Bank of Commerce Holdings Announces Results for the First Quarter of 2019

Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.471 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, 2019. Net income for the quarter ended March 31, 2019 was $2.3 million or $0.13 per share – diluted, compared with net income of $3.2 million or $0.20 per share – diluted for the same period of 2018.

The current quarter includes the results and related acquisition costs of $1.9 million associated with the January 31, 2019 acquisition of Merchants Holding Company in Sacramento (“Merchants”).

Randall S. Eslick, President and CEO commented: “All of our employees have worked diligently to ensure that the integration of Merchants Bank continues to progress very smoothly and we are excited to extend our banking services into downtown Sacramento.”

Financial highlights for the first quarter of 2019 compared to the same quarter a year ago:

• Net income of $2.3 million was a decrease of $935 thousand (29%) from $3.2 million earned during the same period in the prior year. Earnings of $0.13 per share – diluted was a decrease of $0.07 (35%) from $0.20 per share – diluted earned during the same period in the prior year and reflects the impact of 1,834,142 shares of common stock issued during the current quarter as part of our acquisition of Merchants.
• Acquisition costs associated with our acquisition of Merchants totaled $1.9 million.
• Net interest income increased $1.7 million (15%) to $13.0 million compared to $11.3 million for the same period in the prior year.
• Return on average assets decreased to 0.66% compared to 1.05% for the same period in the prior year.
• Return on average equity decreased to 6.12% compared to 10.34% for the same period in the prior year.
• Average loans totaled $993.3 million, an increase of $109.4 million (12%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.337 billion, an increase of $155 million (13%) compared to average earning assets for the same period in the prior year.
• Average deposits totaled $1.224 billion, an increase of $153 million (14%) compared to average deposits for the same period in the prior year.
  • Average non-maturing deposits totaled $1.056 billion, an increase of $168 million (19%) compared to the same period in the prior year.
  • Average certificates of deposit totaled $167.5 million, a decrease of $14.4 million (8%) compared to same period in the prior year.
• The Company’s efficiency ratio was 77.7% compared to 65.2% during the same period in the prior year.
• Nonperforming assets at March 31, 2019 totaled $14.6 million or 0.99% of total assets, an increase of $10.3 million (241%) since March 31, 2018. The increase in nonperforming assets results from one $10.9 million commercial real estate loan which at March 31, 2019 had zero calculated impairment.
• Book value per common share was $8.90 at March 31, 2019 compared to $7.83 at March 31, 2018.
• Tangible book value per common share was $7.96 at March 31, 2019 compared to $7.71 at March 31, 2018.

Financial highlights for the first quarter of 2019 compared to the prior quarter:

• Net income of $2.3 million ($0.13 per share –diluted) was a decrease of $2.5 million (52%) from $4.8 million ($0.30 per share – diluted) earned during the prior quarter.
• Acquisition costs associated with our acquisition of Merchants totaled $1.9 million compared to $802 thousand for the prior quarter.
• Net interest income increased $510 thousand (17% annualized) to $13.0 million compared to $12.5 million for the prior quarter.
• Return on average assets decreased to 0.66% compared to 1.44% for the prior quarter.
• Return on average equity decreased to 6.12% compared to 14.32% for the prior quarter.
• Average loans totaled $993.3 million, an increase of $69.9 million (31% annualized) compared to average loans for the prior quarter.
• Average earning assets totaled $1.337 billion, an increase of $77 million (25% annualized) compared the prior quarter.
• Average deposits totaled $1.224 billion, an increase of $65.9 million (23% annualized) compared the prior quarter.
  • Average non-maturing deposits totaled $1.056 billion, an increase of $55 million (22% annualized) compared to the prior quarter.
  • Average certificates of deposit totaled $167.5 million, an increase of $10.4 million (27% annualized) compared to the prior quarter.
• The Company’s efficiency ratio was 77.7% compared to 65.1% for the prior quarter.
• Nonperforming assets at March 31, 2019 totaled $14.6 million or 0.99% of total assets, an increase of $10.4 million (1,009% annualized) compared to December 31, 2018. The increase in nonperforming assets results from one $10.9 million commercial real estate loan which at March 31, 2019 had zero calculated impairment.
• Book value per common share was $8.90 at March 31, 2019 compared to $8.47 at December 31, 2018.
• Tangible book value per common share was $7.96 at March 31, 2019 compared to $8.36 at December 31, 2018.

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, 2018 under the heading “Risk Factors” and to 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		2019				2018				2018
Net income		$	2,306			$	3,241			$	4,839
Average total assets		$	1,425,860			$	1,248,563			$	1,328,817
Average total earning assets		$	1,337,006			$	1,181,882			$	1,259,709
Average shareholders' equity		$	152,705			$	127,069			$	134,033
Selected performance ratios
Return on average assets			0.66	%			1.05	%			1.44	%
Return on average equity			6.12	%			10.34	%			14.32	%
Efficiency ratio			77.7	%			65.2	%			65.1	%
Share and per share amounts
Weighted average shares - basic (1)			17,489				16,225				16,265
Weighted average shares - diluted (1)			17,552				16,310				16,345
Earnings per share - basic		$	0.13			$	0.20			$	0.30
Earnings per share - diluted		$	0.13			$	0.20			$	0.30
		At March 31,								At December 31,
Share and per share amounts		2019				2018				2018
Common shares outstanding (2)			18,213				16,315				16,334
Book value per common share (2)		$	8.90			$	7.83			$	8.47
Tangible book value per common share (2)(3)		$	7.96			$	7.71			$	8.36
Capital ratios (4)
Bank of Commerce Holdings
Common equity tier 1 capital ratio			12.40	%			12.35	%			12.79	%
Tier 1 capital ratio			13.25	%			13.31	%			13.71	%
Total capital ratio			15.19	%			15.52	%			15.82	%
Tier 1 leverage ratio			11.05	%			11.09	%			11.21	%
Tangible common equity ratio (5)			9.97	%			10.11	%			10.46	%
Redding Bank of Commerce
Common equity tier 1 capital ratio			13.98	%			12.62	%			13.23	%
Tier 1 capital ratio			13.98	%			12.62	%			13.23	%
Total capital ratio			15.08	%			13.87	%			14.42	%
Tier 1 leverage ratio			11.66	%			10.51	%			10.81	%
(1) Excludes unvested restricted shares issued in accordance with the Company's equity incentive plan, as they are non participative in dividends or voting rights.
(2) Includes unvested restricted shares issued in accordance with the Company's equity incentive plan.
(3) Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.
(4) The Company and the Bank continue to meet all capital adequacy requirements to which they are subject.
(5) Management believes the tangible common equity ratio is a useful measure of capital adequacy because it provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the capital of the Company and the ability of the Company to absorb potential losses. The tangible common equity ratio is calculated as total shareholders' equity less goodwill and core deposit intangible, net divided by total assets less goodwill and core deposit intangible, net.

