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

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REDDING, Calif., July 22, 2016 (GLOBE NEWSWIRE) -- Randall S. Eslick, President and Chief Executive Officer of Bank of Commerce Holdings (NASDAQ: BOCH) (the "Company"), a $1.1 billion asset bank holding company and parent company of Redding Bank of Commerce (the "Bank"), today announced financial results for the quarter ended June 30, 2016. Net income available to common shareholders for the quarter ended June 30, 2016 was $1.6 million or $0.11 per share – diluted, compared with net income available to common shareholders of $2.3 million or $0.18 per share – diluted for the same period of 2015.

The current quarter is the first full quarter which includes the benefits derived from the acquisition of five Bank of America branches in March 2016 and the reconfiguration of the Company's Balance Sheet using liquidity provided by those branches. Compared against the first quarter of 2016:

  • Net interest income increased $913 thousand (11%)
  • Net interest margin increased from 3.44% to 3.74%
  • Average interest rate paid on all deposits decreased from 37 basis points to 30 basis points

Randall S. Eslick, President and CEO commented: "We are pleased to see that the first quarter reconfiguration of our Balance Sheet has provided the benefits we anticipated. Healthy loan growth has had a very positive impact on interest income.   The elimination of most brokered and wholesale borrowings and the sizeable growth in low cost core deposits have substantially reduced interest expense. We believe our branch acquisition and financial reconfiguration have achieved the planned results."

Unrelated to the branch acquisition, the second quarter results were negatively impacted by the $546 thousand impairment of a bond investment which is described in more detail later in this press release.

Financial highlights for the second quarter of 2016:

  • Net income available to common shareholders totaled $1.6 million
  • Return on average assets was 0.59%
  • Return on average equity was 6.85%
  • Total deposits for the quarter averaged $931.1 million, an increase of $106.9 million from the previous quarter average of $824.2 million
  • Term debt for the quarter averaged $19.5 million, a decrease of $71.9 million from the previous quarter average of $91.4 million
  • Gross loans at June 30, 2016 totaled $754.1 million, an increase of $29.9 million (17% annualized) since March 31, 2016
  • Nonperforming assets at June 30, 2016 totaled $11.7 million or 1.09% of total assets
  • Net loan loss recoveries of $369 thousand combined with continuing improved asset quality resulted in no provision for loan and lease losses
  • Tangible book value per common share was $6.71 at June 30, 2016

Financial highlights for the six months ended June 30, 2016:

  • Net income available to common shareholders totaled $596 thousand
  • Return on average assets was 0.11%
  • Return on average equity was 1.31%
  • Gross loans at June 30, 2016 totaled $754.1 million, an increase of $37.5 million (11% annualized) since December 31, 2015.
  • Nonperforming assets at June 30, 2016 totaled $11.7 million, a decrease of $3.8 million (49% annualized) compared to December 31, 2015

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 Six Months Ended 
Net income, average assets and June 30,   March 31, June 30,  
average shareholders' equity 2016  2015  2016 2016 2015 
Income (loss) available to common shareholders $ 1,556  $ 2,340  $  (960)  $ 596 $ 4,091 
Average total assets $ 1,064,186  $ 993,815  $  1,034,203   $ 1,049,192 $ 986,406 
Average shareholders' equity $ 91,317  $ 106,198  $  91,307   $ 91,312 $ 105,412 
                    
Selected performance ratios                   
Return on average assets  0.59%  0.94%   (0.37)%  0.11% 0.84%
Return on average equity  6.85%  8.84%   (4.23)%  1.31% 7.83%
Efficiency ratio  79.43%  64.61%   108.08 %  93.45% 68.00%
                    
Share and per share amounts                   
Weighted average shares - basic   13,367    13,338     13,360     13,364   13,320 
Weighted average shares - diluted   13,425    13,370     13,360     13,408   13,353 
Earnings (loss) per share - basic $ 0.11  $ 0.18  $  (0.07)  $ 0.04 $ 0.31 
Earnings (loss) per share - diluted $ 0.11  $ 0.18  $  (0.07)  $ 0.04 $ 0.31 
                    
  At June 30,   At March 31,   
Share and per share amounts 2016  2015  2016     
Common shares outstanding (1)   13,439    13,364     13,442         
Tangible book value per common share $ 6.71  $ 6.48  $  6.57         
                    
Capital ratios                  
Bank of Commerce Holdings                  
Common equity tier 1 capital ratio  9.69%  9.96%   9.82 %       
Tier 1 capital ratio (2)  10.77%  13.33%   10.93 %       
Total capital ratio (2)  13.11%  14.58%   13.30 %       
Tier 1 leverage ratio (2)  9.34%  11.76%   9.48 %       
                    
Redding Bank of Commerce                   
Common equity tier 1 capital ratio  12.80%  13.27%   13.07 %       
Tier 1 capital ratio  12.80%  13.27%   13.07 %       
Total capital ratio  14.05%  14.52%   14.32 %       
Tier 1 leverage ratio  11.14%  11.75%   11.36 %       
(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 June 30, 2016 compared to June 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 the 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 a branch acquisition in March of 2016.

