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Bank of Commerce Holdings Announces Results for the Third Quarter of 2017

SACRAMENTO, Calif., Oct. 20, 2017 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (BOCH) (the “Company”), a $1.2 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, 2017. Net income for the quarter ended September 30, 2017 was $2.9 million or $0.18 per share – diluted, compared with net income of $2.4 million or $0.18 per share – diluted for the same period of 2016. Net income for the nine months ended September 30, 2017 was $7.3 million or $0.49 per share – diluted compared with $3.0 million or $0.22 per share – diluted for the same period of 2016. Earnings per share (EPS) and Return on Average Equity (ROAE) calculations for 2017 reflect the Company’s issuance of 2,738,096 shares ($26.8 million) in its May 2017 public offering.

Financial highlights for the third quarter of 2017:

  • Net income of $2.9 million or $0.18 per share – diluted for the three months ended September 30, 2017 was an increase of $510 thousand (22%) from $2.4 million or $0.18 per share – diluted earned during the same period in the prior year.
  • Return on average assets improved to 0.93% for the third quarter of 2017 compared to 0.86% for the same period in the prior year.
  • Return on average equity declined to 9.01% for the third quarter of 2017 compared to 10.10% for the same period in the prior year.
  • The Company’s efficiency ratio was 62.8% for the third quarter of 2017 compared to 69.6% during the same period in 2016.
  • Net interest income increased $1.3 million (14%) to $10.6 million for the third quarter of 2017 compared to $9.3 million for the same period in the prior year.
  • Average deposits for the three months ended September 30, 2017 totaled $1.1 billion, an increase of $38.8 million (15% annualized) compared to average deposits for the prior quarter.
  • Average loans for the three months ended September 30, 2017 totaled $805.1 million, a decrease of $16.2 million (8% annualized) compared to average loans for the prior quarter.
  • Average earning assets for the three months ended September 30, 2017 totaled $1.1 billion, an increase of $48.5 million (18% annualized) compared to average earning assets for the prior quarter.
  • Nonperforming assets at September 30, 2017 totaled $8.3 million or 0.67% of total assets, a decrease of $2.4 million (89% annualized) since June 30, 2017.
  • Tangible book value per common share was $7.77 at September 30, 2017 compared to $7.61 at June 30, 2017.

Financial highlights for the nine months ended September 30, 2017:

  • Net income of $7.3 million or $0.49 per share – diluted for the nine months ended September 30, 2017 was an increase of $4.4 million (148%) from $3.0 million or $0.22 per share – diluted earned during the same period in the prior year. Net income for 2016 was negatively impacted by $3.0 million of branch acquisition and balance sheet restructuring costs, a $546 thousand other-than-temporary-impairment of an investment security and the write-off of a $363 thousand deferred tax asset.
  • Return on average assets improved to 0.83% for the nine months ended September 30, 2017 compared to 0.37% for the same period in the prior year.
  • Return on average equity improved to 8.80% for the nine months ended September 30, 2017 compared to 4.30% for the same period in the prior year.
  • The Company’s efficiency ratio was 67.8% for the nine months ended September 30, 2017 compared to 85.1% during the same period in the prior year.
  • Net interest income increased $3.7 million (14%) to $30.5 million for the nine months ended September 30, 2017 compared to $26.8 million for the same period in the prior year.
  • Average deposits for the nine months ended September 30, 2017 totaled $1.0 billion, an increase of $122.3 million (14%) compared to average deposits for the same period in the prior year.
  • Average loans for the nine months ended September 30, 2017 totaled $811.1 million, an increase of $66.7 million (9%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.1 billion for the nine months ended September 30, 2017, an increase of $113.4 million (11%) compared to average earning assets for the same period in the prior year.
  • Nonperforming assets at September 30, 2017 totaled $8.3 million or 0.67% of total assets, a decrease of $3.8 million (42% annualized) compared to December 31, 2016.

Randall S. Eslick, President and CEO commented: “We are very pleased to report that the period ended September 30, 2017 was our most profitable quarter. The hard work of our dedicated employees is reflected in our performance metrics, including the solid return on average assets, continued growth in core deposits, reduced reliance on time deposits, improved asset quality and the noticeably improved efficiency ratio.”