BALANCE SHEET OVERVIEW

As of March 31, 2019, the Company had total consolidated assets of $1.471 billion, gross loans of $1.035 billion, allowance for loan and lease losses (“ALLL”) of $12.2 million, total deposits of $1.248 billion, and shareholders’ equity of $162.1 million.

TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(amounts in thousands)
		At March 31,																					At December 31,
						% of							% of			Change											% of
		2019				Total			2018				Total			Amount				%			2018				Total
Commercial		$	149,575			14	%		$	137,870			15	%		$	11,705			8	%		$	135,543			14	%
Real estate - construction and land development			30,335			3				14,723			2				15,612			106	%			22,563			2
Real estate - commercial non-owner occupied			477,798			47				405,192			46				72,606			18	%			433,708			46
Real estate - commercial owner occupied			200,349			19				193,286			22				7,063			4	%			204,622			22
Real estate - residential - ITIN			36,145			3				40,425			4				(4,280	)		(11	)%			37,446			4
Real estate - residential - 1-4 family mortgage			68,092			7				30,247			3				37,845			125	%			34,366			4
Real estate - residential - equity lines			26,162			3				30,520			3				(4,358	)		(14	)%			26,958			3
Consumer and other			46,150			4				48,157			5				(2,007	)		(4	)%			51,045			5
Gross loans			1,034,606			100	%			900,420			100	%			134,186			15	%			946,251			100	%
Deferred fees and costs			1,992							1,713							279							1,927
Loans, net of deferred fees and costs			1,036,598							902,133							134,465							948,178
Allowance for loan and lease losses			(12,242	)						(12,295	)						53							(12,292	)
Net loans		$	1,024,356						$	889,838						$	134,518						$	935,886
Average yield on loans during the quarter			4.91	%						4.92	%						(0.01	)						4.94	%
Average yield on loans during the year			4.91	%						4.92	%						(0.01	)						4.91	%

The Company recorded gross loan balances of $1.035 billion at March 31, 2019, compared with $900.4 million and $946.3 million at March 31, 2018 and December 31, 2018, respectively, an increase of $134.2 million and $88.4 million, respectively. During the first quarter of 2019, Merchants Holding Company acquisition provided an additional $85.3 million of loans. At March 31, 2019, gross loans from the acquisition totaled $84.1 million as follows:

• Commercial $6.0 million
• Real estate - construction and land development $2.4 million
• Real estate - commercial non-owner occupied $39.5 million
• Real estate - residential – 1-4 family mortgage $36.0 million
• Consumer and other $0.2 million

Average loan balances were $993.3 million for the quarter ended March 31, 2019, compared with $883.9 million for the quarter ended March 31, 2018 and $923.4 million for the quarter ended December 31, 2018 an increase of $109.4 million or 12% and an increase of $69.9 million or 31% annualized.

The average yield on loans during the quarter was 4.91% compared to 4.92% and 4.94% for the quarters ended March 31, 2018 and December 31, 2018, respectively. During the quarter, a $10.9 million commercial real estate loan was placed on nonaccrual status. The uncollected interest on the loan was reversed which reduced our average yield on loans by 5 basis points.

TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(amounts in thousands)
		At March 31,																					At December 31,
						% of							% of			Change											% of
		2019				Total			2018				Total			Amount				%			2018				Total
Cash and due from banks		$	32,104			9	%		$	16,247			6	%		$	15,857			98	%		$	23,692			8	%
Interest-bearing deposits in other banks			30,425			9				17,376			6				13,049			75	%			23,673			8
Total cash and cash equivalents			62,529			18				33,623			12				28,906			86	%			47,365			16
Investment securities:
U.S. government and agencies			46,451			13				41,179			14				5,272			13	%			40,087			13
Obligations of state and political subdivisions			48,935			14				59,408			21				(10,473	)		(18	)%			50,530			17
Residential mortgage backed securities and collateralized mortgage obligations			171,814			47				125,567			43				46,247			37	%			138,503			45
Corporate securities			2,958			1				3,958			1				(1,000	)		(25	)%			2,922			1
Commercial mortgage backed securities			23,864			7				25,520			9				(1,656	)		(6	)%			24,762			8
Other asset backed securities			95			—				285			0				(190	)		(67	)%			124			—
Total investment securities - AFS			294,117			82				255,917			88				38,200			15	%			256,928			84
Total cash, cash equivalents and investment securities		$	356,646			100	%		$	289,540			100	%		$	67,106			23	%		$	304,293			100	%
Average yield on interest-bearing due from banks and investment securities during the quarter - nominal			2.83	%						2.45	%						0.38							2.66	%
Average yield on interest-bearing due from banks and investment securities during the quarter - tax equivalent			2.95	%						2.62	%						0.33							2.77	%

As of March 31, 2019, we maintained noninterest-bearing cash positions of $32.1 million and interest-bearing deposits of $30.4 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $294.1 million at March 31, 2019, compared with $255.9 million and $256.9 million at March 31, 2018 and December 31, 2018, respectively. During the first quarter of 2019, the Merchants acquisition included securities with a par value of $107.4 million. Management elected to sell securities with a par value of $67.8 million which resulted in $92 thousand in net realized gains.

