Bank of Commerce Holdings Announces Results for the Third Quarter of 2016

REDDING, Calif., Oct. 21, 2016 (GLOBE NEWSWIRE) — Randall S. Eslick, President and Chief Executive Officer of Bank of Commerce Holdings (NASDAQ:BOCH) (the “Company”), a $1.1 billion asset bank holding company and parent company of Redding Bank of Commerce (the “Bank”), today announced financial results for the quarter and the nine months ended September 30, 2016. Net income available to common shareholders for the quarter ended September 30, 2016 was $2.4 million or $0.18 per share – diluted, compared with $2.5 million or $0.18 per share – diluted for the same period of 2015. Net income available to common shareholders for the nine months ended September 30, 2016 was $3.0 million or $0.22 per share – diluted compared with $6.6 million or $0.49 per share – diluted for the same period of 2015.

Financial highlights for the third quarter of 2016:

  • Net income available to common shareholders of $2.4 million for the three months ended September 30, 2016 was a decrease of $109 thousand (4%) from $2.5 million available to common shareholders earned during the same period in the prior year
  • Return on average assets declined to 0.86% for the third quarter of 2016 compared to 0.99% for the same period in the prior year
  • Return on average equity improved to 10.10% for the third quarter of 2016 compared to 9.12% for the same period in the prior year
  • Deposits at September 30, 2016 totaled $975.5 million, an increase of $38.0 million (16% annualized) since June 30, 2016. This growth which occurred in both our Sacramento and Redding marketplaces was centered entirely in core deposits
  • Gross loans at September 30, 2016 totaled $779.0 million, an increase of $24.9 million (13% annualized) since June 30, 2016. All of this growth occurred in the our Sacramento marketplace and is the result of investments in our SBA division and in our expanded Sacramento commercial banking group
  • Nonperforming assets at September 30, 2016 totaled $10.9 million or 0.98% of total assets, a decrease of $803 thousand (27% annualized) since June 30, 2016
  • Tangible book value per common share was $6.84 at September 30, 2016 compared to $6.71 at June 30, 2016

Financial highlights for the nine months ended September 30, 2016:

  • Net income available to common shareholders of $3.0 million for the nine months ended September 30, 2016 was a decrease of $3.6 million (55%) from $6.6 million available to common shareholders earned during the same period in the prior year. Net income for 2016 is negatively impacted by $3.0 million of branch acquisition and balance sheet restructuring costs, a $546 thousand impairment of an investment security and the write-off of a $363 thousand deferred tax asset during prior quarters
  • Return on average assets declined to 0.37% for the nine months ended September 30, 2016 compared to 0.89% for the same period in the prior year
  • Return on average equity declined to 4.30% for the nine months ended September 30, 2016 compared to 8.27% for the same period in the prior year
  • Deposits at September 30, 2016 totaled $975.5 million, an increase of $171.8 million (29% annualized) since December 31, 2015
  • Gross loans at September 30, 2016 totaled $779.0 million, an increase of $62.3 million (12% annualized) since December 31, 2015
  • Nonperforming assets at September 30, 2016 totaled $10.9 million or 0.98% of total assets, a decrease of $4.6 million (40% annualized) compared to December 31, 2015
  • Net loan loss recoveries of $669 thousand combined with continuing improved asset quality resulted in no provision for loan and lease losses

Randall S. Eslick, President and CEO commented: “We are pleased with our strong organic growth in both loans and deposits during the third quarter. This growth, and our improved asset quality were possible only because of the hard work of our dedicated employees and the loyalty of our customers. We thank them and will continue to rely on them in the future to help us achieve our growth and earnings goals.”

Forward-Looking Statements

This quarterly press release includes forward-looking information, which is subject to the “safe harbor” created by the Securities Act of 1933, and Securities Act of 1934. These forward-looking statements (which involve our plans, beliefs and goals, refer to estimates or use similar terms) involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors:

  • Competitive pressure in the banking industry and changes in the regulatory environment
  • Changes in the interest rate environment and volatility of rate sensitive assets and liabilities
  • A decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of our loans
  • Credit quality deterioration which could cause an increase in the provision for loan and lease losses
  • Asset/Liability matching risks and liquidity risks
  • Changes in the securities markets

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and under the heading: “Risk Factors” and subsequent reports on Form 10-Q and current reports on Form 8-K. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company undertakes no obligation and specifically disclaims any obligation, to revise or publicly release the results of any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date the statements were made.

TABLE 1  
SELECTED FINANCIAL INFORMATION – UNAUDITED  
(amounts in thousands except per share data)  
    For The Three Months Ended   For The Nine Months Ended  
Net income, average assets and   September 30,     June 30,   September 30,  
average shareholders’ equity   2016     2015     2016   2016   2015  
Income available to common shareholders   $  2,366     $  2,475     $  1,556     $  2,962   $  6,566  
Average total assets   $  1,093,918     $  992,034     $  1,064,186     $  1,064,210   $  988,303  
Average shareholders’ equity   $  93,238     $  107,704     $  91,317     $  91,959   $  106,186  
                                       
Selected performance ratios                                      
Return on average assets     0.86 %     0.99 %     0.59 %     0.37 %   0.89 %
Return on average equity     10.10 %     9.12 %     6.85 %     4.30 %   8.27 %
Efficiency ratio     69.61 %     60.17 %     79.43 %     85.08 %   65.41 %
                                       
