×

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

REDDING, Calif., April 22, 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 ended March 31, 2016. Net loss available to common shareholders for the quarter ended March 31, 2016 was $960 thousand or $0.07 per share – diluted, compared with net income available to common shareholders of $1.8 million or $0.13 per share – diluted for the same period of 2015.

The current quarter results were impacted by the following expenses totaling $2.8 million related to the acquisition of five Bank of America branches and the execution of our plans to reconfigure our Balance Sheet using liquidity provided by those branches:

  • $2.3 million loss on termination of interest rate hedge.
  • $412 thousand of branch acquisition transition costs.
  • $57 thousand prepayment penalty on early repayment of $75.0 million Federal Home Loan Bank of San Francisco term debt.
  • $39 thousand accelerated amortization of broker fees recorded in interest expense when $17.5 million of brokered time deposits were called and redeemed.

In addition, unrelated to the branch acquisition, the current quarter results include the write-off of a $363 thousand deferred tax asset.

Randall S. Eslick, President and CEO commented: “We are pleased with the reconfiguration of our Balance Sheet. The redemption of our SBLF preferred stock late last year combined with our current quarter acquisition of new core deposits and the elimination of most wholesale funding sources provide a strong platform for the future. While we are reporting a quarterly loss, we are focused on the long term benefit of $149.0 million of new low cost deposits, the elimination of most of our higher cost wholesale liabilities, significant reductions in our future interest expense and additional liquidity to fund organic loan growth. It is the branch acquisition that makes all of this possible. We are very proud of every employee who diligently and professionally facilitated the transaction and we are happy to welcome the 24 employees at our five new locations into the Redding Bank of Commerce family.”

Financial highlights for the first quarter of 2016:

  • The Company acquired $149.0 million of new deposits from Bank of America which bear an average interest cost of 0.09%.
  • The Company paid off $75.0 million of FHLB term debt and terminated the interest rate hedge associated with that debt eliminating future contractual interest payments on $75.0 million at 2.64% for the period from payoff to August 1, 2016; and at 3.22% for the period August 1, 2016 to August 1, 2017.
  • Net loss available to common shareholders of $960 thousand for the three months ended March 31, 2016 was a decrease of $2.7 million (156%) over $1.8 million net income available to common shareholders earned during the first quarter of 2015.
  • Return on average assets decreased to (0.37%) in the first quarter of 2016 compared to 0.73% in the same quarter of 2015. Return on average equity decreased to (4.23%) in the first quarter of 2016 compared to 6.79% in the same quarter of 2015.
  • Nonperforming assets at March 31, 2016 totaled $12.7 million or 1.18% of total assets, a decrease of $2.8 million from $15.5 million or 1.53% of total assets at December 31, 2015.
  • Net loan loss recoveries of $315 thousand combined with continuing improved asset quality resulted in no provision for loan and lease losses during the first quarter.
  • The Company’s tangible book value per share decreased to $6.57 per common share at March 31, 2016 from $6.76 at December 31, 2015. The Company’s net interest margin was 3.44% for the first quarter of 2016 compared to 3.52% for the fourth quarter of 2015.
  • The Company’s efficiency ratio was 108.1% during the first three months of 2016 compared to 71.5% during the same period in 2015. Excluding $2.8 million of one-time expenses related to the acquisition and reconfiguring our Balance Sheet the efficiency ratio for the first three months of 2016 would have been 77.5%.

Branch Acquisition

On March 11, 2016 we completed the purchase of five Bank of America branches located in northern California. The transaction was most 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). As we previously announced on March 14, 2016, we utilized a portion of that new liquidity to reduce our reliance on wholesale funding sources repaying $75.0 million to the Federal Home Loan Bank of San Francisco and redeeming $17.5 million of brokered time deposits. We intend to use the remaining liquidity to fund future loan growth.

The branches acquired are located in Colusa, Willows, Orland, Corning, and Yreka. The Bank also acquired three offsite ATM locations in Williams, Orland and Corning. With the completion of the acquisition, we now operate nine branches in northern California.

The Bank paid cash consideration 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. The preliminary details of the acquisition as recorded at fair value are presented in the table below.

(Amounts in thousands)
Consideration paid:
Cash paid$6,709
Total consideration$6,709
Assets acquired:
Cash and cash equivalents$149,068
Premises and equipment, net 4,190
Core deposit intangibles 1,772
Other assets 146
Total assets acquired$155,176
Liabilities assumed:
Deposits$148,991
Other liabilities 193
Total liabilities assumed$149,184
Net fair value of assets acquired over liabilities assumed$5,992
Goodwill$717

Intangibles

As part of the branch acquisition, we recorded a core deposit intangible of $1.8 million and goodwill of $717 thousand.

Core deposits provide value as a source of liquidity that is less expensive when compared to market rates for other funding sources on similar terms. The cost savings (core deposit intangible) is defined as the difference between the costs of newly acquired deposits (i.e., interest and net maintenance costs) and the cost of an equal amount of funds from an alternative source having a similar term as the new deposit base. The core deposit intangible will be amortized on a straight line basis over the useful life of the deposits which is estimated at 8 years.