Average securities balances and weighted average tax equivalent yields for the quarters ended March 31, 2019 and 2018 were $303.5 million and 3.01% compared to $265.1 million and 2.75%, respectively.

At March 31, 2019, our net unrealized losses on available-for-sale investment securities were $701 thousand compared with net unrealized losses of $3.9 million and $4.3 million at March 31, 2018 and December 31, 2018, respectively. The changes in net unrealized losses on the investment securities portfolio are due to changes in market interest rates.

TABLE 4
DEPOSITS BY TYPE - UNAUDITED
(amounts in thousands)
		At March 31,																					At December 31,
						% of							% of				Change										% of
		2019				Total			2018				Total			Amount				%			2018				Total
Demand - noninterest-bearing		$	385,696			31	%		$	301,981			29	%		$	83,715			28	%		$	347,199			31	%
Demand - interest-bearing			241,292			19				229,681			22				11,611			5	%			252,202			22
Money market accounts			311,853			25				232,870			22				78,983			34	%			265,093			23
Total demand			938,841			75				764,532			73				174,309			23	%			864,494			76
Savings			139,237			11				107,986			10				31,251			29	%			114,840			10
Total non-maturing deposits			1,078,078			67				872,518			83				205,560			24	%			979,334			86
Certificates of deposit			170,216			14				176,233			17				(6,017	)		(3	)%			152,382			14
Total deposits		$	1,248,294			100	%		$	1,048,751			100	%		$	199,543			19	%		$	1,131,716			100	%

Total deposits at March 31, 2019, increased $200 million or 19% to $1.248 billion compared to March 31, 2018 and increased $117 million or 42% annualized compared to December 31, 2018. Total non-maturing deposits increased $206 million or 24% compared to the same date a year ago and increased $99 million or 41% annualized compared to December 31, 2018. Certificates of deposit decreased $6 million or 3% compared to the same date a year ago and increased $18 million or 47% annualized compared to December 31, 2018.

During the first quarter of 2019, Merchants Holding Company acquisition provided an additional $190.2 million of deposits, which are essentially unchanged at March 31, 2019. As illustrated in the following table, legacy deposits have experienced their seasonal decline, while wholesale time deposits have matured and were not renewed.

TABLE 4a
YEAR TO DATE CHANGES IN DEPOSITS
(amounts in thousands)
		Legacy Deposits				Acquired MerchantsDeposits				Change In				Deposits
		At December 31,				At March 31,				Legacy Deposits				At March 31,
		2018				2019				Deposits				2019
Demand - noninterest-bearing		$	347,199			$	49,892			$	(11,395	)		$	385,696
Demand - interest-bearing			252,202				28,344				(39,254	)			241,292
Money market accounts			265,093				46,321				439				311,853
Total demand			864,494				124,557				(50,210	)			938,841
Savings			114,840				28,386				(3,989	)			139,237
Total non-maturing deposits			979,334				152,943				(54,199	)			1,078,078
Certificates of deposit			152,382				36,863				(19,029	)			170,216
Total deposits		$	1,131,716			$	189,806			$	(73,228	)		$	1,248,294

TABLE 5
WHOLESALE AND RECIPROCAL DEPOSITS - UNAUDITED
(amounts in thousands)
		At March 31,								At December 31,
		2019				2018				2018
CDARS / ICS reciprocal deposits		$	65,192			$	56,732			$	83,666
Online listing service wholesale time deposits			1,683				29,159				22,015
Total wholesale and reciprocal deposits		$	66,875			$	85,891			$	105,681

For calendar quarters prior to April 1, 2018, CDARS/ ICS reciprocal deposits were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, this is no longer so.

AVERAGE COST OF FUNDS

The following table presents the average cost of interest-bearing deposits, all deposits and all interest-bearing liabilities for the periods indicated.

TABLE 6
AVERAGE COST OF FUNDS - UNAUDITED
For The Three Months Ended
		March 31,				December 31,				September 30,				June 30,				March 31,				December 31,				September 30,				June 30,
		2019				2018				2018				2018				2018				2017				2017				2017
Interest-bearing deposits			0.49	%			0.45	%			0.42	%			0.41	%			0.41	%			0.42	%			0.43	%			0.42	%
Interest-bearing deposits and noninterest-bearing demand			0.34	%			0.31	%			0.29	%			0.29	%			0.29	%			0.30	%			0.31	%			0.31	%
All interest-bearing liabilities			0.67	%			0.61	%			0.64	%			0.68	%			0.60	%			0.59	%			0.60	%			0.60	%
All interest-bearing liabilities and noninterest-bearing demand			0.46	%			0.42	%			0.45	%			0.50	%			0.43	%			0.42	%			0.43	%			0.44	%