BALANCE SHEET OVERVIEW

As of June 30, 2016, the Company had total consolidated assets of $1.1 billion, gross loans of $754.1 million, allowance for loan and lease losses ("ALLL") of $11.9 million, total deposits of $937.6 million, and shareholders' equity of $92.5 million.

                        
TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(amounts in thousands)
 At June 30,       At March 31,
   % of    % of  Change   % of
 2016 Total 2015 Total Amount % 2016 Total
Commercial$  150,410  20% $  143,088  20% $  7,322    5 % $  136,721  19%
Real estate - construction and land development   39,009  5     27,858  4     11,151    40 %    27,554  4 
Real estate - commercial non-owner occupied   253,873  35     236,173  34     17,700    7 %    247,840  34 
Real estate - commercial owner occupied   154,480  20     138,183  20     16,297    12 %    154,484  21 
Real estate - residential - ITIN   47,188  6     51,249  7     (4,061)   (8)%    48,384  7 
Real estate - residential - 1-4 family mortgage   10,862  1     12,209  2     (1,347)   (11)%    10,947  2 
Real estate - residential - equity lines   43,971  6     46,463  7     (2,492)   (5)%    44,327  6 
Consumer and other   54,347  7     44,551  6     9,796    22 %    53,986  7 
Gross loans   754,140  100%    699,774  100%    54,366    8 %    724,243  100%
Deferred fees and costs   1,028        403        625        985    
Loans, net of deferred fees and costs   755,168        700,177        54,991        725,228    
Allowance for loan and lease losses   (11,864)       (11,402)       (462)       (11,495)   
Net loans$  743,304     $  688,775     $  54,529     $  713,733    
                        
Average yield on loans during the quarter  4.76%      4.74%       0.02       4.72%   
                                

The Company recorded gross loan balances of $754.1 million at June 30, 2016, compared with $699.8 million and $724.2 million at June 30, 2015 and March 31, 2016, respectively, an increase of $54.4 million and $29.9 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. The increase in deferred fees and costs from June 30, 2015 to June 30, 2016 was the result of increased loan production and revised loan origination costs based on an updated loan origination cost study.

The increase in the ALLL in the current quarter compared to the prior quarter resulted from net loan loss recoveries of $369 thousand. As a result of these net recoveries and continued improved asset quality, no provision for loan and lease losses was deemed necessary during the current quarter or during the prior five consecutive quarters. See table 8 for additional details of the ALLL.

                         
TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(amounts in thousands)
  At June 30,        At March 31,
    % of    % of  Change   % of
  2016 Total 2015 Total Amount % 2016 Total
                         
Cash and due from banks $ 14,695  5% $ 11,115  5% $ 3,580   32 % $ 14,969  5%
Interest-bearing deposits in other banks   51,345  20    21,681  9    29,664   137 %   70,781  24 
Total cash and cash equivalents   66,040  25    32,796  14    33,244   101 %   85,750  29 
                         
Investment securities:                        
U.S. government and agencies   3,262  1    5,314  2    (2,052)  (39)%   3,915  1 
Obligations of state and political subdivisions   59,015  23    51,324  24    7,691   15 %   61,288  21 
Residential mortgage backed securities and
collateralized mortgage obligations
   45,015  17    37,776  16    7,239   19 %   51,721  18 
Corporate securities   22,313  9    33,501  15    (11,188)  (33)%   23,764  8 
Commercial mortgage backed securities   14,865  6    9,467  4    5,398   57 %   14,571  5 
Other asset backed securities   13,436  5    23,381  10    (9,945)  (43)%   18,992  6 
Total investment securities - AFS   157,906  61    160,763  71    (2,857)  (2)%   174,251  59 
                         
Obligations of state and political
subdivisions - HTM
   35,415  14    36,655  15    (1,240)  (3)%   35,357  12 
Total investment securities - AFS and HTM   193,321  75    197,418  86    (4,097)  (2)%   209,608  71 
Total cash, cash equivalents and
investment securities
 $ 259,361  100% $ 230,214  100% $ 29,147   13 % $ 295,358  100%
Average yield on interest bearing due
 from banks and investment securities
during the quarter

   2.37%      2.59%      (0.22)      2.35%   
                                 

As of June 30, 2016, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $14.7 million. We also held interest-bearing deposits in the amount of $51.3 million. The sizeable increase in interest-bearing deposits compared to the same period a year ago derives from liquidity provided by the recent branch acquisition. It is anticipated that much of this liquidity will continue to be deployed into new loans over the remainder of the year.

Available-for-sale investment securities totaled $157.9 million at June 30, 2016, compared with $160.8 million and $174.3 million at June 30, 2015 and March 31, 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 second quarter of 2016 we purchased 2 securities with a par value of $4.1 million and weighted average yield of 2.10% and sold 13 securities with a par value of $13.5 million and weighted average yield of 3.39%. The sales activity resulted in $28 thousand in net realized gains. During the same period, we received $5.9 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 June 30, 2016 and 2015 were $201.4 million and 3.39% compared to $197.9 million and 3.47%, respectively.