Goodwill is calculated as the amount of cash paid in excess of the fair value of the net assets acquired in the transaction.

When calculating capital ratios, goodwill and a portion of core deposit intangibles are subtracted from Tier 1 capital. The deduction for core deposit intangibles is subject to a phase in period under the Basal III risk based capital rules. During 2016, 60% of the core deposit intangibles will be deducted from Tier 1 capital.

Core deposit intangibles and goodwill are subtracted from tangible equity as part of the calculation of tangible book value per share.

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
  • We may fail to realize all of the anticipated benefits of our branch purchase.

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
Net income, average assets and March 31, December 31,
average shareholders' equity 2016 2015 2015
(Loss) income available to common shareholders $ (960) $1,751 $1,729
Average total assets $ 1,034,203 $978,916 $1,005,870
Average shareholders' equity $ 91,307 $104,618 $105,417
Selected performance ratios
Return on average assets (0.37)% 0.73% 0.68%
Return on average equity (4.23)% 6.79% 6.51%
Efficiency ratio 108.08 % 71.48% 73.58%
Share and per share amounts
Weighted average shares - basic 13,360 13,303 13,341
Weighted average shares - diluted 13,403 13,340 13,395
(Loss) earnings per share - basic $ (0.07) $0.13 $0.13
(Loss) earnings per share - diluted $ (0.07) $0.13 $0.13
At March 31, At December 31,
Share and per share amounts 2016 2015 2015
Common shares outstanding (1) 13,442 13,362 13,385
Tangible book value per common share $ 6.57 $6.40 $6.76
Capital ratios
Bank of Commerce Holdings
Common equity tier 1 capital ratio 9.82 % 9.73% 10.06%
Tier 1 capital ratio (2) 10.93 % 13.10% 11.16%
Total capital ratio (2) 13.30 % 14.35% 13.52%
Tier 1 leverage ratio (2) 9.48 % 11.74% 10.03%
Redding Bank of Commerce
Common equity tier 1 capital ratio 13.07 % 13.05% 13.31%
Tier 1 capital ratio 13.07 % 13.05% 13.31%
Total capital ratio 14.32 % 14.30% 14.56%
Tier 1 leverage ratio 11.36 % 11.73% 11.98%
(1) Includes unvested restricted shares issued in accordance with the Banks 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 March 31, 2016 compared to March 31, 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 the applicable capital adequacy rules and regulations promulgated by the Federal Reserve. The capital ratios for the first quarter of 2016 were also impacted by the addition of $1.8 million of core deposit intangibles and $717 thousand of goodwill recorded in conjunction with the branch acquisition.

BALANCE SHEET OVERVIEW

As of March 31, 2016, the Company had total consolidated assets of $1.1 billion, gross loans of $724.2 million, allowance for loan and lease losses (“ALLL”) of $11.5 million, total deposits of $937.7 million, and shareholders’ equity of $90.7 million.

TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(amounts in thousands)
At March 31, At December 31,
% of % of Change % of
2016 Total 2015 Total Amount % 2015 Total
Commercial$ 136,721 19% $ 150,792 22% $ (14,071) (9)% $ 132,805 19%
Real estate - construction and land development 27,554 4 29,127 4 (1,573) (5)% 28,319 4
Real estate - commercial non-owner occupied 247,840 34 234,198 33 13,642 6 % 243,374 33
Real estate - commercial owner occupied 154,484 21 130,717 19 23,767 18 % 156,299 22
Real estate - residential - ITIN 48,384 7 52,043 7 (3,659) (7)% 49,106 7
Real estate - residential - 1-4 family mortgage 10,947 2 12,304 2 (1,357) (11)% 11,390 2
Real estate - residential - equity lines 44,327 6 45,750 7 (1,423) (3)% 45,473 6
Consumer and other 53,986 7 44,298 6 9,688 22 % 49,873 7
Gross loans 724,243 100% 699,229 100% 25,014 4 % 716,639 100%
Deferred fees and costs 985 315 670 870
Loans, net of deferred fees and costs 725,228 699,544 25,684 717,509
Allowance for loan and lease losses (11,495) (11,296) (199) (11,180)
Net loans$ 713,733 $ 688,248 $ 25,485 $ 706,329
Average yield on loans during the quarter 4.72% 4.77% (0.05) 4.61%

The Company recorded gross loan balances of $724.2 million at March 31, 2016, compared with $699.2 million and $716.6 million at March 31, 2015 and December 31, 2015, respectively, an increase of $25.0 million and $7.6 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. The increase in deferred fees and costs from March 31, 2015 to March 31, 2016 was the result of increased loan production and revised loan origination costs based on an updated loan origination cost study.

The increase in the ALLL in the current quarter compared to the prior quarter resulted from net loan loss recoveries of $315 thousand. 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 the past 4 consecutive quarters. See table 8 for additional detail of the ALLL.

TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(amounts in thousands)
At March 31, At December 31,
% of % of Change % of
2016 Total 2015 Total Amount % 2015 Total
Cash and due from banks $ 14,969 5% $ 13,353 6% $ 1,616 12 % $ 9,730 4%
Interest-bearing deposits in other banks 70,781 24 16,758 7 54,023 322 % 41,462 17
Total cash and cash equivalents 85,750 29 30,111 13 55,639 185 % 51,192 21
Investment securities:
U.S. government and agencies 3,915 1 6,422 3 (2,507) (39)% 3,943 2
Obligations of state and political subdivisions 61,288 21 53,491 23 7,797 15 % 61,104 25
Residential mortgage backed securities and
collateralized mortgage obligations
51,721 18 41,851 18 9,870 24 % 32,137 13
Corporate securities 23,764 8 31,660 14 (7,896) (25)% 33,778 14
Commercial mortgage backed securities 14,571 5 6,799 3 �� 7,772 114 % 12,769 5
Other asset backed securities 18,992 6 26,667 11 (7,675) (29)% 15,299 6
Total investment securities - AFS 174,251 59 166,890 72 7,361 4 % 159,030 65
Obligations of state and political
subdivisions - HTM
35,357 12 36,609 15 (1,252) (3)% 35,899 14
Total investment securities - AFS and HTM 209,608 71 203,499 87 6,109 3 % 194,929 79
Total cash, cash equivalents and investment securities $ 295,358 100% $ 233,610 100% $ 61,748 26 % $ 246,121 100%
Average yield on interest bearing due from banks and investment securities during the quarter 2.35% 2.73% (0.38) 2.51%

As of March 31, 2016, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $15.0 million. We also held interest-bearing deposits in the amount of $70.8 million. The sizeable increase in interest-bearing deposits derives from liquidity provided by the recent branch acquisition. 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 $174.3 million at March 31, 2016, compared with $166.9 million and $159.0 million at March 31, 2015 and December 31, 2015, 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 first quarter of 2016 we purchased 28 securities with a par value of $39.2 million and weighted average yield of 2.24% and sold 17 securities with a par value of $18.8 million and weighted average yield of 2.38%. The sales activity resulted in $94 thousand in net realized gains for the three months ended March 31, 2016. During the same period, we received $3.0 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 ending March 31, 2016 and 2015 were $197.8 million and 3.42% compared to $213.9 million and 3.51%, respectively.

During the current quarter, our securities transactions were focused on deploying a portion of the cash acquired from the Bank of America branch acquisition into moderate term securities. Management continues to seek out opportunities to reduce the overall effective duration of the portfolio and accelerate cash flows, while also improving credit quality and liquidity. This strategy could entail absorbing small losses and slightly reduced yields within the portfolio to meet longer term objectives.

At March 31, 2016, our unrealized gains on available-for-sale investment securities were $1.7 million compared with $3.1 million and $1.6 million at March 31, 2015 and December 31, 2015, respectively. The decrease in net unrealized gains between March 31, 2015 and March 31, 2016 is primarily due to interest rate changes over the past 12 months.

TABLE 4
DEPOSITS BY TYPE - UNAUDITED
(amounts in thousands)
At March 31, At December 31,
% of % of Change % of
2016 Total 2015 Total Amount % 2015 Total
Demand - noninterest bearing$ 212,758 23% $ 150,056 20% $ 62,702 42 % $ 169,507 21%
Demand - interest bearing 392,325 42 266,552 35 125,773 47 % 315,658 39
Total demand 605,083 65 416,608 55 188,475 45 % 485,165 60
Savings 105,828 11 92,088 12 13,740 15 % 94,503 12
Total non-maturing deposits 710,911 76 508,696 67 202,215 40 % 579,668 72
Certificates of deposit 226,756 24 253,280 33 (26,524) (10)% 224,067 28
Total deposits$ 937,667 100% $ 761,976 100% $ 175,691 23 % $ 803,735 100%
Average rate on interest bearing
deposits during the quarter
0.48% 0.50% (0.02) 0.48%

Total deposits at March 31, 2016, increased $175.7 million or 23% to $937.7 million compared to March 31, 2015, and increased $133.9 million or 17% compared to December 31, 2015. Total non-maturing deposits increased $202.1 million or 40% compared to the same date a year ago and increased $131.2 million or 23% compared to December 31, 2015. Certificates of deposit decreased $26.5 million or 10% compared to the same date a year ago and increased $2.6 million or 1% compared to December 31, 2015.

During the first quarter of 2016 the branch acquisition provided an additional $149.0 million of deposits and we called $17.5 million of brokered certificates of deposit. The average interest rate paid during the quarter on all acquired deposits was 0.09% and on the acquired interest bearing deposits was 0.11%. At March 31, 2016, the deposits in the acquired branches totaled $148.3 million as follows:

Demand – noninterest bearing totaling $37.9 million.
Savings totaling $9.6 million.
Demand – interest bearing totaling $77.3 million.
Certificates of deposit totaling $23.5 million.


TABLE 5
WHOLESALE AND BROKERED DEPOSITS - UNAUDITED
(amounts in thousands)
At March 31, At December 31,
2016 2015 2015
CDARS / ICS reciprocal deposits$61,601 $52,767 $76,919
Third party brokered time deposits 17,498 17,509
Brokered deposits per Call Report 61,601 70,265 94,428
Online listing service time deposits 55,986 67,453 58,462
Total wholesale and brokered deposits$117,587 $137,718 $152,890

In accordance with regulatory Call Report instructions, the Bank will file (or has filed) quarterly Call Reports which list brokered deposits of $61.6 million, $70.3 million and $94.4 million at March 31, 2016, March 31, 2015 and December 31, 2015, respectively.

