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

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

Source:Bank of Commerce Holdings