | — | $ | — | ||||||||||||||||
PPP loans not fully repaid | 46,711 | 234 | $ | 200 | — | — | $ | — | ||||||||||||||||
Repayments | 629 | 13 | $ | 48 | — | — | $ | — | ||||||||||||||||
Total second PPP loan program - 2021 | 47,340 | 247 | $ | 192 | — | — | $ | — | ||||||||||||||||
Total PPP loans originated by bank | $ | 210,833 | 853 | $ | 247 | $ | 163,493 | 606 | $ | 270 |
(1) Borrowers who participated in the Economic Injury Disaster Loan ("EIDL") program had their forgiveness payment reduced by their EIDL advance. This reduction has subsequently been repealed and the SBA has remitted a reconciliation payment for previously-deducted EIDL advance amounts, plus interest. |
Purchased Loans
In addition to loans we have originated or loans we acquired in conjunction with our acquisition of Merchants National Bank of Sacramento, the loan portfolio includes purchased loan pools and purchased participations. Purchased loansloan pools and participations are recorded at their fair value at the acquisition date. Credit discounts are included
The following table presents the recorded investment in the determination of fair value; therefore, an ALLL is not recorded at the acquisition date. Additional information regarding the individual purchased loan pools can be found in Note 12 Purchase of Financial Assetsand purchased participations at June 30, 2021 and December 31, 2020. The purchased loans presented in the table include the ITIN and SFC loans discussed under the heading “LNotes to Consolidated Financial Statementsoans with Unique Credit Characteristics in this document.”.
June 30, 2021 | December 31, 2020 | |||||||||||||||
(Dollars in thousands) | Balance | % of Gross Loan Portfolio | Balance | % of Gross Loan Portfolio | ||||||||||||
Loan Type: | ||||||||||||||||
Commercial real estate | $ | 10,183 | 1 | % | $ | 14,027 | 1 | % | ||||||||
Residential real estate | 37,302 | 3 | 40,242 | 3 | ||||||||||||
Consumer and other | 14,419 | 1 | 18,369 | 2 | ||||||||||||
Total purchased loans | $ | 61,904 | 5 | % | $ | 72,638 | 6 | % |
The following table presents the recorded investment in loans at September 30, 2017 and December 31, 2016 that were not originated by us.
(Amounts in thousands) | September 30, 2017 | December 31, 2016 | ||||||||||||||
Loans Type | Balance | % of Gross Loan Portfolio | Balance | % of Gross Loan Portfolio | ||||||||||||
Commercial | $ | 109 | — | % | $ | 109 | — | % | ||||||||
Commercial real estate | 30,490 | 4 | 31,662 | 4 | ||||||||||||
Residential real estate | 48,603 | 6 | 52,888 | 7 | ||||||||||||
Consumer and other | 49,316 | 6 | 49,057 | 6 | ||||||||||||
Total purchased loans | $ | 128,518 | 16 | % | $ | 133,716 | 17 | % |
Many of the loans that we have acquired from third party originators are made to borrowers who are located throughout the United States, other than in California. Some of those borrowers were undoubtedly impacted by the hurricanes which caused destruction in Texas, Florida, Georgia and Puerto Rico during the third quarter. As part of our discussion of the ALLL elsewhere in this document, we have provided the preliminary information we have about these loans.
AssetAsset Quality
Nonperforming Assets
Our loan portfolio is heavily concentrated in real estate and the ability for a significant portion of our borrowers’ ability to repay their loans is dependent upon the professional services, commercial real estate market and the residential real estate development industry sectors. Loans secured by real estate or other assets primarily located in California are expected to be repaid from cash flows of the borrower or proceeds from the sale of collateral. As such, our dependence on real estate secured loans could increaseincreases the risk of loss in our loan portfolio inwhen a market ofexperiences declining real estate values. Furthermore, declining real estate values would negatively impact any holdings of OREO.
We manage asset quality and mitigate credit risk through the application of policies designed to promote sound underwriting and loan monitoring practices. Our Loan Committee is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for loan and lease losses charged to earnings is based upon management’smanagement’s judgment of the amount necessary to maintain the allowance at a level adequate to absorbprovide for probable incurred losses.losses inherent in the outstanding loan and lease portfolio. 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 loans, 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 monthlyquarterly 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 externalindependent appraisals. Generally, externalthese appraisals are updated every twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’sMac’s nor our Exclusionary List of appraisers and brokers. In most cases, appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, anthe external appraisal is utilized to measure a loan for potential impairment.
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 our Chief Credit Officer. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, we do not believe there are significant time lapses for the recognition of additional provision for loan and lease losslosses 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 onin nonaccrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear certain.
Upon acquisition of real estate collateral, typically through the foreclosure process, we promptly begin to market the property for sale. If we do not receive offers or indications of interest within a reasonable timeframe, we will review market conditionsconditions to assess the pricing level that would enable us to sell the property. At the time of foreclosure, OREO is recorded at fair value less costs to sell (“cost”), which becomes the property’s new basis. Unless a current appraisal is available, an appraisal will be ordered prior to a loan migrating to OREO. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, management periodically performs valuations and the property is carried at the lower of the cost or fair value less expected selling costs. We obtain updated appraisals on OREO property every six to twelve months. Valuation adjustments recorded in a period are primarily based on (1) updated appraisals received during the period, or (2) management’s authorization to reduce the selling price of the property during the period.
The followingfollowing table summarizes our nonperforming assets as of SeptemberJune 30, 20172021 and December 31, 2016.2020.
(Amounts in thousands) | September 30, | December 31, | ||||||||||||||
Nonperforming Assets | 2017 | 2016 | ||||||||||||||
June 30, | December 31, | |||||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||||
Nonperforming Assets: | ||||||||||||||||
Commercial | $ | 2,309 | $ | 2,749 | $ | 1,506 | $ | 1,535 | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - commercial non-owner occupied | — | 1,196 | ||||||||||||||
Real estate - commercial owner occupied | 617 | 784 | ||||||||||||||
Non-owner occupied | 606 | 640 | ||||||||||||||
Owner occupied | 89 | 3,094 | ||||||||||||||
Total commercial real estate | 617 | 1,980 | 695 | 3,734 | ||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 3,201 | 3,576 | ||||||||||||||
Real estate - residential - 1-4 family mortgage | 626 | 1,914 | ||||||||||||||
Real estate - residential - equity lines | 815 | 917 | ||||||||||||||
ITIN | 1,463 | 1,585 | ||||||||||||||
1-4 family mortgage | 133 | 141 | ||||||||||||||
Total residential real estate | 4,642 | 6,407 | 1,596 | 1,726 | ||||||||||||
Consumer and other | 37 | 250 | 16 | 18 | ||||||||||||
Total nonaccrual loans | 7,605 | 11,386 | 3,813 | 7,013 | ||||||||||||
90 days past due and still accruing | — | — | — | — | ||||||||||||
Total nonperforming loans | 7,605 | 11,386 | 3,813 | 7,013 | ||||||||||||
Other real estate owned | 699 | 759 | — | 8 | ||||||||||||
Total nonperforming assets | $ | 8,304 | $ | 12,145 | $ | 3,813 | $ | 7,021 | ||||||||
Gross loans | $ | 1,090,745 | $ | 1,139,732 | ||||||||||||
PPP loans (1) | 59,058 | 130,814 | ||||||||||||||
Total gross loans, net of PPP loans | $ | 1,031,687 | $ | 1,008,918 | ||||||||||||
Nonperforming loans to gross loans | 0.92 | % | 1.42 | % | 0.35 | % | 0.62 | % | ||||||||
Nonperforming loans to gross loans (excluding PPP) (2) | 0.37 | % | 0.70 | % | ||||||||||||
Nonperforming assets to total assets | 0.67 | % | 1.06 | % | 0.20 | % | 0.40 | % |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
(2) Nonperforming loans to gross loans (excluding PPP) is computed by dividing nonperforming loans by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA. |
We continuallyregularly perform thorough reviews of the commercial real estate portfolio, including semi-annual stress testing. These reviews are performed on both our non-owner and owner occupied credits. These reviews are completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects. Stress testing is performed to determine the effect of rising cap rates, interest rates, and vacancy rates on the portfolio. Based on our analysis, we believe we are effectively managing the risks in this portfolio. There can be no assurance that declines in economic conditions, such as potential increases in retail or office vacancy rates, will not exceed the projected assumptions utilized in stress testing resultingand result in additional nonperforming loans in the future.