INCOME STATEMENT OVERVIEW

TABLE 6
SUMMARY INCOME STATEMENT - UNAUDITED
(amounts in thousands, except per share data)
For The Three Months Ended
March 31, Change December 31, Change
2016 2015 Amount % 2015 Amount %
Interest income $ 9,904 $9,526 $ 378 4 % $9,732 $ 172 2 %
Interest expense 1,600 1,157 443 38 % 1,381 219 16 %
Net interest income 8,304 8,369 (65) (1)% 8,351 (47) (1)%
Provision for loan
and lease losses
0 % 0 %
Noninterest income 949 854 95 11 % 640 309 48 %
Noninterest expense:
Branch acquisition and balance sheet reconfiguration costs 2,795 2,795 100 % 347 2,448 705 %
Other noninterest expense 7,206 6,593 613 9 % 6,269 937 15 %
Income before provision
for income taxes
(748) 2,630 (3,378) (128)% 2,375 (3,123) (131)%
Deferred tax asset write-off 363 363 100 % 363 100 %
Provision for income taxes (151) 829 (980) (118)% 505 (656) (130)%
Net income $ (960) $1,801 $ (2,761) (153)% $1,870 (2,830) (151)%
Less: Preferred stock
extinguishment costs
0 % 102 (102) (100)%
Less: Preferred dividends 50 (50) (100)% 39 (39) (100)%
Income available to
common shareholders
$ (960) $1,751 $ (2,711) (155)% $1,729 $ (2,689) (156)%
Basic earnings per share $ (0.07) $0.13 $ (0.20) (154)% $0.13 $ (0.20) (2)%
Average basic shares 13,360 13,303 57 0 % 13,341 19 0 %
Diluted earnings per share $ (0.07) $0.13 $ (0.20) (154)% $0.13 $ (0.20) (2)%
Average diluted shares 13,403 13,340 63 0 % 13,395 8 0 %
Dividends declared per
common share
$ 0.03 $0.03 $ 0 % $0.03 $ 0 %

First Quarter of 2016 Compared With First Quarter of 2015

Net income available to common shareholders for the first quarter of 2016 decreased $2.7 million over the first quarter of 2015 The difference is centered in branch acquisition and balance sheet reconfiguration costs totaling $2.8 million along with the write-off of a $363 thousand deferred tax asset.

Net Interest Income

Net interest income decreased $65 thousand over a year previous.

Interest income for the three months ended March 31, 2016 increased $378 thousand or 4% to $9.9 million. Income from interest and fees on loans and interest on interest bearing deposits due from banks increased $544 thousand while interest on securities decreased $166 thousand.

Interest expense for the first three months of 2016 increased $443 thousand or 38% to $1.6 million. Interest expense on term debt increased $433 thousand while all other interest expense on deposits and lease liabilities increased only $10 thousand. The significant increase in interest on term debt results from:

  • Interest expense of $296 thousand incurred on $20.0 million of new term debt issued during the fourth quarter of 2015.
  • Interest expense on Federal Home Loan Bank of San Francisco borrowings increased $137 thousand over a year previous due increased net settlement expense associated with the active interest rate swap.

Noninterest Income

Noninterest income for the three months ended March 31, 2016 increased $95 thousand compared to the same period a year ago. During the first quarter of 2016 we recorded a $176 thousand gain on payoff of a purchased impaired loan. Also, during the current quarter we recorded net gains on sale of available-for-sale investment securities of $94 thousand compared to net gains of $215 thousand for the same period a year ago.

Noninterest Expense

Aside from the branch acquisition and balance sheet reconfiguration costs ($2.8 million) noninterest expense for the three months ended March 31, 2016 increased $613 thousand compared to the same period a year ago. The increase was primarily driven by following negative items:

  • Staff increases and salary adjustments totaling $402 thousand, exclusive of our newly acquired offices.
  • Salaries and benefits at our newly acquired offices totaling $101 thousand.
  • Change in employee vacation utilization/carryover policy costing $203 thousand.
  • Increased office and postage of $117 thousand.

The increase in noninterest expense compared to the same period a year ago was partially offset by following positive items:

  • Salary Continuation Plan savings of $186 thousand.
  • The first quarter of 2015 included $147 thousand write-down of a fixed asset.

Income Tax Provision

During the three months ended March 31, 2016, the Company recorded an income tax benefit related to operating losses of $151 thousand and wrote-off a $363 thousand deferred tax asset; a net expense of $212 thousand. This compared with income tax expense of $829 thousand for the same period a year ago. Pre-tax income for 2016 is projected to be less than in 2015, while permanent deductions and tax credits are anticipated to remain relatively unchanged resulting in a decrease in the effective tax rate for 2016. As a result, excluding the write-off of the $363 thousand deferred tax asset, the Company’s effective tax rate decreased from 31.52% in 2015 to 20.19% during the current quarter.