Share and per share amounts                                      
Weighted average shares – basic      13,369        13,340        13,367        13,366      13,327  
Weighted average shares – diluted      13,439        13,377        13,425        13,412      13,358  
Earnings per share – basic   $  0.18     $  0.18     $  0.11     $  0.22   $  0.49  
Earnings per share – diluted   $  0.18     $  0.18     $  0.11     $  0.22   $  0.49  
                                       
    At September 30,     At June 30,      
Share and per share amounts   2016     2015     2016          
Common shares outstanding (1)      13,439        13,374        13,439                
Tangible book value per common share   $  6.84     $  6.64     $  6.71                
                                       
Capital ratios                                    
Bank of Commerce Holdings                                    
Common equity tier 1 capital ratio     9.60 %     9.96 %     9.69 %              
Tier 1 capital ratio (2)     10.65 %     13.25 %     10.77 %              
Total capital ratio (2)     12.96 %     14.50 %     13.11 %              
Tier 1 leverage ratio (2)     9.28 %     11.98 %     9.34 %              
Tangible common equity ratio     8.30 %     8.96 %     8.44 %              
                                       
Redding Bank of Commerce                                      
Common equity tier 1 capital ratio     12.62 %     13.20 %     12.80 %              
Tier 1 capital ratio     12.62 %     13.20 %     12.80 %              
Total capital ratio     13.87 %     14.45 %     14.05 %              
Tier 1 leverage ratio     11.03 %     11.95 %     11.14 %              
(1) Includes unvested restricted shares issued in accordance with the Bank’s equity incentive plan.
(2) The Company and the Bank continue to meet all capital adequacy requirements to which they are subject. The decline in the capital ratios of Bank of Commerce Holdings as of September 30, 2016 compared to September 30, 2015 is primarily due to the redemption of $20.0 million of preferred stock (Tier 1 capital) during the fourth quarter of 2015. The $10.0 million of subordinated debt issued during the fourth quarter of 2015 qualifies as Tier 2 capital under applicable capital adequacy rules and regulations promulgated by the Federal Reserve. The capital ratios for 2016 were also impacted by the addition of $1.8 million of core deposit intangibles and $665 thousand of goodwill recorded in conjunction with the acquisition of five branches in March of 2016.

BALANCE SHEET OVERVIEW

As of September 30, 2016, the Company had total consolidated assets of $1.1 billion, gross loans of $779.0 million, allowance for loan and lease losses (“ALLL”) of $11.9 million, total deposits of $975.5 million, and shareholders’ equity of $94.3 million.

TABLE 2
LOAN BALANCES BY TYPE – UNAUDITED
(amounts in thousands)
  At September 30,             At June 30,
      % of       % of   Change       % of
  2016   Total   2015   Total   Amount   %   2016   Total
Commercial $    136,235     17 %   $    144,749     20 %   $    (8,514 )      (6 ) %   $    150,410     20 %
Real estate – construction and land development      48,365     6          29,701     4          18,664        63   %        39,009     5  
Real estate – commercial non-owner occupied      281,977     37          237,597     34          44,380        19   %        253,873     35  
Real estate – commercial owner occupied      160,474     21          151,762     21          8,712        6   %        154,480     20  
Real estate – residential – ITIN      46,458     6          50,162     7          (3,704 )      (7 ) %        47,188     6  
Real estate – residential – 1-4 family mortgage      10,770     1          12,185     2          (1,415 )      (12 ) %        10,862     1  
Real estate – residential – equity lines      42,363     5          45,733     6          (3,370 )      (7 ) %        43,971     6  
Consumer and other      52,377     7          46,644     6          5,733        12   %        54,347     7  
  Gross loans      779,019     100 %        718,533     100 %        60,486        8   %        754,140     100 %
Deferred fees and costs      1,155                718                437                1,028        
  Loans, net of deferred fees and costs      780,174                719,251                60,923                755,168        
Allowance for loan and lease losses      (11,849 )              (10,891 )              (958 )              (11,864 )      
  Net loans $    768,325           $    708,360           $    59,965           $    743,304        
                                               
Average yield on loans during the quarter     4.66 %             4.70 %              (0.04 )             4.76 %      

The Company recorded gross loan balances of $779.0 million at September 30, 2016, compared with $718.5 million and $754.1 million at September 30, 2015 and June 30, 2016, respectively, an increase of $60.5 million and $24.9 million, respectively. The increase in gross loans compared to the same period a year ago and the prior period was driven by organic loan originations in our Sacramento marketplace and is the result of investments in our SBA division and in our expanded Sacramento commercial banking group.

The increase in the ALLL at September 30, 2016 compared to the same date a year ago resulted from net loan loss recoveries. As a result of these net recoveries and continued improved asset quality, no provision for loan and lease losses was deemed necessary during the current quarter or during the prior six consecutive quarters. See table 8 for additional details of the ALLL.

TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES – UNAUDITED
(amounts in thousands)
    At September 30,               At June 30,
        % of       % of   Change       % of
    2016   Total   2015   Total   Amount   %   2016   Total
                                                 
Cash and due from banks   $    19,699     7 %   $    8,564     4 %   $    11,135       130   %   $    14,695     6 %
Interest-bearing deposits in other banks        65,431     24          16,745     8          48,686       291   %        51,345     20  
  Total cash and cash equivalents        85,130     31          25,309     12          59,821       236   %        66,040     25  
                                                 