INCOME STATEMENT OVERVIEW

TABLE 7
SUMMARY INCOME STATEMENT - UNAUDITED
(amounts in thousands, except per share data)
For The Three Months Ended
		March 31,								Change							December 31,				Change
		2019				2018				Amount				%			2018				Amount				%
Interest income		$	14,427			$	12,530			$	1,897			15	%		$	13,750			$	677			5	%
Interest expense			1,423				1,185				238			20	%			1,256				167			13	%
Net interest income			13,004				11,345				1,659			15	%			12,494				510			4	%
Provision for loan and lease losses			—				—				—			—	%			—				—			—	%
Noninterest income			1,057				982				75			8	%			1,132				(75	)		(7	)%
Noninterest expense			10,923				8,033				2,890			36	%			8,868				2,055			23	%
Income before provision for income taxes			3,138				4,294				(1,156	)		(27	)%			4,758				(1,620	)		(34	)%
Provision for income taxes:
Reversal of uncertain tax position			—				—				—			—	%			(988	)			988			100	%
Benefit from cost segregation study and tangible property review			—				—				—			—	%			(484	)			484			100	%
Provision for income taxes from operations			832				1,053				(221	)		(21	)%			1,391				(559	)		(40	)%
Total provision for income taxes			832				1,053				(221	)		(21	)%			(81	)			913			(1,127	)%
Net income		$	2,306			$	3,241			$	(935	)		(29	)%		$	4,839			$	(2,533	)		(52	)%
Basic earnings per share		$	0.13			$	0.20			$	(0.07	)		(35	)%		$	0.30			$	(0.17	)		(57	)%
Average basic shares			17,489				16,225				1,264			8	%			16,265				1,224			8	%
Diluted earnings per share		$	0.13			$	0.20			$	(0.07	)		(35	)%		$	0.30			$	(0.17	)		(57	)%
Average diluted shares			17,552				16,310				1,242			8	%			16,345				1,207			7	%
Dividends declared per common share		$	0.04			$	0.03			$	0.01			33	%		$	0.04			$	—			—	%

First Quarter of 2019 Compared With First Quarter of 2018

Net income for the first quarter of 2019 decreased $935 thousand compared to the first quarter of 2018. In the current quarter, net interest income was $1.7 million higher, noninterest income was $75 thousand higher and the provision for income taxes was $221 thousand lower. These positive changes were offset by noninterest expenses that were $2.9 million higher.

Net Interest Income

Net interest income increased $1.7 million compared to the same period a year ago.

Interest income for the first quarter of 2019 increased $1.9 million or 15% to $14.4 million:

• Interest and fees on loans increased $1.3 million due to a $109.4 million increase in average loan balances partially offset by a one basis point decrease in the average yield on the loan portfolio.
• Interest on securities increased $479 thousand due to a $38.4 million increase in average securities balances and a 32 basis point increase in average yield on the securities portfolio.
• Interest on interest-bearing deposits due from banks increased $116 thousand due to a $7.3 million increase in average interest-bearing deposit balances, and an 88 basis point increase in average yield.

Interest expense for the first quarter of 2019 increased $238 thousand or 20% to $1.4 million:

• Interest expense on interest bearing deposits increased $241 thousand. Average interest-bearing demand and savings deposit balances increased $86.7 million, while average certificate of deposit balances decreased $14.4 million. The average rate paid on interest-bearing deposits increased eight basis points.
• Interest expense on borrowings from the Federal Home Loan Bank of San Francisco increased $8 thousand. Average Federal Home Loan Bank of San Francisco borrowings outstanding in the current quarter were $8.8 million compared to $12.4 million in the same quarter a year ago.
• Interest expense on other term debt and junior subordinated debentures decreased $11 thousand.

Provision for loan and lease losses

As illustrated in Table 9, the nonaccrual status of a $10.9 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. However, no calculated impairment reserve on this loan is indicated and no provision for loan and lease losses was necessary for the quarter.

Noninterest Income

Noninterest income for the three months ended March 31, 2019 increased $75 thousand compared to the first quarter for 2018. Gains on sale of investment securities increased $56 thousand and dividends on Federal Home Loan Bank of San Francisco stock increased $41 thousand.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2019 increased $2.9 million compared to the same period a year previous which included:

• $1.9 million in acquisition costs
• $0.6 million increase in operating expenses from the Merchants acquisition

The Company’s efficiency ratio was 77.7% for the first quarter of 2019 (64.0% exclusive of acquisition costs). The ratio during the same period in 2018 was 65.2%.

Income Tax Provision

For the three months ended March 31, 2019, our income tax provision of $832 thousand on pre-tax income of $3.1 million was an effective tax rate of 26.5%. The tax provision for the first quarter of the prior year was $1.1 million on pre-tax income of $4.3 million for an effective tax rate of 24.5%. The current quarter includes $135 thousand, of acquisition costs which are not tax deductible.

First Quarter of 2019 Compared With Fourth Quarter of 2018

Net income for the first quarter of 2019 decreased $2.5 million compared to the fourth quarter of 2018. In the current quarter, net interest income was $510 thousand higher. This positive change was offset by noninterest income that was $75 thousand lower, noninterest expense that was $2.1 million higher and provision for income taxes that was $913 thousand higher.

Net Interest Income

Net interest income increased $510 thousand over the prior quarter.

Interest income for the three months ended March 31, 2019 increased $677 thousand or 5% to $14.4 million.

• Interest and fees on loans increased $537 thousand due to a $69.9 million increase in average loan balances partially offset by a three basis point decrease in the average yield on the loan portfolio.
• Interest on investment securities increased $329 thousand due to a $42.5 million increase in average securities balances and a 10 basis point increase in average yield on the investment portfolio.
• Interest on interest-bearing deposits due from banks decreased $189 thousand due to a $35.1 million decrease in average balances partially offset by an 18 basis point increase in average yield.

Interest expense for the three months ended March 31, 2019 increased $167 thousand or 13% to $1.4 million.