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, 2016 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   For The Nine Months Ended  
Net income, average assets and   September 30,     June 30,   September 30,  
average shareholders' equity   2017     2016     2017   2017   2016  
Net income   $  2,876     $  2,366     $  2,209     $  7,337   $  2,962  
Average total assets   $  1,220,900     $  1,093,918     $  1,170,447     $  1,180,150   $  1,064,210  
Average total earning assets   $  1,146,132     $  1,019,230     $  1,097,644     $  1,106,532   $  993,156  
Average shareholders' equity   $  126,574     $  93,238     $  112,855     $  111,533   $  91,959  
                                       
Selected performance ratios                                      
Return on average assets     0.93 %     0.86 %     0.76 %     0.83 %   0.37 %
Return on average equity     9.01 %     10.10 %     7.85 %     8.80 %   4.30 %
Efficiency ratio     62.84 %     69.61 %     69.13 %     67.77 %   85.08 %
                                       
Share and per share amounts                                      
Weighted average shares - basic      16,191        13,369        15,014        14,884      13,366  
Weighted average shares - diluted      16,288        13,439        15,113        14,984      13,412  
Earnings per share - basic   $  0.18     $  0.18     $  0.15     $  0.49   $  0.22  
Earnings per share - diluted   $  0.18     $  0.18     $  0.15     $  0.49   $  0.22  
                                       
    At September 30,     At June 30,      
Share and per share amounts   2017   2016   2017          
Common shares outstanding (1)      16,265        13,439        16,260                
Tangible book value per common share   $  7.77     $  6.84     $  7.61                
                                       
Capital ratios                                    
Bank of Commerce Holdings (2)                                    
Common equity tier 1 capital ratio (3)     12.66 %     9.60 %     12.55 %              
Tier 1 capital ratio (3)     13.65 %     10.65 %     13.56 %              
Total capital ratio (3)     15.91 %     12.96 %     15.83 %              
Tier 1 leverage ratio (3)     11.12 %     9.28 %     11.38 %              
Tangible common equity ratio     10.27 %     8.30 %     10.23 %              
                                       
Redding Bank of Commerce                                      
Common equity tier 1 capital ratio (3)     12.87 %     12.62 %     12.66 %              
Tier 1 capital ratio (3)     12.87 %     12.62 %     12.66 %              
Total capital ratio (3)     14.12 %     13.87 %     13.91 %              
Tier 1 leverage ratio (3)     10.50 %     11.03 %     10.64 %              
(1) Includes unvested restricted shares issued in accordance with the Company's equity incentive plan.
(2) Capital Ratios for the Company include the benefit of $26.8 million net proceeds from the sale of 2,738,096 shares of common stock in the second quarter of 2017.
(3) The Company and the Bank continue to meet all capital adequacy requirements to which they are subject. The capital ratios for 2016 were impacted by increased average total assets, the addition of $1.8 million of core deposit intangible 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, 2017, the Company had total consolidated assets of $1.2 billion, gross loans of $824.9 million, allowance for loan and lease losses (“ALLL”) of $11.7 million, total deposits of $1.1 billion, and shareholders’ equity of $128.4 million.

                                               
TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(amounts in thousands)
  At September 30,             At June 30,
      % of       % of   Change       % of
  2017   Total   2016   Total   Amount   %   2017   Total
Commercial $  147,212     18 %   $  136,235     17 %   $  10,977      8   %   $  152,204     19 %
Real estate - construction and land development    14,700     2        31,225     4        (16,525 )    (53 ) %      22,275     3  
Real estate - commercial non-owner occupied    333,766     40        283,668     36        50,098      18   %      310,995     38  
Real estate - commercial owner occupied    183,424     22        175,923     23        7,501      4   %      184,868     23  
Real estate - residential - ITIN    42,063     5        46,458     6        (4,395 )    (9 ) %      43,229     5  
Real estate - residential - 1-4 family mortgage    21,119     3        16,665     2        4,454      27   %      18,904     2  
Real estate - residential - equity lines    31,158     4        36,468     5        (5,310 )    (15 ) %      32,133     4  
Consumer and other    51,432     6        52,377     7        (945 )    (2 ) %      50,780     6  
Gross loans    824,874     100 %      779,019     100 %      45,855      6   %      815,388     100 %
Deferred fees and costs    1,770              1,155              615              1,541        
Loans, net of deferred fees and costs    826,644              780,174              46,470              816,929        
Allowance for loan and lease losses    (11,692 )            (11,849 )            157              (11,688 )      
Net loans $  814,952           $  768,325           $  46,627           $  805,241        
                                               