The $363 thousand deferred tax asset written off during the first quarter was associated with our investment in affordable housing partnerships. The deferred tax asset represented the timing difference between the book amortization of the investments and the Bank’s share of the tax deductible losses incurred by the projects reported on the partnerships’ Schedule K-1. In accordance with ASU 2014-01 effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015, deferred tax treatment for these items is not permissible under the proportional amortization method of accounting.

First Quarter of 2016 Compared With Fourth Quarter of 2015

Net income available to common shareholders for the first quarter of 2016 decreased $2.7 million over the fourth quarter of 2015.

The difference is centered in branch acquisition and balance sheet reconfiguration costs totaling $2.8 million along with the write-off of a $363 thousand deferred tax asset.

Net Interest Income

Net interest income decreased $47 thousand over the prior quarter. Interest income for the three months ended March 31, 2016 increased $172 thousand or 2% to $9.9 million compared to the prior quarter. Income from interest and fees on loans and interest on interest bearing deposits due from banks increased $188 thousand while interest on securities decreased $16 thousand.

Interest expense for the first three months of 2016 increased $219 thousand or 16% to $1.6 million compared to the prior quarter. Interest expense on term debt increased $210 thousand while all other interest expense on deposits and lease liabilities increased only $9 thousand. The significant increase in interest on term debt was caused by the first full quarter of interest expense on $20.0 million of term debt issued during December of 2015.

Noninterest Income

Noninterest income for the three months ended March 31, 2016 increased $309 thousand compared to the prior quarter. In addition to the previously mentioned $176 thousand gain on full repayment of an impaired loan, net gains recognized on the sale of available-for-sale investment securities during the current quarter increased by $64 thousand to $94 thousand compared to a $30 thousand net gain in the prior quarter.

Noninterest Expense

Aside from the branch acquisition and balance sheet reconfiguration costs ($2.8 million) noninterest expense for the three months ended March 31, 2016 increased $937 thousand compared to the prior quarter. The increase was primarily driven by following:

  • Staff increases and salary adjustments totaling $223 thousand, exclusive of our newly acquired offices.
  • Increased payroll tax costs of $205 thousand, exclusive of our newly acquired offices.
  • Salaries and benefits at our newly acquired offices totaling $101 thousand.
  • Increased salaries for direct loan origination costs of $160 thousand.
  • Change in employee vacation utilization/carryover policy costing $113 thousand.
  • Increased office and postage of $94 thousand.

Income Tax Provision

During the three months ended March 31, 2016, the Company recorded an income tax benefit related to operating losses of $151 thousand and wrote-off a $363 thousand deferred tax asset; a net expense of $212 thousand. This compared with income tax expense of $505 thousand for the prior period. Excluding the write-off of the $363 thousand deferred tax asset, the Company’s effective tax rate decreased from 21.26% in 2015 to 20.19% during the current quarter.

Earnings Per Share

Net losses per share available to common shareholders were $0.07 for the three months ended March 31, 2016 compared with net income available to common shareholders per share of $0.13 for the same period a year ago, and net income available to common shareholders per share of $0.13 for the prior period. Earnings per share decreased for the three months ended March 31, 2016 compared to the same period a year ago primarily as a result of decreased net income.

Compared to the prior quarter, current quarter earnings per share available to common shareholders do not include preferred stock dividends and preferred stock extinguishment costs on preferred stock. All preferred stock was redeemed during the fourth quarter of 2015.

TABLE 7
NET INTEREST SPREAD AND MARGIN - UNAUDITED
(amounts in thousands)
For The Three Months Ended
March 31, Change December 31, Change
2016 2015 Amount 2015 Amount
Tax equivalent yield on average interest
earning assets
4.23% 4.37% (0.14) 4.23% 0.00
Rate on average interest bearing liabilities 0.86% 0.66% (0.20) 0.77% (0.09)
Net interest spread - tax equivalent basis 3.37% 3.71% (0.34) 3.46% (0.09)
Tax equivalent yield on average interest
earning assets
4.23% 4.37% (0.14) 4.23% 0.00
Interest expense to fund average earning assets 0.66% 0.51% 0.15 0.58% 0.08
Net interest margin - tax equivalent basis 3.57% 3.86% (0.29) 3.65% (0.08)
Yield on average interest earning assets 4.10% 4.23% (0.13) 4.10% 0.00
Rate on average interest bearing liabilities 0.66% 0.51% 0.15 0.58% 0.08
Net interest margin - nominal 3.44% 3.72% (0.28) 3.52% (0.08)
Average earning assets$969,818 $912,886 $ 56,932 $940,831 $ 28,987
Average interest bearing liabilities$743,388 $708,234 $ 35,154 $712,807 $ 30,581

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.57% for the three months ended March 31, 2016, a decrease of 29 basis points as compared to the same period a year ago. The decrease in net interest margin resulted from a 14 basis point decrease in tax-equivalent yield on average earning assets and a 15 basis point increase in interest expense to fund average earning assets. The decrease in the tax equivalent yield on average earning assets was primarily due to decreased yields in the securities portfolio. The increased rate on average interest bearing liabilities resulted from the interest on $20.0 million of new term debt issued during the fourth quarter of 2015. Interest on this debt totaled $296 thousand during the first quarter of 2016 and reduced the net interest margin by 12 basis points.

