Bank of Commerce Holdings™ announces First Quarter Results

REDDING, Calif., April 30, 2013 /PRNewswire/ -- Patrick J. Moty, President and Chief Executive Officer of Bank of Commerce Holdings (NASDAQ: BOCH), a $978.5 million bank holding company and parent company of Redding Bank of Commerce™ and Roseville Bank of Commerce™ (a division of Redding Bank of Commerce) (the "Bank"), today reported net income available to common shareholders of $2.0 million and diluted earnings per share (EPS) from continuing operations of $0.13 for the first quarter 2013.

Financial highlights:

• Net income available to common shareholders of $2.0 million reflects a 6% increase over the $1.9 million reported for the quarter ended March 31, 2012, and a 68% increase over the $1.2 million recorded for the fourth quarter 2012.
• Diluted EPS attributable to continuing operations of $0.13 compares to $0.10 reported for the same period a year ago and $0.08 for the prior quarter ended December 31, 2012.  Diluted EPS attributable to discontinued operations of $0.00 compares to $0.01 reported for the same period a year ago and $0.00 for the prior quarter ended December 31, 2012.
• Loan loss provisions for the first quarter were $1.1 million compared to $1.3 million for the first quarter 2012, and $4.6 million for the prior quarter ended December 31, 2012. During the fourth quarter 2012, management determined that further impairment was deemed necessary on several large credit relationships, resulting in additional charge offs of $4.2 million. As a result, additional provisions were needed to fund the allowance for loan and lease losses.
• Nonperforming assets represent 4.07% of total assets in the current period versus 2.45% for the quarter ended March 31, 2012 and 4.45% for the year ended December 31, 2012.

Patrick J. Moty, President and CEO commented:  "Over the past twelve months, we have experienced substantial growth in our core deposits and commercial loans. In addition, there are indications that certain sectors of the economy are finally starting to see some improvement. Our greatest challenges continue to be maintaining an acceptable net interest margin coupled with the lingering effects of nonperforming assets."

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 the Company's 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.
• The health of the economy declines nationally or regionally which could further reduce the demand for loans or reduce the value of real estate collateral securing most of the Company's loans.
• Credit quality deteriorates which could cause an increase in the provision for loan 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 year ended December 31, 2012 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, which speak only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Table 1 below shows summary financial information for the quarters ended March 31, 2013 and 2012, and December 31, 2012.

Bank of Commerce Holdings (the "Company") remains well capitalized. At March 31, 2013, the Company's Tier 1 and Total risk based capital ratios measured 14.19% and 15.44% respectively, while the leverage ratio was 12.77%.

Return on average assets (ROA) and return on average equity (ROE) for the three months ended March 31, 2013, was 0.84% and 7.40%, respectively, compared with 0.89% and 7.41%, respectively, for the same period a year ago.

During the fourth quarter of 2012, the Company sold investment securities resulting in realized gains of $2.1 million which were recorded in noninterest income in the Consolidated Statement of Operations. The Company considered the volume of such securities sold during the fourth to be an aberration of the normal selling activity; however the gains realized as a result of the increased sales activity primarily attributed to driving the Company's fourth quarter efficiency ratio down to 43.66%. Absent the increased gains on securities, the efficiency ratio would have been 53.37%.

Balance Sheet Overview

As of March 31, 2013, the Company had total consolidated assets of $978.5 million, total net portfolio loans of $601.6 million, allowance for loan and lease losses of $11.4 million, total deposits of $698.4 million, and stockholders' equity of $108.8 million.

Overall, the net portfolio loan balance decreased substantially during the first three months of 2013. The Company recorded net portfolio loans of $601.6 million at March 31, 2013, compared with $653.3 million at December 31, 2012, a decrease of $51.7 million, or 8%. The decrease in net portfolio loans was primarily attributable to the $45.2 million decrease in a commercial secured borrowing line held with the Bank's former mortgage subsidiary. The commercial secured borrowing line of credit is used by the former mortgage subsidiary to fund 1-4 family mortgage loan originations which the Bank purchases an undivided participation ownership interest in the mortgage loans.