At June 30, 2016, we held $3.2 million par value of AgriBank subordinated notes due July 15, 2019. On April 28, 2016 AgriBank announced that, on July 15, 2016 it would redeem all of the outstanding principal amount of these notes at 100% of the principal amount together with all accrued and unpaid interest. During the second quarter of 2016, we determined that the present value of the expected cash flows on our AgriBank investment was $546 thousand less than our amortized cost basis and recorded an other-than-temporary impairment for that amount. We did not recognize any additional, other-than-temporary impairment losses for the six months ended June 30, 2016, or the year ended December 31, 2015.

At June 30, 2016, our net unrealized gains on available-for-sale investment securities were $2.6 million compared with $1.5 million and $1.7 million at June 30, 2015 and March 31, 2016, respectively. The increase in net unrealized gains between March 31, 2016 and June 30, 2016 is primarily due to interest rate declines over the past three months.

                        
TABLE 4
DEPOSITS BY TYPE - UNAUDITED
(amounts in thousands)
 At June 30,        At March 31,
   % of    % of   Change   % of
 2016 Total 2015 Total Amount % 2016 Total
Demand - noninterest bearing$ 224,467  24% $ 151,640  20% $ 72,827   48 % $ 212,758  23%
Demand - interest bearing  385,609  41    276,103  36    109,506   40 %   392,325  42 
Total demand  610,076  65    427,743  56    182,333   43 %   605,083  65 
                        
Savings  105,228  11    93,500  12    11,728   13 %   105,828  11 
Total non-maturing deposits  715,304  76    521,243  68    194,061   37 %   710,911  76 
                        
Certificates of deposit  222,252  24    238,796  32    (16,544)  (7)%   226,756  24 
Total deposits$ 937,556  100% $ 760,039  100% $ 177,517   23 % $ 937,667  100%
                        
Average rate on interest bearing
deposits during the quarter
  0.39%      0.50%      (0.11)      0.48%   
Average rate on all
deposits during the quarter
  0.30%      0.40%      (0.10)      0.37%   
                                

Total deposits at June 30, 2016, increased $177.5 million or 23% to $937.6 million compared to June 30, 2015, and decreased $111 thousand or 0.01% compared to March 31, 2016. Total non-maturing deposits increased $194.1 million or 37% compared to the same date a year ago and increased $4.4 million or 1% compared to March 31, 2016. Certificates of deposit decreased $16.5 million or 7% compared to the same date a year ago and decreased $4.5 million or 2% compared to March 31, 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 June 30, 2016, the deposits in the acquired branches totaled $139.0 million.

         
TABLE 5
WHOLESALE AND BROKERED DEPOSITS - UNAUDITED
(amounts in thousands)
 At June 30,  At March 31,
 2016 2015 2016
CDARS / ICS reciprocal deposits$ 54,783 $ 58,628 $ 61,601
Third party brokered time deposits  —   17,502   —
Brokered deposits per Call Report  54,783   76,130   61,601
Online listing service time deposits  54,396   63,328   55,986
Total wholesale and brokered deposits$ 109,179 $ 139,458 $ 117,587
 

In accordance with regulatory Call Report instructions, the Bank will file (or has filed) quarterly Call Reports which list brokered deposits of $54.8 million, $76.1 million and $61.6 million at June 30, 2016, June 30, 2015 and March 31, 2016, respectively.

INCOME STATEMENT OVERVIEW

                      
                      
TABLE 6
SUMMARY INCOME STATEMENT - UNAUDITED
(amounts in thousands, except per share data)
  For The Three Months Ended
  June 30,  Change March 31, Change
  2016 2015 Amount % 2016 Amount %
Interest income $ 10,257 $ 9,763 $  494   5 % $  9,904  $  353   4 %
Interest expense   1,040   1,168    (128)  (11)%    1,600     (560)  (35)%
Net interest income   9,217   8,595    622   7 %    8,304     913   11 %
Provision for loan
and lease losses
   —   —   —  0 %   —   —  0 %
Noninterest income   437   881    (444)  (50)%    949     (512)  (54)%
Noninterest expense:                     
Branch acquisition and balance sheet reconfiguration costs   168   —    168   100 %    2,795     (2,627)  (94)%
Other noninterest expense   7,500   6,122    1,378   23 %    7,206     294   4 %
Income (loss) before provision
for income taxes
   1,986   3,354    (1,368)  (41)%    (748)    2,734   (366)%
Deferred tax asset write-off   —   —   —  0 %    363     (363)  (100)%
Provision for income taxes   430   964    (534)  (55)%    (151)    581   (385)%
Net income (loss) $ 1,556 $ 2,390 $  (834)  (35)% $  (960)    2,516   (262)%
Less: Preferred dividends   —   50    (50)  (100)%   —   —  0 %
Income (loss) available to
common shareholders
 $ 1,556 $ 2,340 $  (784)   (34)% $  (960) $  2,516    (262)%
                      