Average yield on loans during the quarter   4.87 %           4.66 %            0.21             4.77 %      

The Company recorded gross loan balances of $824.9 million at September 30, 2017, compared with $779.0 million and $815.4 million at September 30, 2016 and June 30, 2017, respectively, an increase of $45.9 million and $9.5 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 and is the result of investments in our SBA division and in our expanded Sacramento commercial banking group.

Average loan balances were $805.1 million for the quarter ended September 30, 2017, compared with $769.4 million and $821.3 million for the quarters ended September 30, 2016 and June 30,2017, respectively, an increase of $35.8 million or 5% and a decrease of $16.2 million or 8% annualized, respectively.

The average yield on loans during the quarter was 4.87% compared to 4.66% and 4.77% for the quarters ended September 30, 2016 and June 30, 2017, respectively.  The current quarter yield includes $161 thousand of interest income related to a nonaccrual loan that was repaid during the quarter.

                                                 
TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(amounts in thousands)
    At September 30,               At June 30,
        % of       % of   Change       % of
    2017   Total   2016   Total   Amount   %   2017   Total
                                                 
Cash and due from banks   $  19,929     6 %   $  19,699     7 %   $  230      1   %   $  23,420     7 %
Interest-bearing deposits in other banks      65,702     19        65,431     24        271      —   %      73,434     22  
Total cash and cash equivalents      85,631     25        85,130     31        501      1   %      96,854     29  
                                                 
Investment securities:                                                
U.S. government and agencies      36,474     10        5,527     2        30,947      560   %      24,231     7  
Obligations of state and political subdivisions      53,850     15        59,952     22        (6,102 )    (10 ) %      58,400     17  
Residential mortgage backed securities and
collateralized mortgage obligations
     105,224     31        54,046     20        51,178      95   %      91,375     28  
Corporate securities      6,968     2        16,346     6        (9,378 )    (57 ) %      8,312     2  
Commercial mortgage backed securities      26,148     7        16,254     6        9,894      61   %      23,421     7  
Other asset backed securities      3,830     1        4,315     2        (485 )    (11 ) %      3,870     1  
Total investment securities - AFS      232,494     66        156,440     58        76,054      49   %      209,609     62  
                                                 
Obligations of state and political
subdivisions - HTM
     30,724     9        31,771     11        (1,047 )    (3 ) %      31,329     9  
Total investment securities - AFS
and HTM
     263,218     75        188,211     69        75,007      40   %      240,938     71  
Total cash, cash equivalents and
investment securities
  $  348,849     100 %   $  273,341     100 %   $  75,508      28   %   $  337,792     100 %
Average yield on interest-bearing due
from banks and investment securities
during the quarter
    2.19 %           2.11 %            0.08             2.27 %      

As of September 30, 2017, we maintained noninterest-bearing cash positions of $19.9 million and interest-bearing deposits of $65.7 million at the Federal Reserve Bank and correspondent banks. During the third quarter of 2017, we deployed liquidity provided by the sale of common stock and strong organic deposit growth into organic loan originations, available-for-sale securities and interest-bearing deposits at other banks.