Investment securities:                                                
U.S. government and agencies      —         0          3,998     2          (3,998 )     (100 ) %        3,262     1  
Obligations of state and political subdivisions        59,952     22          57,453     26          2,499       4   %        59,015     23  
Residential mortgage backed securities and collateralized mortgage obligations        54,046     20          34,058     16          19,988       59   %        45,015     17  
Corporate securities        16,346     6          36,560     17          (20,214 )     (55 ) %        22,313     9  
Commercial mortgage backed securities        16,254     6          9,266     4          6,988       75   %        14,865     6  
Other asset backed securities        9,842     4          15,974     7          (6,132 )     (38 ) %        13,436     5  
  Total investment securities – AFS        156,440     58          157,309     72          (869 )     (1 ) %        157,906     61  
                                                 
Obligations of state and political subdivisions – HTM        31,771     11          36,093     16          (4,322 )     (12 ) %        35,415     14  
  Total investment securities – AFS and HTM        188,211     69          193,402     88          (5,191 )     (3 ) %        193,321     75  
Total cash, cash equivalents and investment securities   $    273,341     100 %   $    218,711     100 %   $    54,630       25   %   $    259,361     100 %
Average yield on interest bearing due from banks and investment securities during the quarter       2.11 %             2.46 %              (0.35 )             2.37 %      

As of September 30, 2016, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $19.7 million. We also held interest-bearing deposits in the amount of $65.4 million. The sizeable increase in cash and cash equivalents compared to the same period a year ago derives from liquidity provided by the recent branch acquisition and strong organic deposit growth. It is anticipated that much of this liquidity will be deployed into new loans over the remainder of the year.

Available-for-sale investment securities totaled $156.4 million at September 30, 2016, compared with $157.3 million and $157.9 million at September 30, 2015 and June 30, 2016, respectively. Our available-for-sale investment portfolio provides us with a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations and wholesale loan purchases. During the third quarter of 2016 we purchased 16 securities with a par value of $24.5 million and weighted average yield of 1.90% and sold nine securities with a par value of $12.0 million and weighted average yield of 2.09%. The sales activity on available for sale securities and calls on two held-to-maturity securities resulted in $70 thousand in net realized gains. During the same period, we received $14.2 million in proceeds from principal payments, calls and maturities within the available-for-sale investment securities portfolio. Average securities balances and weighted average tax equivalent yields for the quarters ended September 30, 2016 and 2015 were $188.5 million and 3.22% compared to $191.4 million and 3.40%, respectively.

During the second quarter of 2016, we recorded an other-than-temporary impairment of $546 thousand on an investment security. We did not recognize any additional other-than-temporary impairment losses for the nine months ended September 30, 2016, or during the year ended December 31, 2015.

At September 30, 2016, our net unrealized gains on available-for-sale investment securities were $2.3 million compared with $1.6 million and $2.6 million at September 30, 2015 and June 30, 2016, respectively. The decrease in net unrealized gains between June 30, 2016 and September 30, 2016 is primarily due to interest rate changes over the past three months.

TABLE 4
DEPOSITS BY TYPE – UNAUDITED
(amounts in thousands)
  At September 30,               At June 30,
      % of       % of     Change       % of
  2016   Total   2015   Total   Amount   %   2016   Total
Demand – noninterest bearing $    254,435     26 %   $    162,437     21 %   $    91,998       57   %   $    224,467     24 %
Demand – interest bearing      394,525     40          295,209     38          99,316       34   %        385,609     41  
Total demand      648,960     66          457,646     59          191,314       42   %        610,076     65  
                                               
Savings      110,201     11          93,367     12          16,834       18   %        105,228     11  
Total non-maturing deposits      759,161     77          551,013     71          208,148       38   %        715,304     76  
                                               
Certificates of deposit      216,332     23          228,492     29          (12,160 )     (5 ) %        222,252     24  
Total deposits $    975,493     100 %   $    779,505     100 %   $    195,988       25   %   $    937,556     100 %
                                               
Average rate on interest bearing deposits during the quarter     0.39 %             0.49 %              (0.10 )             0.39 %      
Average rate on all deposits during the quarter     0.29 %             0.39 %              (0.10 )             0.30 %      

Total deposits at September 30, 2016, increased $196.0 million or 25% to $975.5 million compared to September 30, 2015, and increased $37.9 thousand or 4% compared to June 30, 2016. Total non-maturing deposits increased $208.1 million or 38% compared to the same date a year ago and increased $44.2 million or 6% compared to June 30, 2016. Certificates of deposit decreased $12.2 million or 5% compared to the same date a year ago and decreased $5.9 million or 3% compared to June 30, 2016.

During the first quarter of 2016 the branch acquisition provided an additional $149.0 million of deposits and we called and redeemed $17.5 million of brokered certificates of deposit. At September 30, 2016, the deposits in the acquired branches totaled $140.3 million.

TABLE 5
WHOLESALE AND BROKERED DEPOSITS – UNAUDITED
(amounts in thousands)
  At September 30,   At June 30,
  2016   2015   2016
CDARS / ICS reciprocal deposits $  59,502   $  67,825   $  54,783
Third party brokered time deposits    —      17,505      —
Brokered deposits per Call Report    59,502      85,330      54,783
Online listing service time deposits    52,456      61,141      54,396
Total wholesale and brokered deposits $  111,958   $  146,471   $  109,179

In accordance with regulatory Call Report instructions, the Bank will file (or has filed) quarterly Call Reports which list brokered deposits of $59.5 million, $85.3 million and $54.8 million at September 30, 2016, September 30, 2015 and June 30, 2016, respectively.