Troubled Debt Restructurings
Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, troubled debt restructured loans are impaired as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent troubled debt restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement to the loans carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.
As of June 30, 2021, we had $5.8 million in troubled debt restructurings compared to $6.1 million as of December 31, 2020. As of June 30, 2021, 89 loans were classified as troubled debt restructurings, of which 88 loans were performing according to their restructured terms. Of the 89 troubled debt restructurings, 81 were ITIN loans totaling $4.6 million which are serviced by a third party. Troubled debt restructurings represented 0.53% of gross loans as of June 30, 2021 and December 31, 2020.
As of September 30, 2017, we had $11.0 million in troubled debt restructurings compared to $12.1 million as of December 31, 2016. As of September 30, 2017, we had 118 restructured loans that qualified as troubled debt restructurings, of which 111 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.33% of gross loans as of September 30, 2017, compared to 1.50% at December 31, 2016.
Impaired loans of $6.6$3.9 million and $7.1$4.1 million were classified as accruing troubled debt restructurings at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. For a restructured loan to be on accrual status, the loan’sloan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. As of SeptemberJune 30, 2017,2021 and December 31, 2020, we had one restructured commercial line of credit in nonaccrual status that had $261 thousand in available credit. We had no obligationobligations to lend additional funds on any troubled debt restructured loans as of December 31, 2016.loans.
The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of SeptemberJune 30, 20172021 and December 31, 2016.2020.
(Amounts in thousands) | September 30, | December 31, | ||||||||||||||
Troubled Debt Restructurings | 2017 | 2016 | ||||||||||||||
June 30, | December 31, | |||||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||||
Troubled Debt Restructurings: | ||||||||||||||||
Accruing troubled debt restructurings | ||||||||||||||||
Commercial | $ | 671 | $ | 776 | $ | 430 | $ | 498 | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - commercial non-owner occupied | 805 | 808 | ||||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 4,655 | 5,033 | ||||||||||||||
Real estate - residential - equity lines | 441 | 454 | ||||||||||||||
ITIN | 3,374 | 3,466 | ||||||||||||||
Equity lines | 112 | 126 | ||||||||||||||
Total accruing troubled debt restructurings | $ | 6,572 | $ | 7,071 | $ | 3,916 | $ | 4,090 | ||||||||
Nonaccruing troubled debt restructurings | ||||||||||||||||
Commercial | $ | 1,609 | $ | 1,940 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Non-owner occupied | $ | 606 | $ | 640 | ||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 2,461 | 2,691 | ||||||||||||||
Real estate - residential - 1-4 family mortgage | 306 | 335 | ||||||||||||||
ITIN | 1,247 | 1,349 | ||||||||||||||
Consumer and other | 27 | 29 | 16 | 18 | ||||||||||||
Total nonaccruing troubled debt restructurings | $ | 4,403 | $ | 4,995 | $ | 1,869 | $ | 2,007 | ||||||||
Total troubled debt restructurings | ||||||||||||||||
Commercial | $ | 2,280 | $ | 2,716 | $ | 430 | $ | 498 | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - commercial non-owner occupied | 805 | 808 | ||||||||||||||
Non-owner occupied | 606 | 640 | ||||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 7,116 | 7,724 | ||||||||||||||
Real estate - residential - 1-4 family mortgage | 306 | 335 | ||||||||||||||
Real estate - residential - equity lines | 441 | 454 | ||||||||||||||
ITIN | 4,621 | 4,815 | ||||||||||||||
Equity lines | 112 | 126 | ||||||||||||||
Consumer and other | 27 | 29 | 16 | 18 | ||||||||||||
Total troubled debt restructurings | $ | 10,975 | $ | 12,066 | $ | 5,785 | $ | 6,097 | ||||||||
Total troubled debt restructurings to gross loans outstanding at period end | 1.33 | % | 1.50 | % | 0.53 | % | 0.53 | % | ||||||||
Total troubled debt restructurings to gross loans outstanding at period end (excluding PPP) (1) | 0.56 | % | 0.60 | % |
(1) Troubled debt restructuring to gross loans (excluding PPP) is computed by dividing troubled debt restructurings by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA. |
COVID-19 Troubled Debt Restructuring Guidance
AllowanceFinancial institution regulators and the CARES Act have changed the treatment of short-term loan modifications for Loan and Lease Losses and Reserve for Unfunded Commitmentsborrowers impacted by COVID-19. The change provides that modifications made in response to COVID-19, to borrowers under certain circumstances, should not be considered a troubled debt restructuring.
The ALLL at September 30, 2017 increased $147 thousandWe have responded to $11.7 million comparedthe needs of our borrowers in accordance with the CARES Act and regulatory guidance to $11.5 million at December 31, 2016. A combinationgrant short-term COVID-19 related loan modifications. These modified loans are not troubled debt restructurings and are not considered to be past due or non-performing. We have granted payment deferrals ranging from one to six months determined on a case-by-case basis considering the nature of net loan lossesthe business and loan portfolio growth supported management’s decision to recordthe impact of COVID-19. For some borrowers who where initially granted a $500 thousand provision for loan and lease losses during the ninepayment deferral of less than six months, ended September 30, 2017. During the year ended December 31, 2016 there were no provisions for loan and lease losses.we have granted an additional payment deferral period on a case-by-case basis.
We maintain close contact with our borrowers to update our understanding of the impact of the pandemic on them, their businesses and the underlying collateral for our loans. For borrowers who continue to have been granted a loan payment deferral, we have evaluated their credit quality position and the potential for loss of principal.
Most loan payment deferrals have ended and borrowers have resumed making payments. At June 30, 2021, payment deferrals were extant for 16 loans totaling $4.1 million compared to 82 loans totaling $9.5 million at December 31, 2020. Loans with a payment deferral at June 30, 2021 consisted of two SBA 504 commercial real estate loans totaling $3.2 million and 14 first trust deed residential mortgage loans totaling $827 thousand.
