Bank of Commerce Holdings™ announces Fourth Quarter and Full Year 2012 Results

REDDING, Calif., Jan. 31, 2013 /PRNewswire/ -- Patrick J. Moty, President & CEO of Bank of Commerce Holdings (NASDAQ: BOCH), a $979.4 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 $1.2 million and diluted earnings per share (EPS) attributable to continuing and discontinuing operations of $0.08 and $0.00, respectively, for the fourth quarter 2012, and full year income available to common shareholders of $6.5 million and diluted EPS attributable to continuing and discontinuing operations of $0.41 and $(0.01), respectively.

Financial highlights for the full year 2012:

• Net income available to common shareholders of $6.5 million reflects a 4% increase over the $6.3 million reported for the full year 2011.
• Full year 2012 diluted EPS attributable to continuing operations of $0.41 compares to $0.34 diluted EPS attributable to continuing operations for full year 2011.
• Provision for loan losses increased 5% year over year to $9.4 million.
• Nonperforming assets totaled $41.6 million and represented 4.25% of total assets at year end 2012, compared to $25.2 million and 2.68% at year end 2011, respectively.
• Non-maturing core deposits increased $40.8 million or 11% from a year ago December 31, 2011.
• Repurchased 1,019,490 in common stock shares at a weighted average cost of $4.22 per share.

Financial highlights for the fourth quarter 2012:

• Net income available to common shareholders of $1.2 million reflects a 38% decrease over the $1.9 million reported for the quarter ended December 31, 2011, and a 19% decrease over the $1.5 million recorded for the third quarter 2012.
• Diluted EPS attributable to continuing operations of $0.08 compares to $0.11 reported for the same period a year ago and $0.12 for the prior quarter ended September 30, 2012.  Diluted EPS attributable to discontinued operations of $0.00 compares to $0.01 reported for the same period a year ago and $(0.03) for the prior quarter ended September 30, 2012.
• Loan loss provisions for the fourth quarter were $4.6 million compared to $1.8 million for the fourth quarter 2011, and $1.9 million for the prior quarter ended September 30, 2012. During the fourth quarter, 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.

Patrick J. Moty, President and CEO commented:  "In 2012, we experienced both positive results along with a few challenges.  On the positive side we saw a 4% increase in net profits, a 32% increase in share price, and an 11% increase in core deposits.  The challenges continue to be in the lingering effects from assets and the less than robust loan demand.  But more importantly, in 2012 we celebrated our thirtieth year in business.  Throughout these last three decades, it has been our privilege assisting businesses and individuals in achieving their financial goals."

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, 2011 and under the heading:  "Risk factors that may affect results" 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 December 31, 2012 and 2011, and September 30, 2012.

Bank of Commerce Holdings (the "Company") remains well capitalized. At December 31, 2012, the Company's Tier 1 and Total risk based capital ratios measured 14.53% and 15.78% respectively, while the leverage ratio was 13.13%.

Return on average assets (ROA) and return on average equity (ROE) for the three months ended December 31, 2012, was 0.57% and 4.97%, respectively, compared with 0.90% and 7.48%, respectively, for the three months ended December 31, 2011. The decrease in ROA and ROE for the three months ended December 31, 2012, compared with the same period a year ago, was primarily driven by increased provisions for loan and lease losses, partially offset by gains on sales of investment securities. During the fourth quarter, the Company identified additional impairment on certain loans and moved $13.0 million in loans to nonaccrual status, resulting in increased provisions to the allowance for loan and lease losses.

During the fourth quarter, the Company sold investment securities resulting in realized gains of $2.1 million which are recorded in noninterest income in the Consolidated Statement of Operations. The Company considers the volume of such securities sold during the fourth to be a nonrecurring event; however the gains realized as a result of this event primarily attributed to driving the Company's fourth quarter efficiency ratio down 10 basis points to 43.66%. Excluding this nonrecurring event, the efficiency ratio would have been 53.37%, a decrease of 1.58% compared to the same period a year ago.

Balance Sheet Overview

As of December 31, 2012, the Company had total consolidated assets of $979.5 million, total net portfolio loans of $588.1 million, allowance for loan and lease losses of $11.1 million, total deposits of $701.2 million, and stockholders' equity of $110.3 million.

Overall, the net portfolio loan balance increased modestly during the fourth quarter compared to the same period a year ago. The Company's net loan portfolio was $588.1 million at December 31, 2012, compared with $594.1 million at September 30, 2012, a decrease of $6.0 million, or 1%. The decrease in net portfolio loans was primarily driven by net pay-offs of commercial real estate loans, and increases in the allowance for loan and lease losses (ALLL). During the fourth quarter 2012, the decrease in construction loans, when compared to the third quarter 2012, primarily resulted from a project build out, subsequently refinanced into an investor commercial real estate loan.