Basic earnings (loss) per share $ 0.11 $ 0.18 $  (0.07)  (39)% $  (0.07) $  0.18   (3)%
Average basic shares   13,367   13,338    29   0 %    13,360     7   0 %
Diluted earnings (loss) per share $ 0.11 $ 0.18 $  (0.07)  (39)% $  (0.07) $  0.18   (3)%
Average diluted shares   13,425   13,370    55   0 %    13,360     65   0 %
Dividends declared per
common share
 $ 0.03 $ 0.03 $ —  0 % $  0.03  $ —  0 %
                            

Second Quarter of 2016 Compared With Second Quarter of 2015

Net income available to common shareholders for the second quarter of 2016 decreased $784 thousand over the second quarter of 2015. In the current quarter, net interest income was $622 thousand higher, and the provision for income tax was $534 lower. These positive changes were offset by a decrease in noninterest income of $444 thousand and an increase in noninterest expense of $1.5 million.

Net Interest Income

Net interest income increased $622 thousand over a year previous.

Interest income for the three months ended June 30, 2016 increased $494 thousand or 5% to $10.3 million. Interest and fees on loans increased $492 thousand due to increased average loan balances. Interest on interest bearing deposits due from banks increased $9 thousand while interest on securities decreased $7 thousand.

Interest expense for the second quarter of 2016 decreased $128 thousand or 11% to $1.0 million. The net decrease was caused by the following.

  • Interest on FHLB term debt decreased $364 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 $294 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 $70 thousand. Interest bearing deposits increased $103.0 million compared to the prior year, but the rate paid on all interest bearing deposits decreased by 11 basis points.
  • Interest on junior subordinated debentures and other borrowings increased $12 thousand.

Noninterest Income

Noninterest income for the three months ended June 30, 2016 decreased $444 thousand compared to the same period a year ago. During the second quarter of 2016 we recorded a $546 thousand other-than-temporary impairment on an investment security as described in Note 4 to our March 31, 2016 Form 10-Q. Our branch and offsite ATM acquisition completed in the first quarter, enhanced point of sale and ATM fees by $241 thousand for the quarter ended June 30, 2016 compared to the same period a year ago. Additionally, a $205 thousand special dividend on Federal Home Loan Bank of San Francisco stock was included in other noninterest income during the three months ended June 30, 2015.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2016 increased $1.5 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 $601 thousand
  • Data processing fees increased $122 thousand
  • ATM processing fees increased $84 thousand as a result of the additional activity at the recently acquired branch and offsite ATM locations
  • Telecommunications expense increased $90 thousand
  • Branch acquisition costs of $168 thousand

Income Tax Provision

During the three months ended June 30, 2016, the Company recorded a provision for income taxes of $430 thousand compared with a provision for income taxes of $964 thousand for the same period a year ago. The decrease in the current quarter is due to decreased taxable income. Pre-tax income for 2016 is less than in 2015, while permanent deductions and tax credits are essentially unchanged resulting in a decrease in the effective tax rate for 2016. As a result, the Company's effective tax rate decreased from 28.74% for the second quarter of 2015 to 21.65% during the current quarter.

Second Quarter of 2016 Compared With First Quarter of 2016

Net income available to common shareholders for the second quarter of 2016 increased $2.5 million over the first quarter of 2016. In the current quarter, net interest income was $913 thousand higher and noninterest expenses were $2.3 million lower. These positive changes were offset by a decrease in noninterest income of $512 thousand and an increase in the provision for income taxes of $218 thousand.

Net Interest Income

Net interest income increased $913 thousand over the prior quarter.

Interest income for the three months ended June 30, 2016 increased $353 thousand or 4% to $10.3 million compared to the prior quarter. Interest and fees on loans increased $345 thousand and interest on securities increased $18 thousand due to increased average loan and securities balances. Interest on interest bearing deposits due from banks decreased $10 thousand due to decreased average interest bearing deposit balances.

Interest expense for the three months ended June 30, 2016 decreased $560 thousand or 35% to $1.0 million compared to the prior quarter. Interest expense on term debt decreased $487 thousand due to the repayment of $75.0 million of FHLB term debt and the termination of the interest rate hedge associated with that debt during the first quarter of 2016. Average total deposits for the second quarter of 2016 increased $106.9 million from the first quarter of 2016 however, interest expense on those deposits declined $78 thousand due to a nine basis point decline in the average rate paid on interest bearing deposits.