Available-for-sale investment securities totaled $232.5 million at September 30, 2017, compared with $156.4 million and $209.6 million at September 30, 2016 and June 30, 2017, respectively. Our available-for-sale investment portfolio provides us with a secondary source of liquidity to fund higher yielding asset opportunities, such as loan originations. During the third quarter of 2017, we purchased 31 securities with a par value of $49.3 million and weighted average yield of 2.55% and sold 19 securities with a par value of $19.8 million and weighted average yield of 2.02%. The sales activity on available-for-sale securities resulted in $38 thousand in net realized gains. During the same period, we received $6.8 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, 2017 and 2016 were $256.7 million and 2.91% compared to $188.5 million and 3.22%, respectively.

At September 30, 2017, our net unrealized gains on available-for-sale investment securities were $630 thousand compared with net unrealized gains of $2.3 million and $682 thousand at September 30, 2016 and June 30, 2017, respectively. The decrease in net unrealized gains from September 30, 2016 is primarily due to significant changes in market interest rates.

                                               
TABLE 4
DEPOSITS BY TYPE - UNAUDITED
(amounts in thousands)
  At September 30,               At June 30,
      % of       % of     Change       % of
  2017   Total   2016   Total   Amount   %   2017   Total
Demand - noninterest-bearing $  316,814     30 %   $  254,435     26 %   $  62,379     25   %   $  303,560     29 %
Demand - interest-bearing    433,466     41        394,525     40        38,941     10   %      426,798     41  
Total demand    750,280     71        648,960     66        101,320     16   %      730,358     70  
                                               
Savings    111,962     11        110,201     11        1,761     2   %      109,472     10  
Total non-maturing deposits    862,242     82        759,161     77        103,081     14   %      839,830     80  
                                               
Certificates of deposit    200,543     18        216,332     23        (15,789 )   (7 ) %      206,395     20  
Total deposits $  1,062,785     100 %   $  975,493     100 %   $  87,292     9   %   $  1,046,225     100 %
                                               
Average rate on interest-bearing
deposits during the quarter
  0.43 %           0.39 %            0.04             0.42 %      
Average rate on all
deposits during the quarter
  0.31 %           0.29 %            0.02             0.31 %      

Total deposits at September 30, 2017, increased $87.3 million or 9% to $1.1 billion compared to September 30, 2016, and increased $16.6 million or 6% annualized compared to June 30, 2017. Total non-maturing deposits increased $103.1 million or 14% compared to the same date a year ago and increased $22.4 million or 11% annualized compared to June 30, 2017. Certificates of deposit decreased $15.8 million or 7% compared to the same date a year ago and decreased $5.9 million or 11% annualized compared to June 30, 2017.

                     
TABLE 5
WHOLESALE AND BROKERED DEPOSITS - UNAUDITED
(amounts in thousands)
  At September 30,   At June 30,
  2017   2016   2017
CDARS / ICS reciprocal brokered deposits $  56,203   $  59,502   $  56,803
Online listing service wholesale time deposits                         37,293      52,456      42,709
Total wholesale and brokered deposits $  93,496   $  111,958   $  99,512

In accordance with regulatory Call Report instructions, the Bank will file (or has filed) quarterly Call Reports which list brokered deposits of $56.2 million, $59.5 million and $56.8 million at September 30, 2017, September 30, 2016 and June 30, 2017, 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
  2017   2016   Amount   %   2017   Amount   %
Interest income $  11,765   $  10,330   $  1,435   14 %   $  11,320   $  445     4   %
Interest expense    1,181      1,054      127   12 %      1,145      36     3   %
Net interest income    10,584      9,276      1,308   14 %      10,175      409     4   %
Provision for loan
and lease losses
   —      —      —    — %      300      (300 )    (100 ) %
Noninterest income    995      959      36   4 %      983      12     1   %
Noninterest expense:                                        
Other noninterest expense         7,276      7,125      151   2 %      7,714      (438 )   (6 ) %
Income before provision
for income taxes
   4,303      3,110      1,193   38 %      3,144      1,159     37   %
Provision for income taxes    1,427      744      683   92 %      935      492     53   %
Net income $  2,876   $  2,366   $  510   22 %   $  2,209   $  667     30   %
                                         