The Company continued to maintain a strong liquidity position during the reporting period. As of March 31, 2013, the Company maintained cash positions at the FRB and correspondent banks in the amount of $44.2 million. The Company also held certificates of deposits with other financial institutions in the amount of $23.6 million, which the Company considers liquid.

The Company's available-for-sale investment portfolio is primarily utilized as a source of liquidity to fund other higher yielding asset opportunities, such as commercial and commercial real estate loan originations when required. Available-for-sale investment securities totaled $221.8 million at March 31, 2013, compared with $197.4 million at December 31, 2012. During the first three months of 2013, the Company focused on investing excess cash received from net pay downs of the commercial secured borrowing into mortgage backed securities and collateralized mortgage obligations, municipal bonds, and corporate securities.

Purchases of municipal bonds focused on bank qualified general obligation and revenue bonds where the debt proceeds generally are used to fund operations and essential services. The municipal bonds purchased generally had relatively high coupons, maturities ranging from nine to seventeen years, and call dates within three to five years. The majority of these bonds are structured in such a way that management believes there is a reasonable probability that the call options will be exercised at their respective call dates. Management monitors the financial performance of the municipal bond portfolio on an ongoing basis. Should the outcome of these reviews indicate declining credit quality, inadequate debt service coverage, or if the bonds have fallen outside of our accepted risk tolerance, the bonds are sold in the open market.

Purchases of corporate bonds focused on relatively moderate term (maturities ranging between four to eleven years), high quality debt instruments issued by large cap financial institutions. Management believes the relative risk adjusted yield spreads of these securities compared to what is currently offered in the treasury markets, or mortgage backed securities markets provides some mitigation of ongoing net interest margin compression without extending too long on the yield curve.

During the first three months of 2013, the Company purchased forty-two securities with a weighted average yield of 2.44%, and sold ten securities with a weighted average yield of 2.46%. The sales activity resulted in $189 thousand net realized gains. 

At March 31, 2013, the Company's net unrealized gains on available-for-sale securities were $3.3 million compared with $2.9 million net unrealized gains at December 31, 2012. The favorable change in net unrealized gains was primarily due to increases in the fair values of the Company's corporate bond and asset backed portfolios, partially offset by decreases in the fair values of the remaining sectors of the portfolio. The increase in the fair values of the Company's corporate bond and asset backed portfolios were primarily driven by the contraction of market spreads.  

During the first quarter of 2013 average total deposits increased 5% or $34.7 million to $696.7 million from the first quarter in 2012. Non maturing core deposits increased $45.9 million or 13% year over year.  Insured Cash Sweep (ICS) deposits totaling $36.0 million as of March 31, 2013 are included in interest bearing demand. ICS deposits are brokered demand and money market deposit accounts which are considered non core for regulatory purposes.

Operating Results for the First Quarter 2013

Net income attributable to Bank of Commerce Holdings was $2.0 million for the three months ended March 31, 2013 compared with $2.1 million for the same period a year ago. Net income available to common shareholders was $2.0 million for the three months ended March 31, 2013, compared with $1.9 million for the same period a year ago. Diluted earnings per share (EPS) from continuing operations and discontinued operations were $0.13 and $0.00 for the three months ended March 31, 2013 compared with $0.10 and $0.01 for the same period a year ago, respectively. The increase in EPS from continuing operations was principally attributed to reduced provision for loan and lease losses, reduced preferred dividends paid, and decreased basic and dilutive weighted average shares.

The Company declared cash dividends of $0.03 per the first quarter of 2013, consistent with the quarterly dividends paid in 2012.

Net interest income is the largest source of our operating income. Net interest income for the three months ended March 31, 2013 was $8.5 million compared to $8.5 million during the same period a year ago.

Interest income for the three months ended March 31. 2013 was $9.5 million, a decrease of $598 thousand or 6% compared to the same period a year ago. The decrease in interest income during the first quarter of 2013 compared to the same period a year ago was primarily driven by decreased yields in the loan portfolio and the investment securities portfolio, partially offset by increased loan volume and investment securities volume. The decrease in loan portfolio yield was primarily driven by net increases in nonaccruing commercial and commercial real estate loans. Total nonaccruing loans at March 31, 2013 increased $17.2 million compared to the same period a year ago. As a result, during the three months ended March 31, 2013, loan interest income decreased $725 thousand or 9% compared to the same period a year ago, despite the increased loan volume.