• Interest expense on deposits increased $114 thousand as average interest-bearing demand and savings deposits increased $34.5 million, average certificates of deposit increased $10.4 million and the average rate paid on these deposits increased by eight basis points.
• Interest expense on borrowings from the Federal Home Loan Bank of San Francisco increased $55 thousand. Average Federal Home Loan Bank of San Francisco borrowings outstanding in the current quarter were $8.8 million, there were no borrowings in the prior quarter
• Interest expense on other term debt and junior subordinated debentures decreased $2 thousand.

Provision for loan and lease losses

As illustrated in Table 9, the nonaccrual status of a $10.9 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. However, no calculated impairment reserve on this loan is indicated and no provision for loan and lease losses was necessary for the quarter.

Noninterest Income

Noninterest income for the three months ended March 31, 2019 decreased $75 thousand, the decrease was due to a $96 thousand special dividend on Federal Home Loan Bank of San Francisco stock in the prior quarter that did not recur and a decrease in gains on sale of OREO properties of $41 thousand. These decreases were partially offset by an increase in the gain on sale of investment securities of $89 thousand.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2019 increased $2.1 million. The increase was due to:

• $1.1 million increase in acquisition costs
• $0.6 million increase in operating expenses from the Merchants acquisition

The Company’s efficiency ratio was 77.7% for the first quarter of 2019 (64% exclusive of acquisition costs). The ratio during the prior quarter was 65.1%.

Income Tax Provision

For the three months ended March 31, 2019, our income tax provision of $832 thousand on pre-tax income of $3.1 million was an effective tax rate of 26.5%. The negative tax provision for the prior quarter of $81 thousand on pre-tax income of $4.8 million included:

• $(988) thousand benefit due to the reversal of our uncertain tax position.
• $(484) thousand benefit as a result to our cost segregation study and tangible property review.
• $1.4 million tax provision on pre-tax net operating income of $4.8 million (29.2%).

The current and prior quarter include $135 thousand and $765 thousand, respectively, of acquisition costs which are not tax deductible.

Earnings Per Share

Diluted earnings per share were $0.13 for the three months ended March 31, 2019 compared with diluted earnings per share of $0.20 for the same period a year ago and diluted earnings per share of $0.30 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in table 7 presented earlier in this press release.

TABLE 8a
NET INTEREST MARGIN - UNAUDITED
(amounts in thousands)
		For The Three Months Ended
		March 31, 2019											March 31, 2018											December 31, 2018
		Average								Yield /			Average								Yield /			Average								Yield /
(Amounts in thousands)		Balance				Interest(1)				Rate (5)			Balance				Interest(1)				Rate (5)			Balance				Interest(1)				Rate (5)
Interest-earning assets:
Net loans (2)		$	993,261			$	12,031			4.91	%		$	883,876			$	10,729			4.92	%		$	923,409			$	11,494			4.94	%
Taxable securities			253,068				1,764			2.83	%			205,302				1,209			2.39	%			218,137				1,469			2.67	%
Tax-exempt securities			50,454				387			3.11	%			59,789				463			3.14	%			42,868				353			3.27	%
Interest-bearing deposits in other banks			40,223				245			2.47	%			32,915				129			1.59	%			75,295				434			2.29	%
Average interest-earning assets			1,337,006				14,427			4.38	%			1,181,882				12,530			4.30	%			1,259,709				13,750			4.33	%
Cash and due from banks			21,392											17,641											22,447
Premises and equipment, net			14,581											14,557											13,331
Goodwill and core deposit intangible, net			11,872											1,998											1,842
Other assets			41,009											32,485											31,488
Average total assets		$	1,425,860										$	1,248,563										$	1,328,817
Interest-bearing liabilities:
Interest-bearing demand		$	243,376				126			0.21	%		$	234,269				89			0.15	%		$	257,227				141			0.22	%
Money market accounts			293,396				289			0.40	%			236,171				132			0.23	%			265,190				207			0.31	%
Savings deposits			131,081				111			0.34	%			110,725				59			0.22	%			110,934				92			0.33	%
Certificates of deposit			167,463				490			1.19	%			181,901				495			1.10	%			157,035				462			1.17	%
Federal Home Loan Bank of San Francisco borrowings			8,778				55			2.54	%			12,444				47			1.53	%			—				—			—	%
Other borrowings net of unamortized debt issuance costs			12,889				239			7.52	%			16,528				281			6.90	%			13,785				252			7.25	%
Junior subordinated debentures			10,310				113			4.44	%			10,310				82			3.23	%			10,310				102			3.93	%
Average interest-bearing liabilities			867,293				1,423			0.67	%			802,348				1,185			0.60	%			814,481				1,256			0.61	%
Noninterest-bearing demand			388,410											307,397											367,457
Other liabilities			17,452											11,749											12,846
Shareholders’ equity			152,705											127,069											134,033
Average liabilities and shareholders’ equity		$	1,425,860										$	1,248,563										$	1,328,817
Net interest income and net interest margin (4)						$	13,004			3.94	%						$	11,345			3.89	%						$	12,494			3.93	%
Tax equivalent net interest margin (3)										3.98	%										3.94	%										3.96	%
(1) Interest income on loans includes deferred fees and costs of approximately $181 thousand, $137 thousand, and $109 thousand for the three months ended March 31, 2019, and 2018 and December 31, 2018, respectively.
(2) Net loans includes average nonaccrual loans of $8.5 million, $4.8 million and $4.1 million for the three months ended March 31, 2019 and 2018 and December 31, 2018, respectively.
(3) Tax-exempt income has been adjusted to tax equivalent basis at a 21% for 2019 and 2018. The amount of such adjustments was an addition to recorded income of approximately $103 thousand, $123 thousand and $94 thousand for the three months ended March 31, 2019 and 2018 and December 31, 2018, respectively.
(4) Net interest margin is annualized net interest income expressed as a percentage of average interest-earning assets.
(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.