The current quarter tax equivalent net interest margin of 3.57% decreased eight basis points as compared to the prior quarter. This was caused by the cost of new debt previously described partially offset by decreased rates paid on interest bearing deposits.

During the first quarter of 2016, deposit balances increased $175.7 million and $134.0 million compared to the same period a year ago and the prior quarter respectively, primarily due to our branch acquisition. Our overall cost of interest bearing deposits decreased to 0.37% for the quarter ended March 31, 2016 from 0.40% for the same period a year ago and from 0.38% for the prior quarter.

Our future net interest margin will be enhanced by deploying the remaining cash provided by these deposits into higher yielding assets and by the elimination of our contractual interest payments on $75.0 million Federal Home Loan Bank of San Francisco borrowings.

TABLE 8
ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS - UNAUDITED
(amounts in thousands)
For The Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2016 2015 2015 2015 2015
Beginning balance$ 11,180 $ 10,891 $ 11,402 $ 11,296 $ 10,820
Provision for loan and lease losses
charged to expense
Loans charged off (307) (707) (779) (711) (179)
Loan loss recoveries 622 996 268 817 655
Ending balance$ 11,495 $ 11,180 $ 10,891 $ 11,402 $ 11,296
At March 31, At December 31, At September 30, At June 30, At March 31,
2016 2015 2015 2015 2015
Nonaccrual loans:
Commercial$ 2,563 $ 1,994 $ 2,506 $ 3,170 $ 3,908
Real estate - commercial non-owner occupied 1,197 5,488 5,154 6,532 7,103
Real estate - commercial owner occupied 1,190 1,071 1,928 1,079 1,079
Real estate - residential - ITIN 3,705 3,649 4,228 4,375 4,645
Real estate - residential - 1-4 family mortgage 1,742 1,775 1,669 1,693 1,720
Real estate - residential - equity lines 1,270 23 24 24
Consumer and other 31 32 33 34 34
Total nonaccrual loans 11,698 14,009 15,541 16,907 18,513
Accruing troubled debt restructured loans:
Commercial 40 49 56 10 1,004
Real estate - commercial non-owner occupied 821 824 828 832 836
Real estate - commercial owner occupied 849 854
Real estate - residential - ITIN 5,502 5,458 5,423 5,303 5,421
Real estate - residential - equity lines 553 558 563 569 574
Total accruing troubled debt restructured loans 6,916 6,889 6,870 7,563 8,689
All other accruing impaired loans 488 492 494 530 533
Total impaired loans$ 19,102 $ 21,390 $ 22,905 $ 25,000 $ 27,735
Gross loans outstanding at period end$ 724,243 $ 716,639 $ 718,533 $ 699,774 $ 699,229
Allowance for loan and lease losses as a percent of:
Gross loans 1.59 % 1.56 % 1.52 % 1.63 % 1.62 %
Nonaccrual loans 98.26 % 79.81 % 70.08 % 67.44 % 61.02 %
Impaired loans 60.18 % 52.27 % 47.55 % 45.61 % 40.73 %
Nonaccrual loans to gross loans 1.62 % 1.95 % 2.16 % 2.42 % 2.65 %

We realized net loan loss recoveries of $315 thousand in the current quarter compared with net loan loss recoveries of $289 thousand in the prior quarter and net loan loss recoveries of $476 thousand for the same period a year ago.

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 the quarters ended March 31, 2016, December 31, 2015 and March 31, 2015. Our ALLL as a percentage of gross loans was 1.59% as of March 31, 2016 compared to 1.62% as of March 31, 2015 and 1.56% as of December 31, 2015. 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 March 31, 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 March 31, 2016, the recorded investment in loans classified as impaired totaled $19.1 million, with a corresponding valuation allowance of $1.1 million compared to impaired loans of $27.7 million with a corresponding valuation allowance of $1.5 million at March 31, 2015 and impaired loans of $21.4 million, with a corresponding valuation allowance of $832 thousand at December 31, 2015. 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 March 31, At December 31, At September 30, At June 30, At March 31,
2016 2015 2015 2015 2015
Nonaccrual $4,516 $9,015 $11,149 $12,354 $12,695
Accruing 6,916 6,889 6,870 7,563 8,689
Total troubled debt restructurings $11,432 $15,904 $18,019 $19,917 $21,384
Percentage of total gross loans 1.58% 2.22% 2.51% 2.85% 3.06%

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.

There were no new troubled debt restructurings during the three months ended March 31, 2016. As of March 31, 2016, we had 119 restructured loans that qualified as troubled debt restructurings, of which 108 were performing according to their restructured terms.