Past Due Loans
Past due loans as of June 30, 2021 decreased $3.5 million to $1.9 million compared to $5.4 million as of December 31, 2020. The decreases in past due loans resulted from repayment of a $3.0 million nonaccrual borrowing relationship during the first quarter of 2021.
SBA Loan Payments
During the first quarter of 2021, the SBA extended its debt relief program and resumed making principal and interest payments on all of our SBA 7(a) loans, which totaled $29.0 million at June 30, 2021. Payment assistance varies by borrower, will continue for no more than eight months and is limited to a maximum $9 thousand per borrower per month.
Allowance for Loan and Lease Losses
We recorded net monitor credit quality and the general economic environment to ensure that the ALLL is maintained at a level that is adequate to cover estimated credit losses in the loan charge-offsand lease portfolio. Our review of $352 thousandALLL adequacy utilizes both quantitative and qualitative factors. The quantitative analysis relies on historical loss rates which, unfortunately, may not be indicative of future losses. In response to quantitative data deficiencies, we have placed greater reliance on qualitative factors (Q-Factors).
Many of our COVID-19 related credit concerns have moderated and no provision for loan and lease losses was required during the first six months of 2021 compared to a provision of $4.2 million for the nine months ended September 30, 2017 compared to netsame period a year ago. Net loan loss recoveries were $284 thousand during the first six months of $364 thousand2021 and most of our borrowers who received a COVID-19 related loan payment deferral have resumed making their payments. This compares with the first six months of 2020 when concerns over COVID-19 necessitated a provision for the year endedloan and lease losses of $4.2 million. Our ALLL methodology supported an ALLL of $17.2 million at June 30, 2021, an increase of 2% compared to our ALLL of $16.9 million at December 31, 2016. Charge-offs during the nine months ended September 30, 2017 occurred primary from purchased consumer loans and were partially offset by recoveries from two commercial loan relationships.2020. Our ALLL as a percentage of gross loans was 1.42%1.58% as of SeptemberJune 30, 2017 and 1.44%2021 compared to 1.48% as of December 31, 2016.2020.
Management believes the Company’s ALLL is adequate at June 30, 2021. 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 future charges to the provision for loan and lease losses.
The following table summarizes the ALLL roll forward for the ninesix months ended SeptemberJune 30, 2017,2021, twelve months ended December 31, 20162020 and the ninesix months ended SeptemberJune 30, 2016.2020. This table also includes impaired loan information at SeptemberJune 30, 2017,2021, December 31, 20162020 and SeptemberJune 30, 2016.2020.
For The Nine Months Ended | For The Twelve Months Ended | For The Nine Months Ended | ||||||||||
(Amounts in thousands) | September 30, 2017 | December 31, 2016 | September 30, 2016 | |||||||||
Beginning balance ALLL | $ | 11,544 | $ | 11,180 | $ | 11,180 | ||||||
Provision for loan and lease loss charged to expense | 500 | — | — | |||||||||
Loans charged off | (1,051 | ) | (2,784 | ) | (2,398 | ) | ||||||
Loan and lease loss recoveries | 699 | 3,148 | 3,067 | |||||||||
Ending balance ALLL | $ | 11,692 | $ | 11,544 | $ | 11,849 |
For The Six Months Ended | For The Twelve Months Ended | For The Six Months Ended | ||||||||||
(Dollars in thousands) | June 30, 2021 | December 31, 2020 | June 30, 2020 | |||||||||
ALLL: | ||||||||||||
ALLL beginning balance | $ | 16,910 | $ | 12,231 | $ | 12,231 | ||||||
Provision for loan and lease losses | — | 5,250 | 4,150 | |||||||||
Loans charged-off | (162 | ) | (1,113 | ) | (525 | ) | ||||||
Loan and lease loss recoveries | 446 | 542 | 233 | |||||||||
ALLL ending balance | $ | 17,194 | $ | 16,910 | $ | 16,089 | ||||||
At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | ||||||||||
Nonaccrual loans: | ||||||||||||
Commercial | $ | 1,506 | $ | 1,535 | $ | 7 | ||||||
Commercial real estate: | ||||||||||||
Non-owner occupied | 606 | 640 | 1,717 | |||||||||
Owner occupied | 89 | 3,094 | 2,992 | |||||||||
Residential real estate: | ||||||||||||
ITIN | 1,463 | 1,585 | 1,738 | |||||||||
1-4 family mortgage | 133 | 141 | 180 | |||||||||
Consumer and other | 16 | 18 | 37 | |||||||||
Total nonaccrual loans | 3,813 | 7,013 | 6,671 | |||||||||
Accruing troubled debt restructured loans: | ||||||||||||
Commercial | 430 | 498 | 592 | |||||||||
Residential real estate: | ||||||||||||
ITIN | 3,374 | 3,466 | 3,642 | |||||||||
Equity lines | 112 | 126 | 221 | |||||||||
Total accruing troubled debt restructured loans | 3,916 | 4,090 | 4,455 | |||||||||
Total impaired loans | $ | 7,729 | $ | 11,103 | $ | 11,126 | ||||||
Gross loans outstanding | $ | 1,090,745 | $ | 1,139,732 | $ | 1,206,340 | ||||||
Ratio of ALLL to gross loans outstanding | 1.58 | % | 1.48 | % | 1.33 | % | ||||||
Ratio of ALLL to gross loans outstanding (excluding PPP) (1) | 1.67 | % | 1.68 | % | 1.54 | % | ||||||
Nonaccrual loans to gross loans outstanding | 0.35 | % | 0.62 | % | 0.55 | % | ||||||
Nonaccrual loans to gross loans outstanding (excluding PPP) (2) | 0.37 | % | 0.70 | % | 0.64 | % |
At September 30, 2017 | At December 31, 2016 | At September 30, 2016 | ||||||||||
Nonaccrual loans: | ||||||||||||
Commercial | $ | 2,309 | $ | 2,749 | $ | 1,710 | ||||||
Real estate - commercial non-owner occupied | — | 1,196 | 1,196 | |||||||||
Real estate - commercial owner occupied | 617 | 784 | 800 | |||||||||
Real estate - residential - ITIN | 3,201 | 3,576 | 3,392 | |||||||||
Real estate - residential - 1-4 family mortgage | 626 | 1,914 | 1,798 | |||||||||
Real estate - residential - equity lines | 815 | 917 | 942 | |||||||||
Consumer and other | 37 | 250 | 252 | |||||||||
Total nonaccrual loans | 7,605 | 11,386 | 10,090 | |||||||||
Accruing troubled-debt restructured loans: | ||||||||||||
Commercial | 671 | 776 | 726 | |||||||||
Real estate - commercial non-owner occupied | 805 | 808 | 811 | |||||||||
Real estate - residential - ITIN | 4,655 | 5,033 | 5,280 | |||||||||
Real estate - residential - equity lines | 441 | 454 | 543 | |||||||||
Total accruing restructured loans | 6,572 | 7,071 | 7,360 | |||||||||
All other accruing impaired loans | — | 337 | 483 | |||||||||
Total impaired loans | $ | 14,177 | $ | 18,794 | $ | 17,933 | ||||||
Gross loans outstanding | $ | 824,874 | $ | 804,211 | $ | 779,019 | ||||||
Ratio of ALLL to gross loans outstanding | 1.42 | % | 1.44 | % | 1.52 | % | ||||||
Nonaccrual loans to gross loans outstanding | 0.92 | % | 1.42 | % | 1.30 | % |
(1) ALLL to gross loans outstanding (excluding PPP) is computed by dividing the ALLL by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA. |
(2) Nonaccrual loans to gross loans outstanding (excluding PPP) is computed by dividing the nonaccrual loans by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA. |
The following table sets forth the ratio of net charge-offs (recoveries) for the six months ended June 30, 2021 (annualized) and the year ended December 31, 2020 to average loans outstanding for the six months ended June 30, 2021 and the year ended December 31, 2020, respectively.