TABLE 9
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,
		2019				2018				2018				2018				2018
Beginning balance ALLL		$	12,292			$	12,392			$	12,388			$	12,295			$	11,925
Provision for loan and lease losses			—				—				—				—				—
Loans charged-off			(348	)			(279	)			(198	)			(382	)			(390	)
Loan loss recoveries			298				179				202				475				760
Ending balance ALLL		$	12,242			$	12,292			$	12,392			$	12,388			$	12,295
		At March 31,				At December 31,				At September 30,				At June 30,				At March 31,
		2019				2018				2018				2018				2018
Nonaccrual loans:
Commercial		$	1,018			$	959			$	899			$	1,358			$	1,109
Real estate - construction and land development
Real estate - commercial non-owner occupied			10,878				—				—				—				—
Real estate - commercial owner occupied			—				548				—				—				—
Real estate - residential - ITIN			2,392				2,388				2,571				2,613				2,839
Real estate - residential - 1-4 family mortgage			182				185				179				184				188
Real estate - residential - equity lines			42				43				44				44				45
Consumer and other			23				23				24				33				35
Total nonaccrual loans			14,535				4,146				3,717				4,232				4,216
Accruing troubled debt restructured loans:
Commercial			1,187				1,224				1,291				1,420				1,516
Real estate - commercial non-owner occupied			793				795				797				799				800
Real estate - residential - ITIN			4,342				4,484				4,535				4,592				4,554
Real estate - residential - equity lines			358				363				367				372				376
Total accruing troubled debt restructured loans			6,680				6,866				6,990				7,183				7,246
All other accruing impaired loans			—				—				—				—				—
Total impaired loans		$	21,215			$	11,012			$	10,707			$	11,415			$	11,462
Gross loans outstanding at period end		$	1,034,606			$	946,251			$	927,480			$	936,816			$	900,420
Impaired loans to gross loans			2.05	%			1.16	%			1.15	%			1.22	%			1.27	%
Nonaccrual loans to gross loans			1.40	%			0.44	%			0.40	%			0.45	%			0.47	%
Allowance for loan and lease losses as a percent of:
Gross loans			1.18	%			1.30	%			1.34	%			1.32	%			1.37	%
Nonaccrual loans			84.22	%			296.48	%			333.39	%			292.72	%			291.63	%
Impaired loans			57.70	%			111.62	%			115.74	%			108.52	%			107.27	%

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. As illustrated in Table 9, the nonaccrual status of a $10.9 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. However, no calculated impairment reserve on this loan is indicated and no provision for loan and lease losses was necessary for the quarter. There was no provision for loan and lease loss during the prior quarter or during the same quarter a year ago. The loans acquired from Merchants were recorded at fair value which included a discount for credit risk which is not a part of the ALLL. As a result, our ALLL as a percentage of gross loans was declined to 1.18% as of March 31, 2019 compared to 1.37% as of March 31, 2018 and 1.30% as of December 31, 2018. Based on the Bank’s ALLL methodology, which uses criteria such as risk factors and historical loss rates, and given the ongoing improvements in asset quality, management believes the Company’s ALLL is adequate at March 31, 2019. 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, 2019, the recorded investment in loans classified as impaired totaled $21.2 million, with a corresponding specific reserve of $1.4 million compared to impaired loans of $11.5 million with a corresponding specific reserve of $1.1 million at March 31, 2018 and impaired loans of $11.0 million, with a corresponding specific reserve of $1.2 million at December 31, 2018. The increase in loans classified as impaired results from one $10.9 million commercial real estate loan which at March 31, 2019 had zero calculated impairment.

TABLE 10
TROUBLED DEBT RESTRUCTURINGS - UNAUDITED
(amounts in thousands)
		At March 31,				At December 31,				At September 30,				At June 30,				At March 31,
		2019				2018				2018				2018				2018
Nonaccrual		$	2,725			$	2,693			$	2,720			$	3,218			$	3,237
Accruing			6,680				6,866				6,990				7,183				7,246
Total troubled debt restructurings		$	9,405			$	9,559			$	9,710			$	10,401			$	10,483
Troubled debt restructurings as a percentage of total gross loans			0.91	%			1.01	%			1.05	%			1.11	%			1.16	%

There were no new troubled debt restructurings during the three months ended March 31, 2019. As of March 31, 2019, we had 105 restructured loans that qualified as troubled debt restructurings, of which 104 were performing according to their restructured terms.

TABLE 11
NONPERFORMING ASSETS - UNAUDITED
(amounts in thousands)
		At March 31,				At December 31,				At September 30,				At June 30,				At March 31,
		2019				2018				2018				2018				2018
Total nonaccrual loans		$	14,535			$	4,146			$	3,717			$	4,232			$	4,216
90 days past due and still accruing			—				—				—				—				—
Total nonperforming loans			14,535				4,146				3,717				4,232				4,216
Other real estate owned ("OREO")			34				31				136				140				60
Total nonperforming assets		$	14,569			$	4,177			$	3,853			$	4,372			$	4,276
Nonperforming loans to gross loans			1.40	%			0.44	%			0.40	%			0.45	%			0.47	%
Nonperforming assets to total assets			0.99	%			0.32	%			0.29	%			0.34	%			0.34	%