INCOME STATEMENT OVERVIEW

TABLE 6
SUMMARY INCOME STATEMENT – UNAUDITED
(amounts in thousands, except per share data)
    For The Three Months Ended
    September 30,   Change   June 30,   Change
    2016   2015   Amount   %   2016   Amount   %
Interest income   $  10,330   $  9,732   $    598        6   %   $  10,257   $    73       1   %
Interest expense      1,054      1,277        (223 )      (17 ) %      1,040        14       1   %
Net interest income      9,276      8,455        821        10   %      9,217        59       1   %
Provision for loan and lease losses      —      —      —      —   %      —      —      —   %
Noninterest income      959      808        151        19   %      437        522       119   %
Noninterest expense:                                          
  Branch acquisition and balance sheet reconfiguration costs      —      —      —      —   %      168        (168 )     (100 ) %
  Other noninterest expense      7,125      5,574        1,551        28   %      7,500        (375 )     (5 ) %
Income before provision
for income taxes
     3,110      3,689        (579 )      (16 ) %      1,986        1,124       57   %
Provision for income taxes      744      1,164        (420 )      (36 ) %      430        314       73   %
Net income   $  2,366   $  2,525   $    (159 )      (6 ) %   $  1,556        810       52   %
Less: Preferred dividends      —      50        (50 )      (100 ) %      —      —      —   %
Income available to common shareholders   $  2,366   $  2,475   $    (109 )      (4 ) %   $  1,556   $    810        52   %
                                           
Basic earnings per share   $  0.18   $  0.18   $  —      —   %   $  0.11   $    0.07        64   %
Average basic shares      13,369      13,340        29      —   %      13,367        2      —   %
Diluted earnings per share   $  0.18   $  0.18   $  —      —   %   $  0.11   $    0.07        64   %
Average diluted shares      13,439      13,377        62      —   %      13,425        14      —   %
Dividends declared per common share   $  0.03   $  0.03   $  —      —   %   $  0.03   $  —      —   %

Third Quarter of 2016 Compared With Third Quarter of 2015

Net income available to common shareholders for the third quarter of 2016 decreased $109 thousand compared to the third quarter of 2015. In the current quarter, net interest income was $821 thousand higher, noninterest income was $151 thousand higher and the provision for income tax was $420 thousand lower. These positive changes were offset by an increase in noninterest expense of $1.6 million.

Net Interest Income

Net interest income increased $821 thousand over a year previous.

Interest income for the three months ended September 30, 2016 increased $598 thousand or 6% to $10.3 million. Interest and fees on loans increased $650 thousand primarily due to increased average loan balances. Interest on interest bearing deposits due from banks increased $42 thousand while interest on securities decreased $94 thousand.

Interest expense for the third quarter of 2016 decreased $223 thousand or 17% to $1.1 million. The net decrease was caused by the following.

  • Interest on FHLB term debt decreased $474 thousand. During 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
  • Interest on $20.0 million of senior and subordinated term debt increased $289 thousand. The senior and subordinated term debt was issued during the fourth quarter of 2015 to redeem $20.0 million of preferred stock
  • Interest on interest bearing deposits decreased $52 thousand. Interest bearing deposits increased $104.0 million compared to the prior year, but the rate paid on all interest bearing deposits decreased by 10 basis points
  • Interest on junior subordinated debentures and other borrowings increased $14 thousand

Noninterest Income

Noninterest income for the three months ended September 30, 2016 increased $151 thousand compared to the same period a year ago. Our branch and offsite ATM acquisition completed in the first quarter, enhanced point of sale and ATM fees by $191 thousand and service charges on deposit accounts by $81 thousand for the quarter ended September 30, 2016 compared to the same period a year ago. These positive changes were partially offset by a decrease in the gain on sale investment securities of $67 thousand compared to same period a year ago.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2016 increased $1.6 million compared to the same period a year ago. The increase was primarily driven by increased costs to operate the five newly acquired branches and three offsite ATM locations. Noninterest expenses that increased during the current quarter compared to the same period a year ago included the following:

  • Salaries and occupancy costs directly related to the newly acquired branch and offsite ATM locations of $617 thousand
  • Salaries and occupancy costs for all other locations increased $403 thousand primarily as a result of investment in our Sacramento marketplace commercial banking group
  • Data processing fees increased $221 thousand
  • ATM processing fees increased $57 thousand as a result of the additional activity at the recently acquired branch and offsite ATM locations
  • Telecommunications expense increased $83 thousand

Income Tax Provision

During the three months ended September 30, 2016, the Company recorded a provision for income taxes of $744 thousand (23.92% of pretax income) compared with a provision for income taxes of $1.2 million (31.55% of pretax income) for the same period a year ago. The Company’s 2016 effective tax rate has declined as a result of increased permanent deductions arising from investments in low income housing partnerships. Tax credits are essentially unchanged between the two quarters.

Third Quarter of 2016 Compared With Second Quarter of 2016

Net income available to common shareholders for the third quarter of 2016 increased $810 thousand over the second quarter of 2016. In the current quarter, net interest income was $59 thousand higher, noninterest income was $522 thousand higher and noninterest expenses were $543 thousand lower. These positive changes were offset by a an increase in the provision for income taxes of $314 thousand.

Net Interest Income

Net interest income increased $59 thousand over the prior quarter.

Interest income for the three months ended September 30, 2016 increased $73 thousand or 1% to $10.3 million compared to the prior quarter. Interest and fees on loans increased $211 thousand due to increased average balances. Interest on interest bearing deposits due from banks increased $17 thousand due to increased average balances. These positive changes were partially offset by decreased interest on securities of $155 thousand due to decreased yields and decreased average balances.

Interest expense for the three months September 30, 2016 increased $14 thousand or 1% to $1.1 million compared to the prior quarter. Average total deposits for the third quarter of 2016 increased $28.5 million from the second quarter of 2016. The growth was in low cost core deposits with a resulting one basis point decline in the cost of total deposits.