The Company maintained a strong liquidity position during the reporting period. As of December 31, 2012, the Company maintained cash positions at the Federal Reserve Bank (FRB) and correspondent banks in the amount of $21.9 million. The Company also held certificates of deposits with other financial institutions in the amount of $23.3 million, which management considers liquid.

The Company's available-for-sale investment portfolio is generally utilized as a source of liquidity to fund other higher yielding asset opportunities, such as commercial and mortgage loan originations when required. Available-for-sale securities totaled $197.4 million at December 31, 2012, compared with $194.9 million at September 30, 2012. During the period, the Company focused on investing excess cash, and reinvesting principal and interest received from mortgage backed securities and collateralized mortgage obligations, into bank qualified municipal bonds and corporate bonds.

Purchases of corporate bonds were focused on relatively moderate term (maturities ranging between four to six years), high quality debt instruments issued by large financial institutions. Management believes the 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.

Purchases of municipal bonds focused on bank qualified general obligation and revenue bonds where the debt proceeds are used to fund the operations of state and local essential services. The municipal bonds purchased generally had maturities ranging from five to twenty with maturities more heavily weighted towards the shorter end of the range. In addition, many of these bonds have relatively short call dates and relatively high coupons.  Management monitors the financial performance of the municipal bond portfolio on an ongoing basis. Should the outcome of these reviews indicate significant decline in 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.

During the fourth quarter 2012, the Company purchased sixty-three securities with a weighted average yield of 2.33%, and sold thirty-six securities with a weighted average yield of 2.48%. Pursuant to the securities sales activity, the Company recorded $2.1 million in realized gains.  

At December 31, 2012, the Company's net unrealized gain on available-for-sale securities was $2.9 million, compared with $4.6 million net unrealized gains at September 30, 2012. The unfavorable change in net unrealized gains was primarily due to the sale of securities and the realization of $2.1 million in gains during the fourth quarter of 2012. The decrease in unrealized gains was partially offset by increases in the fair value of the Company's variable rate corporate bond portfolio, primarily driven by contraction of market spreads and changes in market interest rates.

During the fourth quarter 2012 average total deposits increased 6% or $42.8 million to $703.7 million from the fourth quarter in 2011. Non maturing core deposits increased $40.8 million or 11% year over year.  Insured Cash Sweep (ICS) deposits totaling $30.8 million as of December 31, 2012 are included in interest bearing demand. ICS deposits are brokered money market deposit accounts which are considered non core for regulatory purposes.

Operating Results for the Fourth Quarter 2012

Due to conservative underwriting, active servicing of problem credits, and maintenance of a relatively solid net interest margin, the Company has remained profitable over an extended period of weak economic conditions. Accordingly, the Company continues to be well positioned to take advantage of strategic growth opportunities.

Net income attributable to Bank of Commerce Holdings was $1.4 million for the three months ended December 31, 2012, compared with $1.7 million for the three months ended September 30, 2012, and $2.1 million for the three months ended December 30, 2011. Net income available to common shareholders was $1.2 million for the three months ended December 31, 2012, compared with $1.5 million for the three months ended September 30, 2012, and $1.9 million for the three months ended December 31, 2011. During the fourth quarter of 2012, diluted earnings per share attributable to continuing operations decreased $0.04 per share when compared to the third quarter of 2012, and decreased $0.03 per share compared to the fourth quarter of 2011. 

The Company continued to pay quarterly cash dividends of $0.03 per share during 2012, consistent with the quarterly dividends paid in 2011.

Net interest income for the three months ended December 31, 2012 was $8.8 million, an increase of $268 thousand or 3% compared to the same period in 2011, and a decrease of $361 thousand compared with the three months ended September 30, 2012. The increase in net interest income during the three months ended December 31, 2012 compared to the same period a year ago was primarily driven by increased volume in the investment securities portfolio, decreased cost of funds resulting from the re-pricing of deposits, and lower average balances in time deposits. The decrease in our cost of funds was partially offset by decreased interest income realized from the loan portfolio.

The decrease in loan interest income was primarily driven by the downward re-pricing of the ITIN variable rate 1-4 family mortgage loans. During the three months ended December 31, 2012, the ITIN portfolio with an average balance of $60.6 million yielded 3.42% compared to an average balance of $65.6 million and a yield of 3.64% during the same period a year ago.