TABLE 12
UNAUDITED CONSOLIDATED
BALANCE SHEET
(amounts in thousands, except per share data)
		At March 31,								Change							At December 31,
		2019				2018				$				%			2018
Assets:
Cash and due from banks		$	32,104			$	16,247			$	15,857			98	%		$	23,692
Interest-bearing deposits in other banks			30,425				17,376				13,049			75	%			23,673
Total cash and cash equivalents			62,529				33,623				28,906			86	%			47,365
Securities available-for-sale, at fair value			294,117				255,917				38,200			15	%			256,928
Loans, net of deferred fees and costs			1,036,598				902,133				134,465			15	%			948,178
Allowance for loan and lease losses			(12,242	)			(12,295	)			53			—	%			(12,292	)
Net loans			1,024,356				889,838				134,518			15	%			935,886
Premises and equipment, net			15,391				14,214				1,177			8	%			13,119
Other real estate owned			34				60				(26	)		(43	)%			31
Life insurance			23,294				22,027				1,267			6	%			22,410
Deferred tax asset, net			6,072				7,523				(1,451	)		(19	)%			7,039
Goodwill and core deposit intangible, net			17,094				1,975				15,119			766	%			1,841
Other assets			28,604				20,398				8,206			40	%			22,485
Total assets		$	1,471,491			$	1,245,575			$	225,916			18	%		$	1,307,104
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	385,696			$	301,981			$	83,715			28	%		$	347,199
Demand - interest-bearing			241,292				229,681				11,611			5	%			252,202
Money market			311,853				232,870				78,983			34	%			265,093
Savings			139,237				107,986				31,251			29	%			114,840
Certificates of deposit			170,216				176,233				(6,017	)		(3	)%			152,382
Total deposits			1,248,294				1,048,751				199,543			19	%			1,131,716
Term debt:
Federal Home Loan Bank of San Francisco borrowings			20,000				30,000				(10,000	)		(33	)%			—
Other borrowings			12,596				16,196				(3,600	)		(22	)%			13,496
Unamortized debt issuance costs			(79	)			(127	)			48			(38	)%			(91	)
Net term debt			32,517				46,069				(13,552	)		(29	)%			13,405
Junior subordinated debentures			10,310				10,310				—			—	%			10,310
Other liabilities			18,272				12,723				5,549			44	%			13,352
Total liabilities			1,309,393				1,117,853				191,540			17	%			1,168,783
Shareholders' equity:
Common stock			71,966				51,959				20,007			39	%			52,284
Retained earnings			90,626				78,507				12,119			15	%			89,045
Accumulated other comprehensive loss, net of tax			(494	)			(2,744	)			2,250			(82	)%			(3,008	)
Total shareholders' equity			162,098				127,722				34,376			27	%			138,321
Total liabilities and shareholders' equity		$	1,471,491			$	1,245,575			$	225,916			18	%		$	1,307,104
Total interest-earning assets		$	1,361,841			$	1,179,321			$	182,520			15	%		$	1,233,049
Shares outstanding			18,213				16,315				1,898			12	%			16,334
Book value per share		$	8.90			$	7.83			$	1.07			14	%		$	8.47
Tangible book value per share (1)		$	7.96			$	7.71			$	0.25			3	%		$	8.36
(1) Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

TABLE 13
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
		For The Three Months Ended
		March 31,								Change							December 31,
		2019				2018				$				%			2018
Interest income:
Interest and fees on loans		$	12,031			$	10,729			$	1,302			12	%		$	11,494
Interest on taxable securities			1,764				1,209				555			46	%			1,469
Interest on tax-exempt securities			387				463				(76	)		(16	)%			353
Interest on interest-bearing deposits in other banks			245				129				116			90	%			434
Total interest income			14,427				12,530				1,897			15	%			13,750
Interest expense:
Interest on demand deposits			126				89				37			42	%			141
Interest on money market accounts			289				132				157			119	%			207
Interest on savings deposits			111				59				52			88	%			92
Interest on certificates of deposit			490				495				(5	)		(1	)%			462
Interest on Federal Home Loan Bank of San Francisco borrowings			55				47				8			17	%			—
Interest on other borrowings			239				281				(42	)		(15	)%			252
Interest on junior subordinated debentures			113				82				31			38	%			102
Total interest expense			1,423				1,185				238			20	%			1,256
Net interest income			13,004				11,345				1,659			15	%			12,494
Provision for loan and lease losses			—				—				—			—	%			—
Net interest income after provision for loan and lease losses			13,004				11,345				1,659			15	%			12,494
Noninterest income:
Service charges on deposit accounts			168				176				(8	)		(5	)%			161
ATM and point of sale fees			265				266				(1	)		—	%			283
Fees on payroll and benefit processing			171				169				2			1	%			178
Life insurance			129				129				—			—	%			128
Gain on investment securities, net			92				36				56			156	%			3
Federal Home Loan Bank of San Francisco dividends			121				80				41			51	%			201
Gain on sale of OREO			23				16				7			44	%			64
Other income			88				110				(22	)		(20	)%			114
Total noninterest income			1,057				982				75			8	%			1,132

TABLE 13 - CONTINUED
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
		For The Three Months Ended
		March 31,								Change							December 31,
		2019				2018				$				%			2018
Noninterest expense:
Salaries and related benefits			5,729				4,855				874			18	%			4,812
Premises and equipment			992				1,071				(79	)		(7	)%			943
Federal Deposit Insurance Corporation insurance premium			100				96				4			4	%			93
Data processing fees			559				432				127			29	%			512
Professional service fees			303				345				(42	)		(12	)%			436
Telecommunications			173				216				(43	)		(20	)%			145
Acquisition			1,930				—				1,930			100	%			802
Other expenses			1,137				1,018				119			12	%			1,125
Total noninterest expense			10,923				8,033				2,890			36	%			8,868
Income before provision for income taxes			3,138				4,294				(1,156	)		(27	)%			4,758
Provision for income taxes:
Reversal of uncertain tax position			—				—				—			—	%			(988	)
Benefit from cost segregation study and tangible property review			—				—				—			—	%			(484	)
Provision for income taxes from operations			832				1,053				(221	)		(21	)%			1,391
Total provision for income taxes			832				1,053				(221	)		(21	)%			(81	)
Net income		$	2,306			$	3,241			$	(935	)		(29	)%		$	4,839
Basic earnings per share		$	0.13			$	0.20			$	(0.07	)		(35	)%		$	0.30
Average basic shares			17,489				16,225				1,264			8	%			16,265
Diluted earnings per share		$	0.13			$	0.20			$	(0.07	)		(35	)%		$	0.30
Average diluted shares			17,552				16,310				1,242			8	%			16,345