As of September 30, 2017, impaired loans totaled $14.2 million, of which $7.6 million were in nonaccrual status. Of the total impaired loans, $7.9 million or 115 were ITIN loans with an average balance of approximately $68 thousand. The remaining impaired loans consist of nine commercial loans, two commercial real estate loans, four residential mortgages, ten home equity loans and two consumer loans.
For the Six Months Ended | For the Year Ended | |||||||
June 30, 2021 | December 31, 2020 | |||||||
Loan Portfolio: | ||||||||
Commercial | (0.01 | )% | 0.25 | % | ||||
Commercial real estate: | ||||||||
Owner occupied | (0.12 | )% | 0.05 | % | ||||
Residential real estate: | ||||||||
ITIN | (0.69 | )% | (0.20 | )% | ||||
1-4 family mortgage | (0.03 | )% | (0.03 | )% | ||||
Equity lines | (0.45 | )% | (0.04 | )% | ||||
Consumer and other | (0.27 | )% | 0.80 | % | ||||
Total | (0.05 | )% | 0.05 | % |
At SeptemberJune 30, 2017,2021, impaired loans had a corresponding specific allowance of $918 thousand.$159 thousand. The specific allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the allocation of the ALLL as of SeptemberJune 30, 20172021 and December 31, 2016.2020.
(Amounts in thousands) | September 30, 2017 | December 31, 2016 | ||||||||||||||
ALLL | Amount | Percent | Amount | Percent | ||||||||||||
Commercial | $ | 2,644 | 22 | % | $ | 2,849 | 25 | % | ||||||||
Commercial real estate: | ||||||||||||||||
Real estate - construction and land development | 67 | 1 | 177 | 2 | ||||||||||||
Real estate - commercial non-owner occupied | 4,415 | 37 | 3,637 | 32 | ||||||||||||
Real estate - commercial owner occupied | 1,822 | 16 | 1,764 | 15 | ||||||||||||
Residential real estate: | ||||||||||||||||
Real estate - residential - ITIN | 552 | 5 | 973 | 8 | ||||||||||||
Real estate - residential - 1-4 family mortgage | 103 | 1 | 106 | 1 | ||||||||||||
Real estate - residential - equity lines | 529 | 5 | 637 | 5 | ||||||||||||
Consumer and other | 1,200 | 10 | 955 | 8 | ||||||||||||
Unallocated | 360 | 3 | 446 | 4 | ||||||||||||
Total ALLL | $ | 11,692 | 100 | % | $ | 11,544 | 100 | % |
June 30, 2021 | December 31, 2020 | |||||||||||||||
(Dollars in thousands) | Amount | % Loan Category | Amount | % Loan Category | ||||||||||||
ALLL: | ||||||||||||||||
Commercial | $ | 1,839 | 9 | % | $ | 2,402 | 10 | % | ||||||||
PPP (1) | — | 5 | — | 11 | ||||||||||||
Commercial real estate: | ||||||||||||||||
Construction and land development | 317 | 3 | 449 | 4 | ||||||||||||
Non-owner occupied | 10,396 | 57 | 9,195 | 48 | ||||||||||||
Owner occupied | 2,199 | 15 | 2,251 | 15 | ||||||||||||
Residential real estate: | ||||||||||||||||
ITIN | 539 | 2 | 617 | 3 | ||||||||||||
1-4 family mortgage | 337 | 5 | 386 | 5 | ||||||||||||
Equity lines | 284 | 2 | 321 | 2 | ||||||||||||
Consumer and other | 469 | 2 | 683 | 2 | ||||||||||||
Unallocated | 814 | n/a | 606 | n/a | ||||||||||||
Total ALLL | $ | 17,194 | 100 | % | $ | 16,910 | 100 | % |
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them. |
The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk grading-based component, or in the specific reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of SeptemberJune 30, 2017,2021, the unallocated allowance amount represents 3%represented 5% of the ALLL compared to 4% at December 31, 2016.2020. While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ.
Natural DisasterReserve for Unfunded Commitmentss
Wildfires
We have extended credit to borrowersThe reserve for unfunded commitments, which is included in California's NapaOther Liabilities in the Consolidated Balance Sheets, was $800 thousand at June 30, 2021 and Sonoma counties where devastating fires recently caused widespread destruction. In those two counties we have made ten commercial real estate loans totaling $12.8 million. We believe that none December 31, 2020. The adequacy of the real estate collateralizing our loans was burned. Itreserve for unfunded commitments is however too soon to approximatereviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic impactconditions. When necessary, the provision expense is recorded in other noninterest expense in the Consolidated Statements of the fires on the general economyIncome.
Goodwill and Other Intangible Assets
Hurricanes
ManyGoodwill and other intangible assets, net totaled $15.3 million at June 30, 2021 and primarily consisted of goodwill and core deposit intangibles recorded as part of previous acquisitions. Goodwill is evaluated for impairment annually and any such impairment is recognized in the period identified. A more frequent assessment of possible goodwill impairment is performed whenever we identify certain triggering events or circumstances that would more likely than not indicate that the fair value of the loans that we have acquired from third party originators were madeBank is less than the carrying amount of the Bank’s equity. The triggering events to borrowers who are located throughoutbe considered include a deterioration in general economic conditions, decreased overall financial performance of the United States, other than in California. Some of those borrowers reside in portions of Texas, Florida, GeorgiaCompany, and Puerto Rico where hurricanes caused severe damage during the third quarter of 2017. The loans that could be affected are primarily ITIN loans which are secured by 1st deeds of trust and consumer home improvement loans which are unsecured. These loans are not serviced by us and we are dependent on third party servicers for collection efforts, processing payment deferral requests and obtaining loss information. Based on preliminary information, we believe thata sustained decrease in the affected areas, our exposure for loans secured by 1st and 2nd residential deeds of trust is 21 loans totaling $1.2 million (none in Puerto Rico), and for unsecured consumer loans is 361 loans totaling $3.5 million (of which 78 loans totaling $1.2 million are in Puerto Rico). We do not currently know the extent of damage to our loan collateral, the amounts of available insurance coverage, the availability of government assistance for our borrowers or whether our borrower's ability to repay their loans has been diminished.Company’s stock price.
Deposits
Total deposits as of SeptemberJune 30, 20172021 were $1.1$1.697 billion compared to $1.0$1.543 billion at December 31, 2016,2020, an increase of $58.1 million or 8% annualized.$155 million. The following table presents the deposit balances by major category as of SeptemberJune 30, 2017,2021, and December 31, 2016.2020. The increase in non-maturing deposits from December 31, 2020 to June 30, 2021 was due to PPP loan program disbursements and changes in customer behavior, which continues to place greater emphasis on savings during the current uncertain times. Management assumes that depositor behavior will change at a later date, but is unable to predict the timing of that change.