Noninterest Income

Noninterest income for the three months ended September 30, 2016 increased $522 thousand compared to the prior quarter. During the prior quarter we recorded a $546 thousand other-than-temporary impairment on an investment security as described in Note 4 to our June 30, 2016 Form 10-Q. Net gains recognized on the sales and calls of  investment securities during the current quarter increased by $42 thousand to $70 thousand compared to a $28 thousand net gain in the prior quarter.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2016 decreased $543 thousand compared to the prior quarter.

The decrease in noninterest expense was primarily driven by following positive items:

  • Branch acquisition and balance sheet reconfiguration costs decreased $168 thousand
  • Professional service fees decreased $167 thousand
  • Salaries and related benefits costs decreased $118 thousand
  • Deferred loan origination costs increased $95 thousand
  • Other real estate owned holding costs decreased $56 thousand

These positive items were partially offset by increased data processing fees of $90 thousand and increased premise and equipment costs of $84 thousand.

Income Tax Provision

During the three months ended September 30, 2016, we recorded a provision for income taxes of $744 thousand (23.92% of pretax income) compared with a provision for income taxes of $430 thousand (21.65% of pretax income) for the prior quarter.

Earnings Per Share

Diluted earnings per share available to common shareholders were $0.18 for the three months ended September 30, 2016 compared with diluted earnings per share available to common shareholders of $0.18 for the same period a year ago, and $0.11 for the prior period. The number of shares outstanding during these periods has not changed significantly. Changes in earnings per share are the result of changes in net income.

TABLE 7
NET INTEREST MARGIN – UNAUDITED
(amounts in thousands)
  For The Three Months Ended
  September 30,   Change   June 30,   Change
  2016   2015   Amount   2016   Amount
Yield on average interest earning assets   4.03 %     4.17 %       (0.14 )     4.16 %       (0.13 )
Interest expense to fund average earning assets   0.41 %     0.55 %       (0.14 )     0.42 %       (0.01 )
Net interest margin – nominal   3.62 %     3.62 %       0.00       3.74 %       (0.12 )
                                   
Yield on average interest earning
assets – tax equivalent basis
  4.14 %     4.30 %       (0.16 )     4.29 %       (0.15 )
Interest expense to fund average earning assets   0.41 %     0.55 %       (0.14 )     0.42 %       (0.01 )
Net interest margin – tax equivalent basis   3.73 %     3.75 %       (0.02 )     3.87 %       (0.14 )
                                   
Average earning assets $  1,019,230     $  927,547     $    91,683     $  990,132     $    29,098  
Average interest bearing liabilities $  749,103     $  709,958     $    39,145     $  740,579     $    8,524  

The current quarter net interest margin decreased 12 basis points to 3.62% as compared to the prior quarter due to decreased yields in both the loan and investment portfolios. In the current interest rate environment, cash flows from maturities and repayments are being reinvested at interest rates lower than the maturing instruments.

The net interest margin was 3.62% for the current quarter and the same period a year ago. The 14 basis point decrease in yield on average earning assets has been offset by a 14 basis point decrease in interest expense to fund average earning assets.  The decrease in interest expense resulted from our acquisition of low cost core deposits and our ability to restructure our balance sheet.

Deposit balances increased $37.9 million and $196.0 million compared to the prior quarter and the same period a year ago respectively. The increase in deposit balances compared to the prior quarter was centered entirely in core deposits. The increase in deposit balances compared to the same period a year ago results from both the recent branch acquisition and strong organic growth. Our overall cost of total deposits decreased to 0.29% for the quarter ended September 30, 2016 from 0.39% for the same period a year ago and from 0.30% for the prior quarter.

TABLE 8  
ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS – UNAUDITED  
(amounts in thousands)  
  For The Three Months Ended  
  September 30,   June 30,   March 31,   December 31,   September 30,
  2016   2016   2016   2015   2015
Beginning balance $    11,864       $    11,495       $    11,180       $    10,891       $    11,402    
Provision for loan and lease losses charged to expense    —          —          —          —          —    
Loans charged off      (357 )          (1,734 )          (307 )          (707 )          (779 )  
Loan loss recoveries      342            2,103            622            996            268    
Ending balance $    11,849       $    11,864       $    11,495       $    11,180       $    10,891    
                                       
  At September 30,   At June 30,   At March 31,   At December 31,   At September 30,
  2016   2016   2016   2015   2015
Nonaccrual loans:                                      
Commercial $    1,710       $    2,149       $    2,563       $    1,994       $    2,506    
Real estate – commercial non-owner occupied      1,196            1,197            1,197            5,488            5,154    
Real estate – commercial owner occupied      800            816            1,190            1,071            1,928    
Real estate – residential – ITIN      3,392            3,664            3,705            3,649            4,228    
Real estate – residential – 1-4 family mortgage      1,798            1,824            1,742            1,775            1,669    
Real estate – residential – equity lines      942            995            1,270          —            23    
Consumer and other      252            266            31            32            33    
Total nonaccrual loans      10,090            10,911            11,698            14,009            15,541    
Accruing troubled debt restructured loans:                                      
Commercial      726            760            40            49            56    
Real estate – commercial non-owner occupied      811            816            821            824            828    
Real estate – residential – ITIN      5,280            5,336            5,502            5,458            5,423    
Real estate – residential – equity lines      543            548            553            558            563    
Total accruing troubled debt restructured loans      7,360            7,460            6,916            6,889            6,870    
                                       
All other accruing impaired loans      483            550            488            492            494    
                                       
