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

| Source: Bank of Commerce Holdings Bank of Commerce Holdings

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
  

            











    

        

        
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