Basic earnings per share $  0.18   $  0.18   $  —    — %   $  0.15   $  0.03      20   %
Average basic shares    16,191      13,369      2,822    21 %      15,014      1,177      8   %
Diluted earnings per share $  0.18   $  0.18   $  —    — %   $  0.15   $  0.03      20   %
Average diluted shares    16,288      13,439      2,849    21 %      15,113      1,175      8   %
Dividends declared per
common share
$  0.03   $  0.03   $  —    — %   $  0.03   $  —      —   %

Third Quarter of 2017 Compared With Third Quarter of 2016

Net income for the third quarter of 2017 increased $510 thousand compared to the third quarter of 2016. In the current quarter, net interest income was $1.3 million higher and noninterest income was $36 thousand higher. These positive changes were offset by noninterest expense that was $151 thousand higher and a provision for income taxes that was $683 thousand higher.

Net Interest Income

Net interest income increased $1.3 million compared to the same period a year ago.

Interest income for the three months ended September 30, 2017 increased $1.4 million or 14% to $11.8 million. Interest and fees on loans increased $880 thousand due to increased average loan balances and increased yield on the loan portfolio. Interest on securities increased $359 thousand and interest on interest-bearing deposits due from banks increased $196 thousand.

Interest expense for the third quarter of 2017 increased $127 thousand or 12% to $1.2 million. The increase was primarily caused by an increase in the average rate paid on interest-bearing deposits.

Provision for loan and lease loss

During the three months ended September 30, 2017 and the same period a year ago, the Company did not record a provision for loan and lease losses.

Noninterest Income

Noninterest income for the three months ended September 30, 2017 increased $36 thousand compared to the third quarter for 2016. Increased fee income of $86 thousand was offset by decreases in gain on sale of securities of $32 thousand and FHLB dividends of $22 thousand.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2017 increased $151 thousand compared to the same period a year previous. The increase in noninterest expense included the following negative items:

  • Employee incentive costs increased $139 thousand
  • Other compensation-related costs increased $175 thousand
  • Loan origination cost deferrals decreased $105 thousand

These increases were partially offset by the following positive items:

  • FDIC insurance costs decreased $97 thousand
  • Recruiting costs decreased $80 thousand

Income Tax Provision

During the three months ended September 30, 2017, the Company recorded a provision for income taxes of $1.4 million (33.2% effective tax rate) compared with a provision for income taxes of $744 thousand (23.92% effective tax rate) for the same period a year ago. The Company’s effective tax rate has increased as muni income, tax credits and permanent deductions arising from investments in low income housing partnerships in 2017 comprise a smaller percentage of pre-tax income.

Third Quarter of 2017 Compared With Second Quarter of 2017

Net income for the third quarter of 2017 increased $667 thousand compared to the second quarter of 2017. In the current quarter, net interest income was $409 thousand higher, provision for loan and lease losses was $300 thousand lower, noninterest income was $12 thousand higher and noninterest expenses were $438 thousand lower. These positive changes were offset by a provision for income taxes that was $492 thousand higher.

Net Interest Income

Net interest income increased $409 thousand over the prior quarter.

Interest income for the three months ended September 30, 2017 increased $445 thousand or 4% to $11.8 million. Interest and fees on loans increased $129 thousand due to increased yields. Interest on investment securities increased $194 thousand due to increased average balances. Interest on interest-bearing deposits due from banks increased $122 thousand due to increased average balances and increased yields.

Interest expense for the three months ended September 30, 2017 increased $36 thousand or 3% to $1.2 million. The average rate paid on interest-bearing deposits increased from 42 basis points to 43 basis points. The average rate paid on all liabilities was 60 basis points for both the current quarter and the prior quarter.

Provision for loan and lease loss

As a result of continued improved asset quality, no provision for loan and lease losses was deemed necessary during the current quarter compared with a provision for loan and lease losses of $300 thousand for the prior quarter.