(Amounts in thousands) | September 30, 2017 | December 31, 2016 | ||||||||||||||
Deposits | Amount | Percentage | Amount | Percentage | ||||||||||||
Noninterest-bearing demand | $ | 316,814 | 30 | % | $ | 270,398 | 27 | % | ||||||||
Interest-bearing demand | 206,045 | 19 | 198,328 | 20 | ||||||||||||
Money market accounts | 227,421 | 21 | 207,241 | 20 | ||||||||||||
Savings | 111,962 | 11 | 113,309 | 11 | ||||||||||||
Certificates of deposit, $100,000 or greater | 156,743 | 15 | 167,962 | 17 | ||||||||||||
Certificates of deposit, less than $100,000 | 43,800 | 4 | 47,428 | 5 | ||||||||||||
Total | $ | 1,062,785 | 100 | % | $ | 1,004,666 | 100 | % |
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2021 | December 31, 2020 | |||||||||||||||
(Dollars in thousands) | Amount | % | Amount | % | ||||||||||||
Deposits: | ||||||||||||||||
Noninterest-bearing demand | $ | 627,911 | 37 | % | $ | 541,033 | 34 | % | ||||||||
Interest-bearing demand | 306,565 | 18 | 290,251 | 19 | ||||||||||||
Money market | 463,639 | 27 | 425,121 | 28 | ||||||||||||
Savings | 162,325 | 10 | 150,695 | 10 | ||||||||||||
Certificates of deposit, $250,000 or less | 74,605 | 4 | 78,217 | 5 | ||||||||||||
Certificates of deposit, greater than $250,000 | 62,293 | 4 | 57,462 | 4 | ||||||||||||
Total | $ | 1,697,338 | 100 | % | $ | 1,542,779 | 100 | % |
The following table sets forth the distribution of our year-to-date average daily balancesdeposits and their respective average rates for the nine months ended September 30, 2017, and the year ended December 31, 2016.periods indicated.
For the Nine Months Ended September 30, 2017 | For the Year Ended December 31, 2016 | |||||||||||||||
(Amounts in thousands) | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||||
Interest-bearing demand | $ | 204,808 | 0.13 | % | $ | 172,011 | 0.12 | % | ||||||||
Money market accounts | 221,557 | 0.20 | % | 202,159 | 0.16 | % | ||||||||||
Savings | 111,258 | 0.18 | % | 104,771 | 0.17 | % | ||||||||||
Certificates of deposit | 209,275 | 1.05 | % | 221,074 | 0.99 | % | ||||||||||
Interest-bearing deposits | 746,898 | 0.41 | % | 700,015 | 0.41 | % | ||||||||||
Noninterest-bearing demand | 280,559 | 226,368 | ||||||||||||||
Average total deposits | $ | 1,027,457 | 0.30 | % | $ | 926,383 | 0.31 | % | ||||||||
Term debt | $ | 18,644 | 6.33 | % | $ | 37,286 | 4.47 | % | ||||||||
Junior subordinated debentures | 10,310 | 2.74 | % | 10,310 | 2.28 | % | ||||||||||
Average total borrowings | $ | 28,954 | 5.05 | % | $ | 47,596 | 4.00 | % |
Deposit Maturity Schedule
The following table sets forth the maturities of certificates of deposit in amounts of $100,000 or more as of September 30, 2017.
(Amounts in thousands) | September 30, | |||
Maturing in: | 2017 | |||
Three months or less | $ | 25,453 | ||
Three through six months | 26,545 | |||
Six through twelve months | 32,907 | |||
Over twelve months | 71,838 | |||
Total | $ | 156,743 |
For the Six Months Ended | For the Year Ended | |||||||||||||||
June 30, 2021 | December 31, 2020 | |||||||||||||||
(Dollars in thousands) | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||||
Deposits: | ||||||||||||||||
Interest-bearing demand | $ | 298,236 | 0.08 | % | $ | 264,652 | 0.12 | % | ||||||||
Money market | 434,140 | 0.17 | % | 372,939 | 0.33 | % | ||||||||||
Savings | 158,738 | 0.11 | % | 142,857 | 0.24 | % | ||||||||||
Certificates of deposit | 136,969 | 0.94 | % | 142,067 | 1.23 | % | ||||||||||
Interest-bearing deposits | 1,028,083 | 0.24 | % | 922,515 | 0.39 | % | ||||||||||
Noninterest-bearing demand | 584,513 | 500,862 | ||||||||||||||
Total deposits | $ | 1,612,596 | 0.15 | % | $ | 1,423,377 | 0.26 | % |
We have an agreement with IntraFi Network (“IntraFi”), formerly known as Promontory Interfinancial Network LLC (“Promontory”) allowingwhich facilitates provision of FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. Promontory’sIntraFi’s Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) products 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.(reciprocal arrangement). These products are designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers. CDARS and ICS deposits can also be reciprocal or one-wayarranged on a non-reciprocal basis. CDARS and are considered brokeredICS deposits by the FDIC.totaled $77.4 million and $85.6 million at June 30, 2021 and December 31, 2020, respectively.
Deposit Maturity Schedule
In accordance with regulatory Call Report instructions, we filed quarterly Call Reports,The following table sets forth the maturities of uninsured certificates of deposit greater than $250,000 as of June 30, 2021.
June 30, | ||||
(Amounts in thousands) | 2021 | |||
Maturing in: | ||||
Three months or less | $ | 15,263 | ||
Three through six months | 6,040 | |||
Six through twelve months | 18,658 | |||
Over twelve months | 22,332 | |||
Total | $ | 62,293 |
Our uninsured deposits, which listed brokered depositsare the portion of $56.2deposit accounts that exceed the FDIC insurance limit (currently $250,000), approximated $934 million and $65.2$795 million at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively. These amounts were obtained throughestimated based on the CDARSsame methodologies and ICS programs.assumptions used for regulatory reporting purposes.
Borrowings
The following table sets forth our year-to-date average balances for borrowings and their respective average rates for the periods indicated.