Total impaired loans $    17,933       $    18,921       $    19,102       $    21,390       $    22,905    
                                       
Gross loans outstanding at period end $    779,019       $    754,140       $    724,243       $    716,639       $    718,533    
                                       
Allowance for loan and lease losses as a percent of:                          
Gross loans     1.52   %       1.57   %       1.59   %       1.56   %       1.52   %
Nonaccrual loans     117.43   %       108.73   %       98.26   %       79.81   %       70.08   %
Impaired loans     66.07   %       62.70   %       60.18   %       52.27   %       47.55   %
                                       
Nonaccrual loans to gross loans     1.30   %       1.45   %       1.62   %       1.95   %       2.16   %

We realized net loan charge offs of $15 thousand in the current quarter compared with net loan loss recoveries of $369 thousand in the prior quarter and net loan charge offs of $511 thousand for the same period a year ago. Charge offs during the third quarter of 2016 of $219 thousand were primarily associated with purchased consumer loans, offset by recoveries of $277 thousand primarily associated with one commercial relationship.

We continue to monitor credit quality, and adjust the ALLL to ensure that the ALLL is maintained at a level that is adequate to cover estimated credit losses in the loan and lease portfolio. We made no provision for loan and lease losses during this quarter or the previous five consecutive quarters. Our ALLL as a percentage of gross loans was 1.52% as of September 30, 2016 compared to 1.52% as of September 30, 2015 and 1.57% as of June 30, 2016. Based on the Bank’s ALLL methodology, which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, management believes the Company’s ALLL is adequate at September 30, 2016. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in future charges to the provision for loan and lease losses.

At September 30, 2016, the recorded investment in loans classified as impaired totaled $17.9 million, with a corresponding valuation allowance of $925 thousand compared to impaired loans of $22.9 million with a corresponding valuation allowance of $789 thousand at September 30, 2015 and impaired loans of $18.9 million, with a corresponding valuation allowance of $903 thousand at June 30, 2016. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.

TABLE 9
PERIOD END TROUBLED DEBT RESTRUCTURINGS – UNAUDITED
(amounts in thousands)
    At September 30,   At June 30,   At March 31,   At December 31,   At September 30,
    2016   2016   2016   2015   2015
Nonaccrual   $  3,795     $  3,785     $  4,516     $  9,015     $  11,149  
Accruing      7,360        7,460        6,916        6,889        6,870  
Total troubled debt restructurings   $  11,155     $  11,245     $  11,432     $  15,904     $  18,019  
                                         
Percentage of total gross loans     1.43 %     1.49 %     1.58 %     2.22 %     2.51 %

Loans are reported as a troubled debt restructuring when we grant a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as 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 restructured loans are measured by calculating the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

During the three months ended September 30, 2016, the Company restructured two loans; one to grant a maturity modification and the other to grant a principal reduction modification. The loans were classified as troubled debt restructurings and placed on nonaccrual status. As of September 30, 2016, we had 119 restructured loans that qualified as troubled debt restructurings, of which 110 were performing according to their restructured terms.

TABLE 10
NONPERFORMING ASSETS – UNAUDITED
(amounts in thousands)
    At September 30,   At June 30,   At March 31,   At December 31,   At September 30,
    2016   2016   2016   2015   2015
Total nonaccrual loans   $  10,090     $  10,911     $  11,698     $  14,009     $  15,541  
90 days past due and still accruing      —        10        —        88        52  
Total nonperforming loans      10,090        10,921        11,698        14,097        15,593  
                                         
Other real estate owned      793        765        1,011        1,423        1,525  
Total nonperforming assets   $  10,883     $  11,686     $  12,709     $  15,520     $  17,118  
                                         
Nonperforming loans to gross loans     1.30 %     1.45 %     1.62 %     1.97 %     2.17 %
Nonperforming assets to total assets     0.98 %     1.09 %     1.18 %     1.53 %     1.73 %

At September 30, 2016, September 30, 2015 and June 30, 2016, the recorded investment in OREO was $793 thousand, $1.5 million and $765 thousand, respectively. The September 30, 2016 OREO balance consists of five properties, of which two are 1-4 family residential real estate properties in the amount of $109 thousand, two are nonfarm nonresidential properties in the amount of $558 thousand and one is an undeveloped commercial property in the amount of $126 thousand.

TABLE 11
UNAUDITED CONSOLIDATED
BALANCE SHEET
(amounts in thousands, except per share data)
    At September 30,   At September 30,   Change   At June 30,
    2016   2015   $   %   2016
Assets:                              
Cash and due from banks   $    19,699     $    8,564     $    11,135       130   %   $    14,695  
Interest-bearing deposits in other banks        65,431          16,745          48,686       291   %        51,345  
  Total cash and cash equivalents        85,130          25,309          59,821       236   %        66,040  
                               
Securities available-for-sale, at fair value        156,440          157,309          (869 )     (1 ) %        157,906  
Securities held-to-maturity, at amortized cost        31,771          36,093          (4,322 )     (12 ) %        35,415  
                               
Loans, net of deferred fees and costs        780,174          719,251          60,923       8   %        755,168  
Allowance for loan and lease losses        (11,849 )        (10,891 )        (958 )     9   %        (11,864 )
  Net loans        768,325          708,360          59,965       8   %        743,304  
                               
Premises and equipment, net        15,930          11,112          4,818       43   %        15,660  
Other real estate owned        793          1,525          (732 )     (48 ) %        765  
Life insurance        22,946          22,326          620       3   %        22,794  
Deferred taxes        8,171          10,638          (2,467 )     (23 ) %        8,026  
Goodwill and core deposit intangibles, net        2,307        —            2,307       100   %        2,362  
Other assets        19,205          18,057          1,148       6   %        17,920  
Total assets   $    1,111,018     $    990,729     $    120,289       12   %   $    1,070,192  
                               