Interest income recognized from the investment securities portfolio increased $138 thousand during the three months ended March 31, 2013 compared to the same period a year ago. The increase in investment securities interest income was primarily attributable to increased volume, partially offset by decreased yields. Average securities balances and weighted average tax equivalent yields at March 31, 2013 and 2012 were $244.4 million and 3.24% compared to $199.3 million and 3.66%, respectively.

Interest expense for the three months ended March 31, 2013 was $971 thousand, a decrease of $579 thousand or 37% compared to the same period a year ago. During the first three months of 2013, the Company continued to benefit from the re-pricing of deposits, and significantly lower FHLB borrowings expense. The decrease in FHLB borrowing expense compared to the same period a year ago was primarily driven by $150 thousand in gains re-classed from OCI and netted with FHLB interest expense. The re-class was associated with the termination of a forward starting interest rate swap agreement. The net result was a 45 basis point decrease in FHLB interest expense yields compared to the same period a year ago.

During the first quarter of 2013, the Company recorded $1.1 million in provisions for loan and lease losses, a decrease of $3.5 million or 77% compared to the fourth quarter of 2012. During the fourth quarter of 2012, management determined that further impairment was deemed necessary on several large credits associated with three borrowers. Accordingly, during the fourth quarter of 2012, due to elevated charge offs, the Company provided additional provisions to the ALLL.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.82% for the three months ended March 31, 2013, a decrease of 19 basis points as compared to the same period a year ago. The decrease in net interest margin primarily resulted from a 48 basis point decline in yield on average earning assets, partially offset by a 29 basis point decrease in interest expense to average earning assets. With decreasing elasticity in managing our funding costs and historically low interest rates, maintaining our net interest margin in the foreseeable future will present significant challenges. Accordingly, management will continue to pursue organic loan growth, wholesale loan purchases, and actively manage the investment securities portfolio within our accepted risk tolerance to maximize yield on earning assets.

Noninterest income for the three months ended March 31, 2013 was $824 thousand, a decrease of $455 thousand or 36% when compared to the same period a year ago. The following table presents the key components of noninterest income for the three months ended March 31, 2013 and 2012, and December 31, 2012:

Payroll and benefit processing fees decreased by $27 thousand for the three months ended March 31, 2013 compared to the same period a year ago. In September 2011, the Bank acquired eighty payroll processing customer relationships from a local payroll processing sole proprietorship. During the three months ended March 31, 2012, additional fees were earned as a result of the larger client base. Accordingly, during the remaining months of 2012, payroll and benefit processing fees decreased due to attrition.

Bank owned life insurance increased $43 thousand or 38% for the three months ended March 31, 2013 compared to the same period a year ago. The increase was primarily attributed to the purchase of an additional life insurance policy during December of 2012.

Gains on the sale of investment securities decreased $456 thousand to $189 thousand for the three months ended March 31, 2013, compared to $645 thousand for the same period a year ago. During the first three months of 2013, the Company focused on investing cash received from net pay downs of the commercial secured borrowing into mortgage backed securities, collateralized mortgage obligations, municipal bonds, and corporate bonds. During this period management focused on purchase activity with the objective of maintaining yield and relatively short overall portfolio duration. During the first three months of 2013, the Company purchased forty-two securities with a weighted average yield of 2.44%, and sold ten securities with a weighted average yield of 2.46%.

The major components of other income are fees earned on ATM transactions, mortgage fee income, online banking services, wire transfers, and FHLB dividends. Changes in the other components of other income are a result of normal operating activities.