For the Six Months Ended | For the Year Ended | |||||||||||||||
June 30, 2021 | December 31, 2020 | |||||||||||||||
(Dollars in thousands) | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||||
Borrowings: | ||||||||||||||||
FHLB borrowings | $ | 1,934 | — | % | $ | 8,347 | 0.06 | % | ||||||||
Subordinated debt, net | 10,000 | 5.55 | % | 9,981 | 7.32 | % | ||||||||||
Junior subordinated debentures | 10,310 | 1.82 | % | 10,310 | 2.41 | % | ||||||||||
Total borrowings | $ | 22,244 | 3.34 | % | $ | 28,638 | 3.45 | % |
Term Debt
At SeptemberJune 30, 2017,2021, we had term debt outstanding with a carrying value of $17.6$10.0 million compared to $18.7$15.0 million at December 31, 2016.2020. Term debt consisted of the following:
Federal Home Loan Bank of San Francisco Borrowings
As of SeptemberJune 30, 2017 and December 31, 2016,2021, the Bank had no Federal Home Loan Bank of San FranciscoFHLB advances outstanding. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2017 and the year endedcompared to $5.0 million at December 31, 2016 was $403 thousand and $18.0 million, respectively.2020. See Note 6 Federal Funds Purchased and Lines of CreditTerm Debt in the Notes to Consolidated Financial Statements for information on our Federal Home Loan Bank of San FranciscoFHLB borrowings.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SeniorSubordinated Debt
In December of 2015, we entered into a senior debt loan agreement to borrow $10.0 million. The debt is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce, matures in 2020, and at September 30, 2017, had a balance of $7.7 million net of unamortized debt issuance costs. Interest on the senior debt is paid at a variable rate equal to three month LIBOR plus 400 basis points resetting monthly. The effective interest rate at September 30, 2017, was 5.32%
Subordinated Debt
In December of 2015, we issued $10.0 million of fixed to floating rate subordinated notes.Subordinated Notes. The subordinated debtSubordinated Debt initially bearsbore interest at a fixed rate of 6.88% per annum for a five-year term. Thereafter, interestthrough December 19, 2020. Interest on the subordinated debt will be paidSubordinated Debt currently bears interest at a variable rate equal to three month LIBOR plus 526 basis points resetting quarterly. At September 30, 2017, the Subordinated Debt had a balance of $9.9 million net of unamortized debt issuance costs. The notes are due in 2025.
Junior Subordinated DebentureDebenturess
Bank of Commerce Holdings Trust IIII
During July of 2005, we participated in a $10.0 million private placement of fixed rate trust-preferred securities (the "Trust-Preferred Securities") through a wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). TrustTrust 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 a rate equal to three month LIBOR plus 158 basis points (2.90%(1.19% at SeptemberJune 30, 2017)2021).
The Trust-Preferred Securities mature on September 15, 2035, and the covenants allow for redemption of the securities at our option during any quarter prior to maturity.
The proceeds from the salesale 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.Bank. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.
LIQUIDITY AND CASH FLOW
ReddingMerchants Bank of Commerce
On March 11, 2016, we completed the purchase of five Bank of America branches located in northern California. The transaction was attractive to us because it provided a new source of low cost core deposits and allowed us to execute our plan to reconfigure our Balance Sheet. The acquisition provided approximately $142.3 million of new liquidity ($149.0 million of new deposits less payments of $6.7 million made to Bank of America). We utilized a portion of that new liquidity to reduce our reliance on wholesale funding sources, repaying $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and redeeming $17.5 million of brokered time deposits. We utilized the remaining liquidity to fund loan growth.
The principal objective of our liquidity management program is to maintain our ability to meet the day-to-day cash flow requirements of our customers who wish either wish to withdraw funds on deposit or to draw upon their credit facilities.
We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. We may be required to collateralize a portion of public deposits that exceed FDIC insurance limitations based on the state of California’s risk assessment of the Bank. Public deposits represent 2% of our total deposits at September 30, 2017 and December 31, 2016.
In addition to liquidity fromprovided by core deposits, loan repayments and cash flows from 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,FHLB, borrow on a secured basis from the Federal Reserve Bank, borrow on established conditional federal funds lines of credit, sell securities, or issue subscription / brokered certificates of deposit.
We have experienced significant increased deposit balances due to PPP loan program disbursements and customer behavior, which continues to place greater emphasis on savings during the current uncertain times. Through June 30, 2021, we have not experienced any unusual pressure on our deposit balances or on our liquidity position as a result of the COVID-19 pandemic.
At SeptemberJune 30, 2017,2021, the Bank hadhas the following credit arrangements:
● |
|
|
|
● |
|
● | Nonbinding unsecured federal funds line of credit agreements with three financial institutions. The available credit on these lines totaled |
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 ofAt June 30, 2021, the Holding Company'sCompany had cash flows are obtainedbalances of $3.1 million. Our principal source of cash is dividends received from dividends declared and paid by the Bank. During the first six months of 2021, the Bank paid dividends totaling $2.5 million to the Holding Company. There are statutory and regulatory provisions thatthat could limit the ability of the Bank to pay dividends to the Holding Company. As describedCompany in the paragraph below, the Holding Company received $26.8 million in proceeds from the sale of common stock and given its cash position, there are currently no plans to pay dividends from the Bank to the Holding Company.future.
On May 10, 2017, we completed the sale of 2,738,096 shares of our common stock at a public offering price of $10.50 and received net proceeds of $26.8 million. These proceeds will support lending and investment activities, support or fund acquisitions of other institutions or branches if opportunities for such transactions become available, or repay certain borrowings. We deployed liquidity provided by the sale of common stock into available-for-sale securities and interest-bearing deposits at other banks.
Consolidated Statements of Cash FlowsFlows
As disclosed in the Consolidated Statements of Cash Flows,, net cash of $10.3 million was provided by operating activities during the nine months ended September 30, 2017. The primary difference between net income and cash provided by operating activities isare non-cash items including depreciation and amortization totaling $3.2 million and a provision for loan and lease losses of $500 thousand.items.
Net cash of $75.6$12.1 million usedwas provided by investingoperating activities during the six months ended June 30, 2021 consisted principally of $121.6 million in purchases of available-for-sale investment securities and $22.0 million in net loan purchases and originations partially offset by $47.9 million in proceeds from sale of available-for-sale investment securities, $16.6 million in proceeds from maturities and payments of available-for-sale securities and $2.2 million of life insurance proceeds.of:
● | $9.1 million in net income. |
● | $1.1 million in depreciation and amortization. |
● | $1.4 million in amortization of premiums and accretion of discounts on investment securities. |
Net cash of $82.6$89.7 million used in investing activities during the six months ended June 30, 2021 consisted principally of:
● | $227.6 million in purchases of investment securities. |
These uses of cash were partially offset by:
● | $39.1 million in proceeds from sale of investment securities. |
● | $49.9 million in proceeds from maturities and payments of investment securities. |
● | $39.0 million in net loan principal repayments. |
● | $10.7 million in repayments on purchased loan pools. |
Net cash of $147.7 million provided by financing activities during the six months ended June 30, 2021 consisted principally of a $73.0 million increase in demand and savings deposits and $26.8 million in proceeds from issuance of common stockof:
● | $153.3 million increase in non-maturing deposits. |
● | $1.2 million increase in certificates of deposit. |
These sources were partially offset by a decrease in certificatesby:
● | $5.0 million repayment of term debt. |
● | $2.0 million dividends paid on common stock. |
CAPITAL RESOURCES
We useEquity capital is available to support organic and strategic growth, pay dividends and pay dividends.repurchase shares. The objective of effective capital management is to produce above marketcompetitive long-term returns by usingfor our shareholders while ensuring that adequate capital when investment returns are perceivedis maintained relative to be high and issuing capital when costs are perceived to be low.the Company’s risk profile. Our sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt or trust notes.debt.
REGULATORY CAPITAL GUIDELINES
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. On July 2, 2013, the federal banking agencies approved the finalThe current rules (the “Final Rules”) implementing the Basel Committee's December 2010 final capital framework (commonly known as Basel III). The Final Rules substantially amended the regulatory risk-based capital rules applicable to the Holding Company and the Bank. The phase-in period for the Final Rules began for the Company on January 1, 2015 with full compliance with the Final Rules phased in by January 1, 2019.