Interest income recognized from the investment securities portfolio increased $296 thousand during the three months ended December 31, 2012, compared with the same period a year ago. During the latter half of 2011, the entire pool of U.S Agencies with yields averaging 2%, were either sold or called away, with the majority of the cash flows reinvested into higher yielding corporate bonds, municipal bonds, and asset backed securities. While net purchases of municipal bonds and corporate bonds were made at relatively lower yields when compared to like kind bonds in our existing portfolio, only a modest decrease in the portfolio's yield is reflected as compared to in the fourth quarter 2011. The tax equivalent yield from the investment securities portfolio for the three months ended December 31, 2012 was 3.51% compared with 3.66% during the same period a year ago.

During the fourth quarter 2012, the Company realized increased provisions for loan and lease losses primarily attributable to impairment charges incurred on portfolio loans. The increased loan and lease loss provisions were the primary driver in the decrease in income available to common shareholders.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.95% for the three months ended December 31, 2012, a decrease of three basis points compared to the same period a year ago. The decreases in net interest margin during the three months ended December 31, 2012 compared to the same period a year ago primarily resulted from a 36 basis point decline in yield on earning assets, partially offset by a 29 basis point decline in interest expense to average earning assets. With decreasing elasticity in managing our funding costs, and historically low interest rates, maintaining net interest margins 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 December 31, 2012 was $2.7 million, an increase of $2.0 million or 286% when compared to the same period a year ago. The following table presents the key components of noninterest income for the three months ended December 31, 2012 and 2011, and September 30, 2012:

Payroll and benefit processing fees increased by $14 thousand for the three months ended December 31, 2012 compared to the same period a year ago. During the fourth quarter 2012, the increase in payroll and benefit processing fees compared to the same period a year ago was primarily driven by increased customer relationships which resulted in increased volume.

Earnings on bank owned life insurance increased by $11 thousand for the three months ended December 31, 2012 compared to the same period a year ago. During the fourth quarter 2012, the Company purchased a $5.0 million dollar policy to offset certain employee benefit and compensation plan expenses.

Gains on the sale of investment securities increased by $2.0 million for the three months ended December 31, 2012 compared to the same period a year ago. During the fourth quarter 2012, the Company purchased sixty-three securities with a weighted average yield of 2.33%, and sold thirty-six securities with a weighted average yield of 2.48%. Pursuant to the sales activity, the Company recorded $2.1 million in realized gains on the sales of securities. 

The major components of other income are fees earned on ATM transactions, safe deposits, online banking, gains on litigation, FHLB dividends, mortgage early purchase fees, and wealth management commissions. Changes the components of other income are a result of normal operating activities.

Noninterest expense for the three months ended December 31, 2012 was $5.0 million, a decrease of $42 thousand or 1% compared to the same period a year ago. The following table presents the key elements of noninterest expense for the three months ended December 31, 2012 and 2011, and September 30, 2012:

Salaries and related benefits expense for the three months ended December 31, 2012, was $2.6 million, a decrease of $202 thousand or 7% compared to the same period a year ago.  The decrease in salary and related benefits expense was primarily attributable to a decrease in the employee cash incentive program accrued at the Bank level.

Occupancy and equipment expense for the three months ended December 31, 2012, was $535 thousand, an increase of $82 thousand or 18% compared to the same period a year ago.  The increase in occupancy and equipment expense is primarily attributable to a decrease in net rent expense received on OREO properties and increases in depreciation expense as a result of increased depreciable assets.

The decrease in FDIC assessments during the three months ended December 31, 2012, compared to the same period a year ago resulted from improvements in the Bank's overall deposit assessment risk profile.

Data processing fees for the three months ended December 31, 2012, was $142 thousand, an increase of $35 thousand or 33% compared to the same period a year ago.  The increase in data processing fees is attributable to reclassifications of certain core processing maintenance expenses, increases in ongoing software licensing fees as a result of additional staffing requirements, and licensing fees for new software products.

Professional service fees encompass audit, legal and consulting fees. Increases in professional service fees for the three months ended December 31, 2012, compared to the same period a year ago were primarily driven by commissions paid pursuant to the Company's stock repurchase plan and an increase in legal expense associated with SEC filings.

Other expenses for the three months ended December 31, 2012, were $1.1 million, an increase of $56 thousand or 5% compared to the same period a year ago. The increase in other expenses was primarily driven by increased operating expenses on OREO properties and increased amortization of the California Affordable Housing credits.