Noninterest Income

Noninterest income for the three months ended June 30, 2016 decreased $512 thousand compared to the prior quarter. In addition to the previously mentioned $546 thousand other-than-temporary impairment of an investment security, net gains recognized on the sale of available-for-sale investment securities during the current quarter decreased by $66 thousand to $28 thousand compared to a $94 thousand net gain in the prior quarter. Point of sale and ATM fees increased $244 thousand primarily as a result of the acquisition of five branch and three offsite ATM locations during March of 2016. Noninterest income during the first quarter of 2016 included a $176 thousand gain on payoff of a purchased impaired loan.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2016 decreased $2.3 million 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 $2.6 million
  • Incentive and payroll tax costs decreased $224 thousand
  • Direct loan origination deferred costs increased $100 thousand

The decrease in noninterest expense compared to the prior period was partially offset by following negative items:

  • Salaries and occupancy costs related to the newly acquired branches increased $476 thousand
  • ATM processing fees increased $84 thousand as a result of the recently acquired branch and offsite ATM locations
  • Data processing fees increased $73 thousand
  • Telecommunications expense increased $52 thousand

Income Tax Provision

During the three months ended June 30, 2016, we recorded a provision for income taxes of $430 thousand. During the three months ended March 31, 2016, we recorded an income tax benefit related to operating losses of $151 thousand and wrote-off a $363 thousand deferred tax asset; a net expense of $212 thousand. Our effective tax rate increased slightly to 21.65% in the second quarter from 20.19% (excluding the write-off of deferred tax asset) in the first quarter of 2016.

Earnings Per Share

Diluted earnings per share available to common shareholders were $0.11 for the three months ended June 30, 2016 compared with diluted earnings per share available to common shareholders of $0.18 for the same period a year ago, and net losses per share available to common shareholders of $0.07 for the prior period. Earnings per share for the three months ended June 30, 2016 declined $0.07 compared to the same period a year ago as a result of a $784 thousand decrease in net income, and increased $0.18 compared to the prior quarter as a result of a $2.5 million increase in net income. The causes of these increases and decreases in earnings have been previously detailed in this press release.

                  
TABLE 7
NET INTEREST MARGIN - UNAUDITED
(amounts in thousands)
 For The Three Months Ended
 June 30,  Change March 31, Change
 2016 2015 Amount 2016 Amount
Yield on average interest earning assets 4.16%  4.21%   (0.05)  4.10%   0.06 
Interest expense to fund average earning assets 0.42%  0.50%   (0.08)  0.66%   (0.24)
Net interest margin - nominal 3.74%  3.71%   0.03   3.44%   0.30 
                  
Yield on average interest earning
assets - tax equivalent basis
 4.29%  4.35%   (0.06)  4.23%   0.06 
Interest expense to fund average earning assets 0.42%  0.50%   (0.08)  0.66%   (0.24)
Net interest margin - tax equivalent basis 3.87%  3.85%   0.02   3.57%   0.30 
                  
Average earning assets$ 990,132  $ 928,578  $  61,554  $ 969,818  $  20,314 
Average interest bearing liabilities$ 740,579  $ 723,288  $  17,291  $ 743,388  $  (2,809)
                      

The current quarter net interest margin increased 30 basis points to 3.74% as compared to the prior quarter. This was caused by increased yield on the loan portfolio, a decrease in the overall cost of interest bearing deposits, and by the elimination of our contractual interest payments on $75.0 million Federal Home Loan Bank of San Francisco borrowings. These positive changes were partially offset by interest on $20.0 million of new term debt issued during the fourth quarter of 2015.

The current quarter net interest margin increased 3 basis points to 3.74% as compared to the same period a year ago. The increase resulted from an eight basis point decrease in interest expense to fund average earning assets offset by a five basis point decrease in yield on average earning assets. During the second quarter of 2016, interest on the $20.0 million of new term debt issued during the fourth quarter of 2015 totaled $295 thousand and reduced the net interest margin by 10 basis points.

During the second quarter of 2016, deposit balances increased $177.5 million and decreased $111 thousand compared to the same period a year ago and the prior quarter respectively. The increase in deposit balances results from the recent branch acquisition and strong organic growth. Our overall cost of total deposits decreased to 0.30% for the quarter ended June 30, 2016 from 0.40% for the same period a year ago and from 0.37% 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 
 June 30,  March 31, December 31, September 30,  June 30,
 2016 2016 2015 2015 2015
Beginning balance$  11,495   $  11,180   $  10,891   $  11,402   $  11,296  
Provision for loan and lease losses
charged to expense
  —    —    —    —    — 
Loans charged off   (1,734)     (307)     (707)     (779)     (711) 
Loan loss recoveries   2,103      622      996      268      817  
Ending balance$  11,864   $  11,495   $  11,180   $  10,891   $  11,402  
                    
 At June 30,  At March 31, At December 31, At September 30,  At June 30,
 2016 2016 2015 2015 2015
Nonaccrual loans:                   
Commercial$  2,149   $  2,563   $  1,994   $  2,506   $  3,170  
Real estate - commercial non-owner occupied   1,197      1,197      5,488      5,154      6,532  
Real estate - commercial owner occupied   816      1,190      1,071      1,928      1,079  
Real estate - residential - ITIN   3,664      3,705      3,649      4,228      4,375  
Real estate - residential - 1-4 family mortgage   1,824      1,742      1,775      1,669      1,693  
Real estate - residential - equity lines   995      1,270     —     23      24  
Consumer and other   266      31      32      33      34  
Total nonaccrual loans   10,911      11,698      14,009      15,541      16,907  
Accruing troubled debt restructured loans:                   
Commercial   760      40      49      56      10  
Real estate - commercial non-owner occupied   816      821      824      828      832  
Real estate - commercial owner occupied  —    —    —    —     849  
Real estate - residential - ITIN   5,336      5,502      5,458      5,423      5,303  
Real estate - residential - equity lines   548      553      558      563      569  
Total accruing troubled debt restructured loans   7,460      6,916      6,889      6,870      7,563  
                    