Generally speaking, effective January 1, 2015, the Final Rules did the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Final Rules require the Bank and the Company to meet thea capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. TheThe capital conservation buffer of 2.50% is added to the minimum capital ratios and is being phased in between 2016 and 2019. For 2017, the partially phased in buffer is 1.25%.ratios.
When the new capital rule is fully phased in, theThe Basel III minimum capital requirements plus the conservation buffer will exceed the well-capitalizedprior regulatory “well-capitalized” capital thresholds by 0.5 percentage points. This 0.5-percentage-point0.5 percentage-point cushion will allowallows institutions to dip into a portion of their capital conservation buffer before reaching a status that is considered less than well capitalized for prompt corrective action purposes.
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
These capital rules also changeAs of January 1, 2020 for certain qualifying institutions, the risk-weights of certain assets for purposesFDIC accepts compliance with a Community Bank Leverage Ratio in lieu of the risk-basedBasel III capital ratios and phase out certain instruments asrequirements. We are a qualifying capital. The Final Rules also contain revisionsinstitution; however, we have opted to continue reporting under the prompt corrective action framework, which is designedBasel III requirements. We can opt-in to place restrictions on insured depository institutions, if their capital levels begin to show signs of weakness.
Underuse the prompt corrective action requirements, which are designed to complementCommunity Bank Leverage Ratio at any time in the capital conservation buffer, insured depository institutions are required to meet the following increased capital level requirements in order to qualify as “well-capitalized:”
|
|
|
|
|
|
|
|
|
|
The FDIC's rules (as amended by the Final Rules) also contain other capital classification categories, such as "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," which are based on an institution's specific capital ratios.future.
CAPITAL ADEQUACY
Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board of Directors on a monthly basis. Our regulators measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. Based on management’s review and analysis of Basel III, management believes that the Holding Company and the Bank will exceed the standards under these new rules.
As of SeptemberJune 30, 2017,2021, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action.Prompt Corrective Action (“FDIC PCA”). There are no conditions or events since the notification that management believes have changed the Bank’sBank’s risk category. The Holding Company and the Bank’s capital amounts and ratios as of SeptemberJune 30, 2017,2021, are presented in the following table.
September 30, 2017 | ||||||||||||||||||||||||
(Amounts in thousands) | Capital | Actual | Well Capitalized Requirement | Minimum Capital Requirement | Applicable 2017 Capital Conservation Buffer | Minimum Capital Ratio plus Capital Conservation Buffer | ||||||||||||||||||
Holding Company: | ||||||||||||||||||||||||
Common Equity Tier 1 Capital Ratio | $ | 125,592 | 12.66 | % | n/a | 4.50 | % | 1.25 | % | 5.750 | % | |||||||||||||
Tier 1 Capital Ratio | $ | 135,462 | 13.65 | % | n/a | 6.00 | % | 1.25 | % | 7.250 | % | |||||||||||||
Total Capital Ratio | $ | 157,848 | 15.91 | % | n/a | 8.00 | % | 1.25 | % | 9.250 | % | |||||||||||||
Tier 1 Leverage Ratio | $ | 135,462 | 11.12 | % | n/a | 4.00 | % | n/a | n/a | |||||||||||||||
Bank: | ||||||||||||||||||||||||
Common Equity Tier 1 Capital ratio | $ | 127,819 | 12.87 | % | 6.50 | % | 4.50 | % | 1.25 | % | 5.750 | % | ||||||||||||
Tier 1 Capital Ratio | $ | 127,819 | 12.87 | % | 8.00 | % | 6.00 | % | 1.25 | % | 7.250 | % | ||||||||||||
Total Capital Ratio | $ | 140,206 | 14.12 | % | 10.00 | % | 8.00 | % | 1.25 | % | 9.250 | % | ||||||||||||
Tier 1 Leverage Ratio | $ | 127,819 | 10.50 | % | 5.00 | % | 4.00 | % | n/a | n/a |
June 30, 2021 | ||||||||||||||||||||||||
FDIC PCA | BASEL III | |||||||||||||||||||||||
Well | Minimum | Capital | Minimum Capital | |||||||||||||||||||||
Actual | Capitalized | Capital | Conservation | Ratio plus Capital | ||||||||||||||||||||
(Dollars in thousands) | Capital | Ratio | Requirement | Requirement | Buffer | Conservation Buffer | ||||||||||||||||||
Holding Company: | ||||||||||||||||||||||||
Common equity tier 1 capital ratio | $ | 163,336 | 13.04 | % | n/a | 4.50 | % | 2.50 | % | 7.00 | % | |||||||||||||
Tier 1 capital ratio | $ | 173,336 | 13.84 | % | n/a | 6.00 | % | 2.50 | % | 8.50 | % | |||||||||||||
Total capital ratio | $ | 199,025 | 15.89 | % | n/a | 8.00 | % | 2.50 | % | 10.50 | % | |||||||||||||
Tier 1 leverage ratio | $ | 173,336 | 9.37 | % | n/a | 4.00 | % | n/a | 4.00 | % | ||||||||||||||
Bank: | ||||||||||||||||||||||||
Common equity tier 1 capital ratio | $ | 181,361 | 14.48 | % | 6.50 | % | 4.50 | % | 2.50 | % | 7.00 | % | ||||||||||||
Tier 1 capital ratio | $ | 181,361 | 14.48 | % | 8.00 | % | 6.00 | % | 2.50 | % | 8.50 | % | ||||||||||||
Total capital ratio | $ | 197,042 | 15.74 | % | 10.00 | % | 8.00 | % | 2.50 | % | 10.50 | % | ||||||||||||
Tier 1 leverage ratio | $ | 181,361 | 9.80 | % | 5.00 | % | 4.00 | % | n/a | 4.00 | % |
On December 10, 2015, the Holding Company issued $10.0 million in aggregate principal amount of Subordinated Notes to certain institutional investors. The Subordinated Notes qualify as Tier 2 Capital under the Final Rules. See Item 1a1A - Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 20162020 for further detail on potential risks relating to the Subordinated Notes.
AsGoodwill and other intangible assets, net totaled $15.3 million at June 30, 2021 and primarily consisted of goodwill and core deposit intangibles recorded as part of previous acquisitions. See Note 10, Goodwill and Other Intangibles in the branch acquisition, we recorded a core depositNotes to Consolidated Financial Statements in this document for additional detail goodwill and other intangible of $1.8 million and goodwill of $665 thousand.assets. When calculating capital ratios, goodwill and a portion of the core deposit intangiblesother intangible assets, net are subtracteddeducted from Tier 1 capital. The deduction for core deposit intangibles is subject to a phase in period under the Basel III risk based capital rules. During 2016, 60% of the core deposit intangible was deducted from Tier 1 capital, 80% for 2017 and 100% thereafter. Both of these intangible assets are subtracted from tangible equity as part of the calculation of tangible book value per share.
Capital ratios for the Holding Company include the benefit of $26.8 million net proceeds from the sale of 2,738,096 shares of common stock in the second quarter of 2017.