Noninterest Income

Noninterest income for the three months ended September 30, 2017 increased $12 thousand. During the current quarter, dividends on Federal Home Loan Bank of San Francisco stock increased $26 thousand.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2017 decreased $438 thousand compared to the second quarter of 2017. The decrease in noninterest expense included the following items:

  • Termination and write-off of a software development project - $97 thousand
  • Holding costs and write-downs for other real estate owned - $86 thousand
  • Legal fees - $57 thousand
  • Recruiting costs - $34 thousand

Income Tax Provision

During the three months ended September 30, 2017, we recorded a provision for income taxes of $1.4 million (33.16% of pretax income) compared with a provision for income taxes of $935 thousand (29.74% of pretax income) for the prior quarter. Tax benefits from vesting of restricted stock were $2 thousand in the current quarter compared to $45 thousand in the prior quarter. Excluding those benefits, the Company’s effective tax rates would have been 33.21% and 31.17%, respectively.

Earnings Per Share

Diluted earnings per share were $0.18 for the three months ended September 30, 2017 compared with diluted earnings per share of $0.18 for the same period a year ago and diluted earnings per share of $0.15 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in table 6 above.

                                                       
TABLE 7a
NET INTEREST MARGIN - UNAUDITED
(amounts in thousands)
    For The Three Months Ended
    September 30, 2017   September 30, 2016   June 30, 2017
    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)   $  805,144   $  9,887    4.87 %   $  769,354   $  9,007    4.66 %   $  821,321   $  9,758    4.77 %
Taxable securities      179,362      1,049    2.32 %      114,578      689    2.39 %      143,705      872    2.43 %
Tax-exempt securities      77,303      551    2.83 %      73,952      552    2.97 %      73,927      534    2.90 %
Interest-bearing deposits
in other banks
     84,323      278    1.31 %      61,346      82    0.53 %      58,691      156    1.07 %
Average interest-
earning assets
     1,146,132      11,765    4.07 %      1,019,230      10,330    4.03 %      1,097,644      11,320    4.14 %
Cash and due from banks      19,143                  17,018                  17,364            
Premises and equipment, net      15,362                  15,941                  15,809            
Other assets      40,263                  41,729                  39,630            
Average total assets   $  1,220,900               $  1,093,918               $  1,170,447            
                                                       
Interest-bearing liabilities:                                                      
Interest-bearing demand   $  436,614      196    0.18 %   $  390,895      136    0.14 %   $  421,888      184    0.17 %
Savings deposits      110,305      52    0.19 %      107,210      43    0.16 %      109,857      47    0.17 %
Certificates of deposit      204,044      567    1.10 %      221,078      524    0.94 %      208,703      545    1.05 %
Net term debt      17,804      292    6.51 %      19,610      292    5.92 %      19,539      298    6.12 %
Junior subordinated
debentures
     10,310      74    2.85 %      10,310      59    2.28 %      10,310      71    2.76 %
Average interest-
bearing liabilities
     779,077      1,181    0.60 %      749,103      1,054    0.56 %      770,297      1,145    0.60 %
Noninterest-bearing demand      303,314                  240,418                  275,039            
Other liabilities      11,935                  11,159                  12,256            
Shareholders’ equity      126,574                  93,238                  112,855            
Average liabilities and
shareholders’ equity
  $  1,220,900               $  1,093,918               $  1,170,447            
Net interest income and
net interest margin (4)
        $  10,584    3.66 %         $  9,276    3.62 %         $  10,175    3.72 %
Tax equivalent net
  interest margin (3)
               3.76 %                3.73 %                3.82 %
(1) Interest income on loans is net of deferred fees and costs of approximately $95 thousand, $289 thousand, and $131 thousand for the three months ended September 30, 2017, and 2016 and June 30, 2017, respectively.
(2) Net loans includes average nonaccrual loans of $8.6 million, $10.5 million and $9.8 million for the three months ended September 30, 2017 and 2016 and June 30, 2017, respectively.
(3) Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $284 thousand, $284 thousand and $275 thousand for the three months ended September 30, 2017 and 2016 and June 30, 2017, respectively.
(4) Net interest margin is 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 7b  
NET INTEREST MARGIN - UNAUDITED  
(amounts in thousands)  
    For The Nine Months Ended  
    September 30, 2017   September 30, 2016  
    Average         Yield /   Average         Yield /  
(Amounts in thousands)   Balance   Interest(1)   Rate (5)   Balance   Interest(1)   Rate (5)  
Interest-earning assets:                                      
Net loans (2)   $  811,080   $  29,029    4.79 %   $  744,370   $  26,254    4.71 %  
Taxable securities      153,702      2,710    2.36 %      119,541      2,281    2.55 %  
Tax-exempt securities      74,932      1,615    2.88 %      76,315      1,734    3.04 %  
Interest-bearing deposits
in other banks
     66,818      548    1.10 %      52,930      222    0.56 %  
Average interest-
earning assets
     1,106,532      33,902    4.10 %      993,156      30,491    4.10 %  
Cash and due from banks      17,802                  15,455              
Premises and equipment, net      15,776                  14,657              
Other assets      40,040                  40,942              
Average total assets   $  1,180,150               $  1,064,210              
                                       