Noninterest expense for the three months ended March 31, 2013 was $5.5 million, a decrease of $363 thousand or 6% compared to the same period a year ago. The following table presents the key elements of noninterest expense for the three months ended March 31, 2013 and 2012, and December 31, 2012:

Salaries and related benefits expense for the three months ended March 31, 2013 was $2.9 million, a decrease of $134 thousand or 4% compared to the same period a year ago. The decrease in salaries and related benefits was primarily driven by decreases in officer salary expense, stock option expense, and salary continuation expense. During the three months ended March 31, 2012, the Bank paid early retirement benefits to four employees, absent this payment in the current period, officer salary expense decreased $84 thousand compared the same period a year ago. In addition during the three months ended March 31, 2012 the Company issued stock options that were partially vested upon issuance resulting in the acceleration of additional stock option expense. During the current period, certain true-up adjustments to salary continuation expenses were deemed necessary primarily resulting in a decrease of $34 thousand in salary continuation expense compared to the same period a year ago.

Occupancy and equipment expense for the three months ended March 31, 2013 was $574 thousand, an increase of $32 thousand or 6% compared to the same period a year ago. The increase in this expense is primarily driven by the acceleration of certain leasehold amortization, partially offset by decreased maintenance expenses in the current period.

The decrease in FDIC assessments during the three months ended March 31, 2013, compared to the same period a year ago resulted from true-up adjustments to reverse prior period over accruals. In November 2009, the FDIC adopted the final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter 2010, 2011, and 2012, on December 30, 2009. The amount paid on December 30, 2009 was substantially higher than the subsequent quarterly deposit insurance assessments. As a consequence, true-up adjustments were deemed necessary. Additional discussion on FDIC insurance assessments is provided in Part I, Item 1 under the caption Deposit Insurance, in our most recent Form 10-K filed on March 15, 2013.

Data processing expense for the three months ended March 31, 2013 was $134 thousand, an increase of $64 thousand or 91% compared to the same period a year ago. The increase in this expense is primarily driven by a $54 thousand increase in software maintenance and licensing expenses compared to the same period a year ago. The Bank continues to strive to make improvements in network infrastructure and systems, and expects to see continued increased costs in these expenses in the foreseeable future.

Professional service fees encompass audit, legal and consulting fees. Professional service fees for the three months ended March 31, 2013 was $269 thousand, a decrease of $34 thousand or 11% compared to the same period a year ago. The decrease in professional fees was primarily driven by decreased commissions paid on the repurchases of the Company's common stock. During the first three months of 2013, the Company repurchased 662,977 shares of common stock compared to 485,983 common stock shares repurchased during the same period a year ago. However, in the current year the majority of the repurchased common stock were conducted in private placements.

Other expenses for the three months ended March 31, 2013 were $1.3 million, a decrease of $178 thousand or 12% compared to the same period a year ago. The decrease in other expenses was primarily driven by decreased losses on sale of OREO partially offset by increased OREO expenses, and additional provisions provided to the reserve for unfunded commitments. During the three months ended March 31, 2013, the Bank sold a commercial OREO property, resulting in a $167 gain on sale. Accordingly, during the first three months of 2013, the Bank recorded net gains on sale of OREO properties in the amount of $30 thousand compared to net losses on sale of OREO properties of $369 thousand during the same period a year ago.

The ALLL allocation remained consistent with amounts reported as of December 31, 2012, and March 31, 2012. The ALLL totaled $11.4 million and $11.1 million at March 31, 2013, and December 31, 2012, respectively. During the first three months of 2013, the provisions for loan and lease losses exceeded net charge-offs for the same period. During the current period net charge-offs increased compared to the same period a year ago. There were a number of factors that contributed to the increase in net charge offs, including additional impairment charges on both existing impaired loans and newly classified impaired loans, and continued weakness in the local real estate markets.

The Company continued to conservatively monitor credit quality during the period, and adjust the ALLL accordingly. As such, the Company provided $1.1 million in provisions for loan losses during the first three months of 2013, compared with $1.3 million during the same period a year ago. The Company's ALLL as a percentage of gross portfolio loans was 1.85% and 1.67% as of March 31, 2013, and December 31, 2012, respectively.