All other accruing impaired loans   550      488      492      494      530  
                    
Total impaired loans$  18,921   $  19,102   $  21,390   $  22,905   $  25,000  
                    
Gross loans outstanding at period end$  754,140   $  724,243   $  716,639   $  718,533   $  699,774  
                    
Allowance for loan and lease losses as a percent of:             
Gross loans  1.57 %   1.59 %   1.56 %   1.52 %   1.63 %
Nonaccrual loans  108.73 %   98.26 %   79.81 %   70.08 %   67.44 %
Impaired loans  62.70 %   60.18 %   52.27 %   47.55 %   45.61 %
                    
Nonaccrual loans to gross loans  1.45 %   1.62 %   1.95 %   2.16 %   2.42 %
                              

We realized net loan loss recoveries of $369 thousand in the current quarter compared with net loan loss recoveries of $315 thousand in the prior quarter and net loan loss recoveries of $106 thousand for the same period a year ago. Recoveries during the second quarter of 2016 of $1.9 million were primarily associated with one commercial real estate relationship, offset by $1.4 million in charge-offs related to two commercial loan relationships and one residential real estate loan.

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 1.57% as of June 30, 2016 compared to 1.63% as of June 30, 2015 and 1.59% as of March 31, 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 June 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 June 30, 2016, the recorded investment in loans classified as impaired totaled $18.9 million, with a corresponding valuation allowance of $903 thousand compared to impaired loans of $25.0 million with a corresponding valuation allowance of $1.3 million at June 30, 2015 and impaired loans of $19.1 million, with a corresponding valuation allowance of $1.1 million at March 31, 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 June 30,  At March 31, At December 31, At September 30,  At June 30,
  2016 2016 2015 2015 2015
Nonaccrual $ 3,785  $ 4,516  $ 9,015  $ 11,149  $ 12,354 
Accruing   7,460    6,916    6,889    6,870    7,563 
Total troubled debt restructurings $ 11,245  $ 11,432  $ 15,904  $ 18,019  $ 19,917 
                     
Percentage of total gross loans  1.49%  1.58%  2.22%  2.51%  2.85%
                     

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 June 30, 2016, the Company restructured one loan to grant a rate and maturity modification. The loan was classified as troubled debt restructurings and placed on nonaccrual status. As of June 30, 2016, we had 118 restructured loans that qualified as troubled debt restructurings, of which 108 were performing according to their restructured terms.

                     
TABLE 10
NONPERFORMING ASSETS - UNAUDITED
(amounts in thousands)
  At June 30,  At March 31, At December 31, At September 30,  At June 30,
  2016 2016 2015 2015 2015
Total nonaccrual loans $10,911  $11,698  $14,009  $15,541  $16,907 
90 days past due and still accruing  10      88   52   54 
Total nonperforming loans  10,921   11,698   14,097   15,593   16,961 
                     
Other real estate owned  765   1,011   1,423   1,525   1,405 
Total nonperforming assets $11,686  $12,709  $15,520  $17,118  $18,366 
                     
Nonperforming loans to gross loans  1.45%  1.62%  1.97%  2.17%  2.42%
Nonperforming assets to total assets  1.09%  1.18%  1.53%  1.73%  1.87%
                     

At June 30, 2016, June 30, 2015 and March 31, 2016, the recorded investment in OREO was $765 thousand, $1.4 million and $1.0 million, respectively. The June 30, 2016 OREO balance consists of four properties, of which one is a 1-4 family residential real estate property in the amount of $81 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 June 30,  At June 30,  Change At March 31,
  2016 2015 $ % 2016
Assets:               
Cash and due from banks $  14,695  $  11,115  $  3,580   32 % $  14,969 
Interest-bearing deposits in other banks    51,345     21,681     29,664   137 %    70,781 
Total cash and cash equivalents    66,040     32,796     33,244   101 %    85,750 
                
Securities available-for-sale, at fair value    157,906     160,763     (2,857)  (2)%    174,251 
Securities held-to-maturity, at amortized cost    35,415     36,655     (1,240)  (3)%    35,357 
                
Loans, net of deferred fees and costs    755,168     700,177     54,991   8 %    725,228 
Allowance for loan and lease losses    (11,864)    (11,402)    (462)  4 %    (11,495)
Net loans    743,304     688,775     54,529   8 %    713,733 
                
Premises and equipment, net    15,660     11,342     4,318   38 %    15,494 
Other real estate owned    765     1,405     (640)  (46)%    1,011 
Goodwill and core deposit intangibles, net    2,362    —    2,362   100 %    2,469 
Life insurance    22,794     22,168     626   3 %    22,642 
Deferred taxes    8,026     10,648     (2,622)  (25)%    8,389 
Other assets    17,920     18,503     (583)  (3)%    17,987 
Total assets $  1,070,192  $  983,055  $  87,137   9 % $  1,077,083 
                
