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 StreetSan Francisco, CA 94105(800) 346-5544 Stifel NicolausPerry Wright1255 East Street, Suite 100Redding, 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
Bank of Commerce (NASDAQ:BOCH)
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