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,
		2019				2018				2018				2018				2018
Earning assets:
Loans		$	993,261			$	923,409			$	930,863			$	922,687			$	883,876
Taxable securities			253,068				218,137				199,883				206,247				205,302
Tax exempt securities			50,454				42,868				48,561				50,306				59,789
Interest-bearing deposits in other banks			40,223				75,295				50,397				29,041				32,915
Total earning assets			1,337,006				1,259,709				1,229,704				1,208,281				1,181,882
Cash and due from banks			21,392				22,447				21,834				19,880				17,641
Premises and equipment, net			14,581				13,331				13,768				14,167				14,557
Goodwill and core deposit intangible, net			11,872				1,842				1,888				1,943				1,998
Other assets			41,009				31,488				33,084				32,426				32,485
Total assets		$	1,425,860			$	1,328,817			$	1,300,278			$	1,276,697			$	1,248,563
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	388,410			$	367,457			$	343,948			$	309,199			$	307,397
Demand - interest-bearing			243,376				257,227				235,664				225,927				234,269
Money market accounts			293,396				265,190				259,242				241,724				236,171
Savings			131,081				110,934				107,349				107,108				110,725
Certificates of deposit			167,463				157,035				163,302				170,824				181,901
Total deposits			1,223,726				1,157,843				1,109,505				1,054,782				1,070,463
Federal Home Loan Bank of San Francisco borrowings			8,778				—				22,283				55,275				12,444
Other borrowings net of unamortized debt issuance costs			12,889				13,785				14,681				15,614				16,528
Junior subordinated debentures			10,310				10,310				10,310				10,310				10,310
Other liabilities			17,452				12,846				12,000				12,535				11,749
Total liabilities			1,273,155				1,194,784				1,168,779				1,148,516				1,121,494
Shareholders' equity			152,705				134,033				131,499				128,181				127,069
Liabilities & shareholders' equity		$	1,425,860			$	1,328,817			$	1,300,278			$	1,276,697			$	1,248,563

TABLE 15
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,
		2019				2018				2018				2017				2016
Earning assets:
Loans		$	993,261			$	883,876			$	915,360			$	818,119			$	752,938
Taxable securities			253,068				205,302				207,407				165,333				120,884
Tax exempt securities			50,454				59,789				50,330				74,231				75,303
Interest-bearing deposits in other banks			40,223				32,915				47,038				66,872				58,668
Total earning assets			1,337,006				1,181,882				1,220,135				1,124,555				1,007,793
Cash and due from banks			21,392				17,641				20,468				18,301				15,831
Premises and equipment, net			14,581				14,557				13,952				15,567				15,078
Goodwill and core deposit intangible, net			11,872				1,998				1,917				2,136				1,888
Other assets			41,009				32,485				32,369				37,692				39,160
Total assets		$	1,425,860			$	1,248,563			$	1,288,841			$	1,198,251			$	1,079,750
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	388,410			$	307,397			$	332,197			$	289,735			$	226,368
Demand - interest-bearing			243,376				234,269				238,328				209,792				172,011
Money market accounts			293,396				236,171				250,685				224,913				202,159
Savings			131,081				110,725				109,025				111,376				104,771
Certificates of deposit			167,463				181,901				168,183				205,648				221,074
Total deposits			1,223,726				1,070,463				1,098,418				1,041,464				926,383
Federal Home Loan Bank of San Francisco borrowings			8,778				12,444				22,466				302				17,856
Other borrowings net of unamortized debt issuance costs			12,889				16,528				15,143				17,981				19,430
Junior subordinated debentures			10,310				10,310				10,310				10,310				10,310
Other liabilities			17,452				11,749				12,286				12,293				13,217
Total liabilities			1,273,155				1,121,494				1,158,623				1,082,350				987,196
Shareholders' equity			152,705				127,069				130,218				115,901				92,554
Liabilities & shareholders' equity		$	1,425,860			$	1,248,563			$	1,288,841			$	1,198,251			$	1,079,750

About Bank of Commerce Holdings

Bank of Commerce Holdings is a bank holding company headquartered in Sacramento, California and is the parent company for Redding Bank of Commerce which operates under three separate names (Redding Bank of Commerce; Sacramento Bank of Commerce, a division of Redding Bank of Commerce; and The Merchants Bank of Sacramento, a division of Redding Bank of Commerce). As previously announced, the Bank will change its name for all operations to Merchants Bank of Commerce effective May 20, 2019. The Bank is an FDIC-insured California banking corporation providing community banking and financial services through twelve locations in northern California. The Bank was incorporated as a California banking corporation on November 25, 1981 and opened for business on October 22, 1982. The Company’s common stock is listed on the NASDAQ Global Market and trades under the symbol “BOCH”.

Contact Information:

Randall S. Eslick, President and Chief Executive OfficerTelephone Direct [phone]

James A. Sundquist, Executive Vice President and Chief Financial OfficerTelephone Direct [phone]

Samuel D. Jimenez, Executive Vice President and Chief Operating OfficerTelephone Direct [phone]

Andrea M. Newburn, Vice President and Senior Administrative Officer / Corporate SecretaryTelephone Direct [phone]