The ALLL allocation remained consistent with amounts reported as of December 31, 2011. The ALLL totaled $11.1 million and $10.6 million at December 31, 2012, and December 31, 2011, respectively. During 2012, the provisions for loan and lease losses were $9.4 million which approximated net charge-offs for the year. Net charge-offs of $8.9 million for the year ended December 31, 2012, decreased by $2.3 million compared to the same period a year ago. There were a number of factors that contributed to the decrease in net charge offs, including less impairment charges on both existing impaired loans and newly classified impaired loans, and a stabilizing real estate market within our footprints.

The ALLL totaled $11.1 million and $10.6 million at December 31, 2012 and September 31, 2012, respectively. The increase in the ALLL as of December 31, 2012 compared to September 31, 2012 is principally attributable to increased provisions for loan and lease losses. During the fourth quarter, charge offs resulted from impairment evaluations of loans newly classified as nonaccrual, and existing loans already classified as nonaccrual. As a result, additional provisions were needed to fund the allowance for loan and lease losses to reflect the perceived increase in credit risk inherent in the loan portfolio.

Net charge offs were $4.0 million for the three months ended December 31, 2012, compared with net charge offs of $3.8 million for the three months ended September 30, 2012. The fourth quarter charge offs were centered in commercial real estate, 1-4 family residential, and home equity loans.

Overall, the loan portfolio showed some signs of stabilization during 2012, however there continues to be lingering weaknesses where the borrower's business revenue is tied to real estate. Accordingly, during December of 2012, the Company reclassified certain loans in the amount of $7.3 million to nonaccrual status. The majority of the amounts reclassified during December were associated with two large commercial real estate borrowers whose loans were rated as substandard prior to the reclassification.

At December 31, 2012, the loan portfolio reflects a modest increase in total past due loans and net migrations to greater than 90 days past due, compared to December 31, 2011. Consequently, as of December 31, 2012 loans classified as substandard increased by $3.9 million to $51.3 million compared to the same period a year ago. The commercial real estate and commercial loan portfolios continue to be influenced by depressed real estate values, the effects of relatively high unemployment levels, and sluggish economic conditions. As such, management will continue to aggressively identify and dispose of problematic assets which could lead to a continuing elevated level of charge offs. Despite the current level of charge offs, management believes the Company's ALLL is adequately funded given the current level of credit risk.

At December 31, 2012, the recorded investment in loans classified as impaired totaled $47.7 million, with a corresponding valuation allowance (included in the ALLL) of $2.4 million. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans. At September 30, 2012, the total recorded investment in impaired loans was $46.4 million, with a corresponding valuation allowance (included in the ALLL) of $2.8 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 December 31, 2012, the Company restructured eleven loans, six of which were restructured to grant interest rate concessions, one loan was restructured to grant an interest rate and maturity modification, one loan was restructured to provide a maturity modification, and three loans were restructured to provide payment deferral modifications. Five loans reclassified as TDR's during the three months ended December 31, 2012 were on nonaccrual status, and the remaining reclassifications were accruing.

As of December 31, 2012, the Company had $24.7 million in TDRs compared to $27.7 million as of September 30, 2012.  As of December 31, 2012, the Company had one hundred and six loans that qualified as TDRs, of which eighty-six were performing according to their restructured terms. TDRs represented 4.12% of gross portfolio loans as of December 31, 2012 compared with 4.59% at September 30, 2012. 

Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, totaled $38.6 million or 6.44% of total portfolio loans as of December 31, 2012, as compared to $25.6 million, or 4.24% of total loans at September 30, 2012. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $41.6 million, or 4.25% of total assets as of December 31, 2012, compared with $28.7 million, or 3.03% of total assets as of September 30, 2012.

As of December 31, 2012, nonperforming assets of $41.6 million have been written down by 22%, or $9.1 million, from their original balance of $55.6 million.

At December 31, 2012, the recorded investment in OREO was $3.1 million compared to $3.1 million at September 30, 2012. For the three months ended December 31, 2012, the Company transferred foreclosed property from three loans in the amount of $242 thousand to OREO, and no adjustments to the ALLL were necessary. During this period, the Company sold four properties with balances of $234 thousand for a net loss of $222 thousand. The December 31, 2012 OREO balance consists of sixteen properties, of which twelve are secured with 1-4 family residential real estate in the amount of $947 thousand. The remaining four properties consist of improved commercial land in the amount of $750 thousand, a vacant residential lot in the amount of $24 thousand, and two commercial real estate properties in the amount of $1.3 million. 

BOCH is a NASDAQ National Market listed stock.  Please contact your local investment advisor for purchases and sales.  Investment firms making a market in BOCH stock are:

Raymond James Financial / Howe Barnes
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