Liabilities and shareholders’ equity:                              
Demand – noninterest bearing   $    254,435     $    162,437     $    91,998       57   %   $    224,467  
Demand – interest bearing        394,525          295,209          99,316       34   %        385,609  
Savings        110,201          93,367          16,834       18   %        105,228  
Certificates of deposit        216,332          228,492          (12,160 )     (5 ) %        222,252  
  Total deposits        975,493          779,505          195,988       25   %        937,556  
                               
Term debt        19,317          75,000          (55,683 )     (74 ) %        19,577  
Unamortized debt issuance costs        (193 )      —            (193 )     100   %        (201 )
  Net term debt        19,124          75,000          (55,876 )     (75 ) %        19,376  
                               
Junior subordinated debentures        10,310          10,310        —       0   %        10,310  
Other liabilities        11,798          17,239          (5,441 )     (32 ) %        10,462  
  Total liabilities        1,016,725          882,054          134,671       15   %        977,704  
                               
Shareholders’ equity:                              
Preferred stock      —            19,931          (19,931 )     (100 ) %      —  
Common stock        24,483          24,180          303       1   %        24,421  
Retained earnings        68,321          65,232          3,089       5   %        66,356  
Accumulated other comprehensive income (loss), net of tax        1,489          (668 )        2,157       (323 ) %        1,711  
  Total shareholders’ equity        94,293          108,675          (14,382 )     (13 ) %        92,488  
                               
Total liabilities and shareholders’ equity   $    1,111,018     $    990,729     $    120,289       12   %   $    1,070,192  
                               
Total interest earning assets   $    1,031,527     $    927,773     $    103,754       11   %   $    997,211  
Shares outstanding        13,439          13,374                      13,439  
Tangible book value per share   $    6.84     $    6.64                 $    6.71  

TABLE 12
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
    For The Three Months Ended   For The Nine Months Ended
    September 30,   Change   June 30,   September 30,
    2016   2015   $   %   2016   2016   2015
Interest income:                                          
  Interest and fees on loans   $  9,007   $  8,357   $    650        8   %   $    8,796     $    26,254     $  24,572
  Interest on securities      689      743        (54 )      (7 ) %        808          2,281        2,489
  Interest on tax-exempt securities      552      592        (40 )      (7 ) %        588          1,734        1,793
  Interest on deposits in other banks      82      40        42        105   %        65          222        167
Total interest income      10,330      9,732        598        6   %        10,257          30,491        29,021
Interest expense:                                          
  Interest on demand deposits      136      116        20        17   %        130          388        339
  Interest on savings deposits      43      53        (10 )      (19 ) %        41          129        162
  Interest on certificates of deposit      524      586        (62 )      (11 ) %        515          1,636        1,771
  Interest on term debt      292      475        (183 )      (39 ) %        295          1,369        1,187
  Interest on other borrowings      59      47        12        26   %        59          172        143
Total interest expense      1,054      1,277        (223 )      (17 ) %        1,040          3,694        3,602
Net interest income      9,276      8,455        821        10   %        9,217          26,797        25,419
Provision for loan and lease losses      —      —      —      —   %      —        —        —
  Net interest income after provision for loan and lease losses      9,276      8,455        821        10   %        9,217          26,797        25,419
Noninterest income:                                          
  Service charges on deposit accounts      133      52        81        156   %        88          293        153
  Payroll and benefit processing fees      133      138        (5 )      (4 ) %        139          432        416
  Earnings on cash surrender value – life insurance      152      158        (6 )      (4 ) %        153          461        482
  Gain on investment securities, net      70      137        (67 )      (49 ) %        28          192        413
  Impairment losses on investment securities      —      —      —      —   %        (546 )        (546 )      —
  ATM and point of sale      287      96        191        199   %        335          714        279
  Other income      184      227        (43 )      (19 ) %        240          799        800
Total noninterest income      959      808        151        19   %        437          2,345        2,543

TABLE 12 – CONTINUED
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
    For The Three Months Ended   For The Nine Months Ended
    September 30,   Change   June 30,   September 30,
    2016   2015   $   %   2016   2016   2015
Noninterest expense:                                          
  Salaries and related benefits      3,873      3,208        665        21   %      4,086      12,188      10,693
  Occupancy and equipment      1,071      714        357        50   %      987      2,847      2,157
  Federal Deposit Insurance Corporation insurance premium      176      159        17        11   %      181      513      544
  Data processing fees      464      243        221        91   %      374      1,142      736
  Professional service fees      303      337        (34 )      (10 ) %      470      1,209      1,167
  Telecommunications      199      116        83        72   %      199      545      335
  Branch acquisition costs      —      —      —      —   %      168      580      —
  Loss on cancellation of interest rate swap      —      —      —      —   %      —      2,325      —
  Other expenses      1,039      797        242        30   %      1,203      3,445      2,657
Total noninterest expense      7,125      5,574        1,551        28   %      7,668      24,794      18,289
Income before provision for income taxes      3,110      3,689        (579 )      (16 ) %      1,986      4,348      9,673
Deferred tax asset write-off      —      —      —      —   %      —      363      —
Provision for income taxes      744      1,164        (420 )      (36 ) %      430      1,023      2,957
Net income   $  2,366   $  2,525   $    (159 )      (6 ) %   $  1,556   $  2,962   $  6,716
Less: Preferred dividends      —      50        (50 )      (100 ) %      —      —      150
Income available to common shareholders   $  2,366   $  2,475   $    (109 )      (4 ) %   $  1,556   $  2,962   $  6,566
                                           