In late 2020, we announced a new share repurchase program to repurchase up to 1.0 million shares of common stock over a period ending December 31, 2021. As of June 30, 2021, no shares have been repurchased under this program. Given the recent announcement of the merger with Columbia, management will not be purchasing shares under the program.
Cash Dividends and Payout Ratios per Common Share
DuringThe following table presents cash dividends declared and dividend pay-out ratios (dividends declared per common share divided by basic earnings per common share) for the ninethree and six months ended SeptemberJune 30, 20172021 and the year ended December 31, 2016, we declared quarterly cash dividends of $0.03 per common share.
2020. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, our risk profile, capital preservation and expected growth. The dividend rate will beis reassessed periodically by the Board of Directors in accordance with the dividend policy. There is no assurance that future cash dividends on common shares will be declared or increased.
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Dividends declared per common share | $ | 0.06 | $ | 0.05 | $ | 0.12 | $ | 0.10 | ||||||||
Dividend payout ratio | 24 | % | 22 | % | 22 | % | 36 | % |
Tangible Book Value Per Share and Tangible Common Equity Ratio
We believe the tangible common equity ratio and tangible book value per share are meaningful measures that the Company and investors commonly use to assess the value and capital levels of the Company.
The following table presents cash dividends declaredprovides a reconciliation of shareholders' equity (GAAP) to tangible common equity (non-GAAP), and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the threetotal assets (GAAP) to tangible assets (non-GAAP) as of June 30, 2021 and nine months ended September 30, 2017 and 2016.December 31, 2020.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Dividends declared per common share | $ | 0.03 | $ | 0.03 | $ | 0.09 | $ | 0.09 | ||||||||
Dividend payout ratio | 17 | % | 17 | % | 18 | % | 41 | % |
June 30, | December 31, | |||||||
(Dollars in thousands except ratio and per share data) | 2021 | 2020 | ||||||
Tangible common shareholders' equity: | ||||||||
Total shareholders' equity (GAAP) | $ | 182,137 | $ | 177,702 | ||||
Subtract: | ||||||||
Goodwill (GAAP) | 11,671 | 11,671 | ||||||
Other intangible assets, net (GAAP) | 3,661 | 4,044 | ||||||
Tangible common shareholders' equity (non-GAAP) | $ | 166,805 | $ | 161,987 | ||||
Total assets (GAAP) | $ | 1,917,153 | $ | 1,763,954 | ||||
Subtract: | ||||||||
Goodwill (GAAP) | 11,671 | 11,671 | ||||||
Other intangible assets, net (GAAP) | 3,661 | 4,044 | ||||||
Tangible assets (non-GAAP) | $ | 1,901,821 | $ | 1,748,239 | ||||
Common equity ratio (GAAP) | 9.50 | % | 10.07 | % | ||||
Tangible common equity ratio (non-GAAP) | 8.77 | % | 9.27 | % | ||||
Book value per share (GAAP) | $ | 10.78 | $ | 10.58 | ||||
Tangible book value per share (non-GAAP) | $ | 9.87 | $ | 9.64 |
The Tangible common equity, the tangible common equity ratio and tangible book value are non-GAAP financial measures, are not audited, and should be viewed in conjunction with the total shareholders' equity, total shareholders' equity ratio and book value per share. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
OFF-BALANCE SHEET ARRANGEMENTS
Information regarding Off-Balance Sheet Arrangements is included in Note 8, 7, Commitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.
CONCENTRATION OF CREDIT RISK
Information regarding Concentration of Credit Risk is included in Note 8, 7, CommitmentsCommitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.
ItemItem 3. Quantitative and Qualitative Disclosures About Market Risk
Our assessment of market risk as of SeptemberJune 30, 20172021 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, 2016.2020.
ItemItem 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’sCompany’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’sentity’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 ReportingReporting
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’sCompany’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’sCompany’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 SeptemberJune 30, 2017,2021, 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 ninesix months of 20172021 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
We are subject to various pending and threatened legal actions arising in the ordinary course of business and maintainsmaintain 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 our consolidated financial position or results of operations.
We have only fragmented information about the impact of hurricanes Harvey, Irma and Maria on our purchased loan portfolios. We are in the preliminary stage of assessing how these storms will impact our portfolio or our earnings. Until more is known, we are unable to quantify that impact.
The risks described below, as well as the risk factors previously disclosed in the Company’sCompany’s Form 10-K for the period ended December 31, 2016,2020, filed with the SEC on March 15, 20175, 2021 should be carefully considered. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results. Our risk factors regarding natural disasters have been expanded to specifically address additional types of natural disasters and risks to our purchased loan portfolio and loan servicers.
A natural disaster outside California, could negatively impact our purchased loan portfolio or our third party loan servicer.Due to the fluctuation in market price of Columbia Banking System, Inc. common stock, the BOCH shareholders’ cannot be sure of the exact value of consideration they will receive in the Merger.
Our purchased loan portfolio includes a significant amount of loans made to borrowers outside California and which are serviced by third parties outside of California. A significant portionUpon the effective time of the purchased loansMerger described Note 11 Merger in the Notes to Consolidated Financial Statements, each share of Bank of Commerce common stock will be cancelled and third party loan servicers are in areas that are vulnerableconverted into the right to natural disasters. Therefore, we are susceptiblereceive the Merger Consideration, consisting of shares of Columbia common stock pursuant to the risksterms of natural disasters outside California. Natural disastersthe Merger Agreement. The value of the Merger Consideration to be received by Company shareholders will be based on an Exchange Ratio, which is 0.40 shares of Columbia common stock for each share of Bank of Commerce common stock. Because the price of Columbia common stock could impactfluctuate during the operationsperiod of our loan servicers directly through interference with communications, includingtime between the interruptiondate of this filing and the time the Company's shareholders actually receive their shares of Columbia common stock as merger consideration, the Company's shareholders will be subject to the risk of a decline in the price of Columbia common stock during this period.
The Merger is subject to approval from BOCH’s shareholders, customary regulatory approvals and other customary closing conditions.
Prior to completion of the Merger, approvals must be obtained from various parties. Although the Company does not currently expect that any such conditions or changes will be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger, imposing additional costs on, or limiting the revenues of Columbia Banking System, Inc. following the Merger or causing the Merger Agreement to terminate.
Termination of the Merger Agreement could negatively affect us.
If, for any reason, the Merger Agreement is terminated, the Company may be adversely affected as a result of not pursuing other beneficial opportunities prior to such termination and the loss of websites, destruction of facilities, operational, financial and management information systems which could prevent them from servicing our portfolio. Natural disasters outside California could also impactcritical personnel. The Company will be required to pay the underlying collateral and borrower’s ability to repay the loans for our purchased loan portfoliosColumbia Banking System, Inc. a termination fee totaling $12 million.
ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
a) | Not Applicable |
|
|
|
|
c) | Not Applicable |
ItemItem 3. Defaults Upon Senior Securities
Not Applicable
ItemItem 4. Mine Safety Disclosures
Not Applicable
Not Applicable
2.1 | |
10.1 | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.0 | |
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | XBRL Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
FollowingPursuant to 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: | /s/ James A. Sundquist | ||
James A. Sundquist | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
68