Interest-bearing liabilities:                                      
Interest-bearing demand   $  426,365      528    0.17 %   $  365,917      388    0.14 %  
Savings deposits      111,258      146    0.18 %      102,427      129    0.17 %  
Certificates of deposit      209,275      1,641    1.05 %      222,286      1,636    0.98 %  
Net term debt      18,644      883    6.33 %      43,435      1,369    4.21 %  
Junior subordinated
debentures
     10,310      211    2.74 %      10,310      172    2.23 %  
Average interest-
bearing liabilities
     775,852      3,409    0.59 %      744,375      3,694    0.66 %  
Noninterest-bearing demand      280,559                  214,540              
Other liabilities      12,206                  13,336              
Shareholders’ equity      111,533                  91,959              
Average liabilities and
shareholders’ equity
  $  1,180,150               $  1,064,210              
Net interest income and
net interest margin (4)
        $  30,493    3.68 %         $  26,797    3.60 %  
Tax equivalent net
  interest margin (3)
               3.78 %                3.72 %  
(1) Interest income on loans is net of deferred fees and costs of approximately $423 thousand and $956 thousand for the nine months ended September 30, 2017 and 2016, respectively.
(2) Net loans includes average nonaccrual loans of $9.7 million and $10.7 million for the nine months ended September 30, 2017 and 2016, respectively.
(3) Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $832 thousand and $893 thousand for the nine months ended September 30, 2017 and 2016, respectively.
(4) Net interest margin is 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.

The current quarter net interest margin decreased six basis points to 3.66% as compared to the prior quarter due to decreased yields on average interest-earning assets. The decreased yields on average interest-earning assets was due to maturities and repayments on loans being invested at lower rates in the securities portfolio and interest-bearing deposits in other banks.  Increases in average interest-earning assets were funded by increases in low cost demand deposits and increases in equity from the sale of common stock during the previous quarter.

The net interest margin was 3.66% for the current quarter compared to 3.62% for the same period a year ago. The increase was due to increased yield on the loan portfolio and increased yield on interest-bearing deposits in other banks. The increase was partially offset by decreased yield in the investment portfolio and an increase in the average rate paid on interest-bearing deposits.

Average deposit balances for the current quarter increased $38.8 million and $94.7 million compared to the prior quarter and the same period a year ago, respectively. The increase in average deposits was due to organic growth in core deposits. Our overall cost of total deposits was 0.31% for the quarter ended September 30, 2017 compared to 0.29% for the same period a year ago and 0.31% 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,
  2017   2017   2017   2016   2016
Beginning balance ALLL $  11,688       $  11,641       $  11,544       $  11,849       $  11,864    
Provision for loan and lease losses    —          300          200          —          —    
Loans charged-off    (245 )        (359 )        (447 )        (386 )        (357 )  
Loan loss recoveries    249          106          344          81          342    
Ending balance ALLL $  11,692       $  11,688       $  11,641       $  11,544       $  11,849    
                                       
  At September 30,   At June 30,   At March 31,   At December 31,   At September 30,
  2017   2017   2017   2016   2016
Nonaccrual loans:                                      
Commercial $  2,309       $  2,410       $  2,534       $  2,749       $  1,710    
Real estate - commercial non-owner occupied    —          1,196          1,196