Basic earnings per share   $  0.18   $  0.18   $  —      — %   $  0.11   $  0.22   $  0.49
Average basic shares      13,369      13,340        29      — %      13,367      13,366      13,327
Diluted earnings per share   $  0.18   $  0.18   $  —      — %   $  0.11   $  0.22   $  0.49
Average diluted shares      13,439      13,377        62      — %      13,425      13,412      13,358

TABLE 13
UNAUDITED CONDENSED CONSOLIDATED
YEAR TO DATE AVERAGE BALANCE SHEETS
(amounts in thousands)
  For the Nine Months Ended   For the Twelve Months Ended
    September 30,   September 30,   December 31,   December 31,   December 31,
    2016   2015   2015   2014   2013
Earning assets:                            
Loans   $  744,370   $  694,082   $  699,227   $  625,166   $  612,780
Taxable securities      119,541      124,199      120,897      147,916      157,486
Tax exempt securities      76,315      76,755      77,089      83,973      92,854
Interest-bearing deposits in other banks      52,930      28,021      30,323      56,465      43,342
Average earning assets      993,156      923,057      927,536      913,520      906,462
                               
Cash and due from banks      15,455      10,832      11,220      11,246      10,624
Premises and equipment, net      14,657      11,738      11,552      12,105      10,337
Other assets      40,942      42,676      42,423      36,936      26,431
Average total assets   $  1,064,210   $  988,303   $  992,731   $  973,807   $  953,854
                               
Liabilities and shareholders’ equity:                              
Demand – noninterest bearing   $  214,540   $  151,567   $  156,578   $  139,792   $  122,011
Demand – interest bearing      365,917      276,446      283,105      272,383      244,125
Savings      102,427      92,565      92,659      91,108      92,502
Certificates of deposit      222,286      242,569      238,626      259,445      248,350
Total deposits      905,170      763,147      770,968      762,728      706,988
                               
Repurchase agreements      —      —      —      —      5,780
Term debt      43,435      91,941      88,874      77,534      107,603
Junior subordinated debentures      10,310      10,310      10,310      15,239      15,465
Other liabilities      13,336      16,719      16,588      15,934      11,825
Average total liabilities      972,251      882,117      886,740      871,435      847,661
                               
Shareholders’ equity      91,959      106,186      105,991      102,372      106,193
Average liabilities & shareholders’ equity   $  1,064,210   $  988,303   $  992,731   $  973,807   $  953,854

TABLE 14
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(amounts in thousands)
    For The Three Months Ended
    September 30,   June 30,   March 31,   December 31,   September 30,
    2016   2016   2016   2015   2015
Earning assets:                              
Loans   $  769,354   $  742,684   $  720,795   $  714,494   $  705,762
Taxable securities      114,578      124,183      119,917      111,098      115,165
Tax exempt securities      73,952      77,168      77,852      78,081      76,190
Interest-bearing deposits in other banks      61,346      46,097      51,254      37,158      30,430
Average earning assets      1,019,230      990,132      969,818      940,831      927,547
                               
Cash and due from banks      17,018      17,028      12,301      12,372      11,355
Premises and equipment, net      15,941      15,632      12,384      11,001      11,265
Other assets      41,729      41,394      39,700      41,666      41,867
Average total assets   $  1,093,918   $  1,064,186   $  1,034,203   $  1,005,870   $  992,034
                               
Liabilities and shareholders’ equity:                              
Demand – noninterest bearing   $  240,418   $  220,377   $  182,539   $  171,449   $  158,232
Demand – interest bearing      390,895      382,811      323,771      302,862      284,508
Savings      107,210      103,990      96,027      92,939      93,230
Certificates of deposit      221,078      223,958      221,836      226,924      235,551
Total deposits      959,601      931,136      824,173      794,174      771,521
                               
Term debt      19,610      19,510      91,444      79,772      86,359
Junior subordinated debentures      10,310      10,310      10,310      10,310      10,310
Other liabilities      11,159      11,913      16,969      16,197      16,140
Average total liabilities      1,000,680      972,869      942,896      900,453      884,330
                               
Shareholders’ equity      93,238      91,317      91,307      105,417      107,704
Average liabilities & shareholders’ equity   $  1,093,918   $  1,064,186   $  1,034,203   $  1,005,870   $  992,034

About Bank of Commerce Holdings

Bank of Commerce Holdings is a bank holding company headquartered in Redding, California and is the parent company for Redding Bank of Commerce which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce). The Bank is an FDIC-insured California banking corporation providing banking and financial services through nine offices located in Northern California. The Bank opened on October 22, 1982. The Company’s common stock is listed on the NASDAQ Global Market and trades under the symbol “BOCH”.

Investment firms making a market in BOCH stock are:

Raymond James Financial
John T. Cavender
555 Market Street
San Francisco, CA 94105
(800) 346-5544

Stifel Nicolaus
Perry Wright
1255 East Street, Suite 100
Redding, CA 96001
(530) 244-7199

Contact Information:

Randall S. Eslick, President and Chief Executive Officer
Telephone Direct (530) 722-3900

Samuel D. Jimenez, Executive Vice President and Chief Operating Officer
Telephone Direct (530) 722-3952

James A. Sundquist, Executive Vice President and Chief Financial Officer
Telephone Direct (530) 722-3908

Andrea Schneck, Vice President and Senior Administrative Officer
Telephone Direct (530) 722-3959