TABLE 10
NONPERFORMING ASSETS - UNAUDITED
(amounts in thousands)
At March 31, At December 31, At September 30, At June 30, At March 31,
2016 2015 2015 2015 2015
Total nonaccrual loans $11,698 $14,009 $15,541 $16,907 $18,513
90 days past due and still accruing 88 52 54 30
Total nonperforming loans 11,698 14,097 15,593 16,961 18,543
Other real estate owned 1,011 1,423 1,525 1,405 1,502
Total nonperforming assets $12,709 $15,520 $17,118 $18,366 $20,045
Nonperforming loans to gross loans 1.62% 1.97% 2.17% 2.42% 2.65%
Nonperforming assets to total assets 1.18% 1.53% 1.73% 1.87% 2.03%

At March 31, 2016, March 31, 2015 and December 31, 2015, the recorded investment in OREO was $1.0 million, $1.5 million and $1.4 million, respectively. The March 31, 2016 OREO balance consists of six properties, of which three are 1-4 family residential real estate in the amount of $306 thousand, two are nonfarm nonresidential properties in the amount of $557 thousand and one is an undeveloped commercial property in the amount of $147 thousand.

TABLE 11
UNAUDITED CONSOLIDATED
BALANCE SHEET
(amounts in thousands, except per share data)
At March 31, At March 31, Change At December 31,
2016 2015 $ % 2015
Assets:
Cash and due from banks $ 14,969 $ 13,353 $ 1,616 12 % $ 9,730
Interest-bearing deposits in other banks 70,781 16,758 54,023 322 % 41,462
Total cash and cash equivalents 85,750 30,111 55,639 185 % 51,192
Securities available-for-sale, at fair value 174,251 166,890 7,361 4 % 159,030
Securities held-to-maturity, at amortized cost 35,357 36,609 (1,252) (3)% 35,899
Loans, net of deferred fees and costs 725,228 699,544 25,684 4 % 717,509
Allowance for loan and lease losses (11,495) (11,296) (199) 2 % (11,180)
Net loans 713,733 688,248 25,485 4 % 706,329
Premises and equipment, net 15,494 11,903 3,591 30 % 11,072
Other real estate owned 1,011 1,502 (491) (33)% 1,423
Goodwill and core deposit intangibles, net 2,469 2,469 100 %
Life insurance 22,642 22,009 633 3 % 22,485
Deferred taxes 8,389 10,041 (1,652) (16)% 9,760
Other assets 17,987 18,089 (102) (1)% 18,251
Total assets $ 1,077,083 $ 985,402 $ 91,681 9 % $ 1,015,441
Liabilities and shareholders' equity:
Demand - noninterest bearing $ 212,758 $ 150,056 $ 62,702 42 % $ 169,507
Demand - interest bearing 392,325 266,552 125,773 47 % 315,658
Savings 105,828 92,088 13,740 15 % 94,503
Certificates of deposit 226,756 253,280 (26,524) (10)% 224,067
Total deposits 937,667 761,976 175,691 23 % 803,735
Term debt 19,839 90,000 (70,161) (78)% 94,917
Unamortized debt issuance costs (213) (213) 100 % (223)
Net term debt 19,626 90,000 (70,374) (78)% 94,694
Junior subordinated debentures 10,310 10,310 0 % 10,310
Other liabilities 18,762 17,679 1,083 6 % 16,180
Total liabilities 986,365 879,965 106,400 12 % 924,919
Shareholders' equity:
Preferred stock 19,931 (19,931) (100)%
Common stock 24,325 24,105 220 1 % 24,214
Retained earnings 65,201 61,217 3,984 7 % 66,562
Accumulated other comprehensive income (loss), net of tax 1,192 184 1,008 548 % (254)
Total shareholders' equity 90,718 105,437 (14,719) (14)% 90,522
Total liabilities and shareholders' equity $ 1,077,083 $ 985,402 $ 91,681 9 % $ 1,015,441
Total interest earning assets $ 1,002,492 $ 916,676 $ 85,816 9 % $ 952,212
Shares outstanding 13,442 13,362 13,385
Tangible book value per share $ 6.57 $ 6.40 $ 6.76


TABLE 12
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
For The Three Months Ended
March 31, Change December 31,
2016 2015 $ % 2015
Interest income:
Interest and fees on loans $8,451 $7,911 $ 540 7 % $8,299
Interest on securities 784 945 (161) (17)% 795
Interest on tax-exempt securities 594 599 (5) (1)% 599
Interest on deposits in other banks 75 71 4 6 % 39
Total interest income 9,904 9,526 378 4 % 9,732
Interest expense:
Interest on demand deposits 122 116 6 5 % 121
Interest on savings deposits 45 54 (9) (17)% 51
Interest on certificates of deposit 597 591 6 1 % 585
Interest on term debt 782 349 433 124 % 572
Interest on other borrowings 54 47 7 15 % 52
Total interest expense 1,600 1,157 443 38 % 1,381
Net interest income 8,304 8,369 (65) (1)% 8,351
Provision for loan and lease losses 0 %
Net interest income after provision for loan and lease losses 8,304 8,369 (65) (1)% 8,351
Noninterest income:
Service charges on deposit accounts 72 49 23 47 % 51
Payroll and benefit processing fees 160 148 12 8 % 139
Earnings on cash surrender value - life insurance 156 165 (9) (5)% 159
Gain (loss) on investment securities, net 94 215 (121) (56)% 30
Other income 467 277 190 69 % 261
Total noninterest income 949 854 95 11 % 640