Liabilities and shareholders' equity:               
Demand - noninterest bearing $  224,467  $  151,640  $  72,827   48 % $  212,758 
Demand - interest bearing    385,609     276,103     109,506   40 %    392,325 
Savings    105,228     93,500     11,728   13 %    105,828 
Certificates of deposit    222,252     238,796     (16,544)  (7)%    226,756 
Total deposits    937,556     760,039     177,517   23 %    937,667 
                
Term debt    19,577     90,000     (70,423)  (78)%    19,839 
Unamortized debt issuance costs    (201)   —    (201)  100 %    (213)
Net term debt    19,376     90,000     (70,624)  (78)%    19,626 
                
Junior subordinated debentures    10,310     10,310    —  0 %    10,310 
Other liabilities    10,462     16,156     (5,694)  (35)%    18,762 
Total liabilities    977,704     876,505     101,199   12 %    986,365 
                
Shareholders' equity:               
Preferred stock   —    19,931     (19,931)  (100)%   —
Common stock    24,421     24,144     277   1 %    24,325 
Retained earnings    66,356     63,158     3,198   5 %    65,201 
Accumulated other comprehensive income (loss), net of tax    1,711     (683)    2,394   (351)%    1,192 
Total shareholders' equity    92,488     106,550     (14,062)  (13)%    90,718 
                
Total liabilities and shareholders' equity $  1,070,192  $  983,055  $  87,137   9 % $  1,077,083 
                
Total interest earning assets $  997,211  $  917,756  $  79,455   9 % $  1,002,492 
Shares outstanding    13,439     13,364           13,442 
Tangible book value per share $  6.71  $  6.48        $  6.57 



                      
TABLE 12
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
  For The Three Months Ended For The Six Months Ended
  June 30,  Change March 31, June 30,
  2016 2015 $ % 2016 2016 2015
Interest income:                     
Interest and fees on loans $  8,796  $ 8,304 $  492   6 % $ 8,451 $  17,247  $ 16,215
Interest on securities    808    801    7   1 %   784    1,592    1,746
Interest on tax-exempt securities    588    602    (14)  (2)%   594    1,182    1,201
Interest on deposits in other banks    65    56    9   16 %   75    140    127
Total interest income    10,257    9,763    494   5 %   9,904    20,161    19,289
Interest expense:                     
Interest on demand deposits    130    107    23   21 %   122    252    223
Interest on savings deposits    41    55    (14)  (25)%   45    86    109
Interest on certificates of deposit    515    594    (79)  (13)%   597    1,112    1,185
Interest on term debt    295    363    (68)  (19)%   782    1,077    712
Interest on other borrowings    59    49    10   20 %   54    113    96
Total interest expense    1,040    1,168    (128)  (11)%   1,600    2,640    2,325
Net interest income    9,217    8,595    622   7 %   8,304    17,521    16,964
Provision for loan and lease losses   —   —   —  0 %   —   —   —
Net interest income after provision for loan and lease losses    9,217    8,595    622   7 %   8,304    17,521    16,964
Noninterest income:                     
Service charges on deposit accounts    88    52    36   69 %   72    160    101
Payroll and benefit processing fees    139    130    9   7 %   160    299    278
Earnings on cash surrender value - life insurance    153    159    (6)  (4)%   156    309    324
Gain on investment securities, net    28    61    (33)  (54)%   94    122    276
Impairment losses on investment securities    (546)   —    (546)  100 %   —    (546)   —
ATM and point of sale    335    92    243   264 %   92    427    183
Other income    240    387    (147)  (38)%   375    615    573
Total noninterest income    437    881    (444)  (50)%   949    1,386    1,735



                      
TABLE 12 - CONTINUED
UNAUDITED
INCOME STATEMENT
(amounts in thousands, except per share data)
  For The Three Months Ended For The Six Months Ended
  June 30,  Change March 31, June 30,
  2016 2015 $ % 2016 2016 2015
Noninterest expense:                     
Salaries and related benefits   4,086   3,575    511   14 %    4,229    8,315   7,485
Occupancy and equipment   987   709    278   39 %    789    1,776   1,443
Federal Deposit Insurance Corporation
insurance premium
   181   178    3   2 %    156    337   385
Data processing fees   374   251    123   49 %    304    678   493
Professional service fees   470   442    28   6 %    436    906   830
Telecommunications   199   109    90   83 %    147    346   219
Branch acquisition costs   168   —    168   100 %    412    580   —
Loss on cancellation of interest rate swap   —   —   —  100 %    2,325    2,325   —
Other expenses   1,203   858    345   40 %    1,203    2,406   1,860
Total noninterest expense   7,668   6,122    1,546   25 %    10,001    17,669   12,715
Income before provision for income taxes   1,986   3,354    (1,368)  (41)%    (748)   1,238   5,984
Deferred tax asset write-off   —   —   —  0 %    363    363   —
Provision for income taxes   430   964    (534)  (55)%    (151)   279   1,793
Net income $ 1,556 $ 2,390 $  (834)  (35)% $  (960) $ 596 $ 4,191
Less: Preferred dividends   —   50    (50)   (100)%   —   —   100
Income available to common shareholders $ 1,556 $ 2,340 $  (784)  (34)% $  (960) $ 596 $ 4,091
                      