Net charge offs were $803 thousand during the first three months of 2013, compared with net charge offs of $549 thousand during the same period a year ago. The charge offs in the current year were primarily focused in commercial and 1-4 family residential loans. During the first three months of 2013 the asset quality of the Bank's loan portfolio remained stable; however there continue to be lingering weaknesses where the borrower's business revenue is tied to real estate. Accordingly, during the first quarter of 2013, total past due loans increased by $7.8 million. The increase in past due loans was primarily attributable to several large commercial real estate credits becoming 30-59 days past due. The commercial real estate and commercial loan portfolio's continue to be influenced by depressed real estate values, the effects of relatively high unemployment levels, and overall sluggish economic conditions. As such, management will continue to aggressively identify and dispose of problematic assets which could lead to an elevated level of charge offs. At March 31, 2013, management believes the Company's ALLL is adequately funded given the current level of credit risk.

At March 31, 2013, the recorded investment in loans classified as impaired totaled $47.7 million, with a corresponding valuation allowance (included in the ALLL) of $2.6 million. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans. At December 31, 2012, the total recorded investment in impaired loans was $47.7 million, with a corresponding valuation allowance (included in the ALLL) of $2.3 million.

Loans are reported as troubled debt restructurings (TDR) when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include a reduction in the note 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 the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing 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 March 31, 2013, the Company restructured seven loans, four of which were restructured to grant interest rate concessions, two loans were restructured to grant interest rate and maturity modification, and one loan was restructured to provide rate and payment deferral modifications. Four loans reclassified as TDRs during the three months ended March 31, 2013 were on nonaccrual status, and the remaining three reclassified loans were in accruing status. 

As of March 31, 2013, the Company had $24.0 million in TDRs compared to $24.7 million as of December 31, 2012.  As of March 31, 2013, the Company had one hundred and eight loans that qualified as TDRs, of which eighty-eight were performing according to their restructured terms. TDRs represented 3.91% of gross portfolio loans as of March 31, 2013 compared with 3.71% at December 31, 2012. 

Although recent indicators reflect a recovery has begun in our local real estate markets, our loan portfolio continues to be impacted by the repercussions from the recent economic recession. Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, totaled $38.1 million or 6.21% of total portfolio loans as of March 31, 2013, as compared to $38.6 million, or 5.81% of total loans, at December 31, 2012. Nonperforming assets, which include nonperforming loans and foreclosed real estate ("OREO"), totaled $39.9 million, or 4.07% of total assets as of March 31, 2013, compared with $41.6 million, or 4.25% of total assets as of December 31, 2012.

As of March 31, 2013, nonperforming assets of $39.9 million have been written down by 19%, or $7.5 million, from their original balance of $52.2 million.

At March 31, 2013, and December 31, 2012, the recorded investment in OREO was $1.8 million and $3.1 million, respectively. For the three months ended March 31, 2013, the Company transferred foreclosed property from five loans in the amount of $1.2 million to OREO and adjusted the balances through charges to the ALLL in the amount of $4 thousand relating to the transferred foreclosed property. During the three months ended March 31, 2013, no further impairment was identified on the foreclosed properties. During this period, the Company sold eight properties with balances of $2.4 million for a net gain of $30 thousand. The March 31, 2013 OREO balance consists of thirteen properties, of which ten are secured with 1-4 family residential real estate in the amount of $837 thousand. The remaining three properties consist of improved commercial land in the amount of $750 thousand, a commercial real estate property in the amount of $174 thousand, and a vacant residential lot in the amount of $24 thousand.

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^TM and Roseville Bank of Commerce^TM, a division of Redding Bank of Commerce). The Bank is an FDIC insured California banking corporation providing commercial banking and financial services through 4 offices located in Northern California. The Bank opened on October 22, 1982. The Company's common stock is listed on the NASDAQ Global Market and trades under the symbol "BOCH".

Investment firms making a market in BOCH stock are:

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

Sandler & O'Neil
Bryan Sullivan
919 Third Avenue, 6^th Floor
New York, NY 10022
(888) 383-3112

McAdams Wright Ragen, Inc.
Joey Warmenhoven
1121 SW Fifth Avenue
Suite 1400
Portland, OR 97204
(866) 662-0351

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

FIG Partners
Mike Hedrei
1175 Peachtree Street NE #100
Colony Square Suite 2250
Atlanta, GA 30361
(212) 899-5217

SOURCE Bank of Commerce Holdings