TABLE 12 - CONTINUED
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
For The Three Months Ended
March 31, Change December 31,
2016 2015 $ % 2015
Noninterest expense:
Salaries and related benefits 4,229 3,910 319 8 % 3,610
Occupancy and equipment 789 734 55 7 % 737
Write-down of other real estate owned 55 55 100 %
Federal Deposit Insurance Corporation
insurance premium
156 207 (51) (25)% 173
Data processing fees 304 242 62 26 % 280
Professional service fees 436 388 48 12 % 461
Branch acquisition costs 412 412 100 % 347
Loss on cancellation of interest rate swap 2,325 2,325 100 %
Other expenses 1,295 1,112 183 16 % 1,008
Total noninterest expense 10,001 6,593 3,408 52 % 6,616
Income before provision for income taxes (748) 2,630 (3,378) (128)% 2,375
Deferred tax asset write-off 363 363 0 %
Provision for income taxes (151) 829 (980) (118)% 505
Net income $ (960) $1,801 $ (2,761) (153)% $1,870
Less: Preferred stock extinguishment costs 100 % 102
Less: Preferred dividends 50 (50) (100)% 39
Income available to common shareholders $ (960) $1,751 $ (2,711) (155)% $1,729
Basic earnings per share $ (0.07) $0.13 $ (0.20) (154)% $0.13
Average basic shares 13,360 13,303 57 0 % 13,341
Diluted earnings per share $ (0.07) $0.13 $ (0.20) (154)% $0.13
Average diluted shares 13,403 13,340 63 0 % 13,395


TABLE 13
UNAUDITED CONDENSED CONSOLIDATED
YEAR TO DATE AVERAGE BALANCE SHEETS
(amounts in thousands)
For the Three Months Ended For the Twelve Months Ended
March 31, March 31, December 31, December 31, December 31,
2016 2015 2015 2014 2013
Earning assets:
Loans $720,795 $673,120 $699,227 $625,166 $612,780
Taxable securities 119,917 136,557 120,897 147,916 157,486
Tax exempt securities 77,852 77,316 77,089 83,973 92,854
Interest-bearing deposits in other banks 51,254 25,893 30,323 56,465 43,342
Average earning assets 969,818 912,886 927,536 913,520 906,462
Cash and due from banks 12,301 10,295 11,220 11,246 10,624
Premises and equipment, net 12,384 12,195 11,552 12,105 10,337
Other assets 39,700 43,540 42,423 36,936 26,431
Average total assets $1,034,203 $978,916 $992,731 $973,807 $953,854
Liabilities and shareholders' equity:
Demand - noninterest bearing $182,539 $148,923 $156,578 $139,792 $122,011
Demand - interest bearing 323,771 275,954 283,105 272,383 244,125
Savings 96,027 91,152 92,659 91,108 92,502
Certificates of deposit 221,836 246,707 238,626 259,445 248,350
Total deposits 824,173 762,736 770,968 762,728 706,988
Repurchase agreements 5,780
Term debt 91,444 84,111 88,874 77,534 107,603
Junior subordinated debentures 10,310 10,310 10,310 15,239 15,465
Other liabilities 16,969 17,141 16,588 15,934 11,825
Average total liabilities 942,896 874,298 886,740 871,435 847,661
Shareholders' equity 91,307 104,618 105,991 102,372 106,193
Average liabilities & shareholders' equity $1,034,203 $978,916 $992,731 $973,807 $953,854


TABLE 14
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(amounts in thousands)
For The Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2016 2015 2015 2015 2015
Earning assets:
Loans $720,795 $714,494 $705,762 $703,008 $673,120
Taxable securities 119,917 111,098 115,165 121,110 136,557
Tax exempt securities 77,852 78,081 76,190 76,772 77,316
Interest-bearing deposits in other banks 51,254 37,158 30,430 27,688 25,893
Average earning assets 969,818 940,831 927,547 928,578 912,886
Cash and due from banks 12,301 12,372 11,355 10,833 10,295
Premises and equipment, net 12,384 11,001 11,265 11,767 12,195
Other assets 39,700 41,666 41,867 42,637 43,540
Average total assets $1,034,203 $1,005,870 $992,034 $993,815 $978,916
Liabilities and shareholders' equity:
Demand - noninterest bearing $182,539 $171,449 $158,232 $147,442 $148,923
Demand - interest bearing 323,771 302,862 284,508 268,784 275,954
Savings 96,027 92,939 93,230 93,291 91,152
Certificates of deposit 221,836 226,924 235,551 245,573 246,707
Total deposits 824,173 794,174 771,521 755,090 762,736
Term debt 91,444 79,772 86,359 105,330 84,111
Junior subordinated debentures 10,310 10,310 10,310 10,310 10,310
Other liabilities 16,969 16,197 16,140 16,887 17,141
Average total liabilities 942,896 900,453 884,330 887,617 874,298
Shareholders' equity 91,307 105,417 107,704 106,198 104,618
Average liabilities & shareholders' equity $1,034,203 $1,005,870 $992,034 $993,815 $978,916

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 commercial banking and financial services through four 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

Source:Bank of Commerce Holdings