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

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

Financial highlights for the third quarter of 2016:

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

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

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

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

Forward-Looking Statements

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

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

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

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

BALANCE SHEET OVERVIEW

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

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

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

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

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

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

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

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

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

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

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

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

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

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

INCOME STATEMENT OVERVIEW

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

Third Quarter of 2016 Compared With Third Quarter of 2015

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

Net Interest Income

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

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

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

  • Interest on FHLB term debt decreased $474 thousand. During the first quarter of 2016 all FHLB term debt was repaid and an interest rate hedge associated with $75.0 million of that debt was terminated
  • Interest on $20.0 million of senior and subordinated term debt increased $289 thousand. The senior and subordinated term debt was issued during the fourth quarter of 2015 to redeem $20.0 million of preferred stock
  • Interest on interest bearing deposits decreased $52 thousand. Interest bearing deposits increased $104.0 million compared to the prior year, but the rate paid on all interest bearing deposits decreased by 10 basis points
  • Interest on junior subordinated debentures and other borrowings increased $14 thousand

Noninterest Income

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

Noninterest Expense

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

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

Income Tax Provision

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

Third Quarter of 2016 Compared With Second Quarter of 2016

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

Net Interest Income

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

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

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

Noninterest Income

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

Noninterest Expense

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

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

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

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

Income Tax Provision

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

Earnings Per Share

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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


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


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

About Bank of Commerce Holdings

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

Investment firms making a market in BOCH stock are:

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

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

Contact Information:

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

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

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

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

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