Basic earnings per share $ 0.11 $ 0.18 $  (0.07)  (39)% $  (0.07) $ 0.04 $ 0.31
Average basic shares   13,367   13,338    29   0 %    13,360    13,364   13,320
Diluted earnings per share $ 0.11 $ 0.18 $  (0.07)  (39)% $  (0.07) $ 0.04 $ 0.31
Average diluted shares   13,425   13,370    55   0 %    13,360    13,408   13,353



                
                
TABLE 13
UNAUDITED CONDENSED CONSOLIDATED
YEAR TO DATE AVERAGE BALANCE SHEETS
(amounts in thousands)
 For the Six Months Ended For the Twelve Months Ended
  June 30,  June 30,  December 31, December 31, December 31,
  2016 2015 2015 2014 2013
Earning assets:              
Loans $ 731,740 $ 688,146 $ 699,227 $ 625,166 $ 612,780
Taxable securities   122,050   128,791   120,897   147,916   157,486
Tax exempt securities   77,510   77,043   77,089   83,973   92,854
Interest-bearing deposits in other banks   48,676   26,795   30,323   56,465   43,342
Average earning assets   979,976   920,775   927,536   913,520   906,462
                
Cash and due from banks   14,665   10,566   11,220   11,246   10,624
Premises and equipment, net   14,008   11,980   11,552   12,105   10,337
Other assets   40,543   43,085   42,423   36,936   26,431
Average total assets $ 1,049,192 $ 986,406 $ 992,731 $ 973,807 $ 953,854
                
Liabilities and shareholders' equity:               
Demand - noninterest bearing $ 201,457 $ 148,179 $ 156,578 $ 139,792 $ 122,011
Demand - interest bearing   353,291   272,349   283,105   272,383   244,125
Savings   100,008   92,227   92,659   91,108   92,502
Certificates of deposit   222,897   246,137   238,626   259,445   248,350
Total deposits   877,653   758,892   770,968   762,728   706,988
                
Repurchase agreements   —   —   —   —   5,780
Term debt   55,478   94,779   88,874   77,534   107,603
Junior subordinated debentures   10,310   10,310   10,310   15,239   15,465
Other liabilities   14,439   17,013   16,588   15,934   11,825
Average total liabilities   957,880   880,994   886,740   871,435   847,661
                
Shareholders' equity   91,312   105,412   105,991   102,372   106,193
Average liabilities & shareholders' equity $ 1,049,192 $ 986,406 $ 992,731 $ 973,807 $ 953,854



                
                
TABLE 14
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(amounts in thousands)
  For The Three Months Ended
  June 30,  March 31, December 31, September 30,  June 30,
  2016 2016 2015 2015 2015
Earning assets:               
Loans $ 742,684 $ 720,795 $ 714,494 $ 705,762 $ 703,008
Taxable securities   124,183   119,917   111,098   115,165   121,110
Tax exempt securities   77,168   77,852   78,081   76,190   76,772
Interest-bearing deposits in other banks   46,097   51,254   37,158   30,430   27,688
Average earning assets   990,132   969,818   940,831   927,547   928,578
                
Cash and due from banks   17,028   12,301   12,372   11,355   10,833
Premises and equipment, net   15,632   12,384   11,001   11,265   11,767
Other assets   41,394   39,700   41,666   41,867   42,637
Average total assets $ 1,064,186 $ 1,034,203 $ 1,005,870 $ 992,034 $ 993,815
                
Liabilities and shareholders' equity:               
Demand - noninterest bearing $ 220,377 $ 182,539 $ 171,449 $ 158,232 $ 147,442
Demand - interest bearing   382,811   323,771   302,862   284,508   268,784
Savings   103,990   96,027   92,939   93,230   93,291
Certificates of deposit   223,958   221,836   226,924   235,551   245,573
Total deposits   931,136   824,173   794,174   771,521   755,090
                
Term debt   19,510   91,444   79,772   86,359   105,330
Junior subordinated debentures   10,310   10,310   10,310   10,310   10,310
Other liabilities   11,913   16,969   16,197   16,140   16,887
Average total liabilities   972,869   942,896   900,453   884,330   887,617
                
Shareholders' equity   91,317   91,307   105,417   107,704   106,198
Average liabilities & shareholders' equity $ 1,064,186 $ 1,034,203 $ 1,005,870 $ 992,034 $ 993,815
 

About Bank of Commerce Holdings

Bank of Commerce Holdings is a bank holding company headquartered in Redding, California and is the parent company for Redding Bank of Commerce which operates under two separate names: Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce. The Bank is an FDIC insured California banking corporation providing commercial banking and financial services through 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 FinancialStifel Nicolaus
John T. CavenderPerry Wright
555 Market Street1255 East Street, Suite 100
San Francisco, CA 94105Redding, CA 96001
(800) 346-5544(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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