Bank of Commerce Holdings™ Announces Second Quarter 2012 Results

REDDING, Calif., July 27, 2012 /PRNewswire/ -- Patrick J. Moty, President & CEO of Bank of Commerce Holdings (NASDAQ: BOCH), a $962.5 million bank holding company, and parent company of Redding Bank of Commerce™, Roseville Bank of Commerce™ (a division of Redding Bank of Commerce) (the "Bank"), and Bank of Commerce Mortgage™ today reported net income available to common shareholders of $2.0 million and diluted earnings per share (EPS) of $0.12 for the second quarter 2012.

Financial Highlights

• Net income available to common shareholders of $2.0 million reflects a 60% increase over the $1.3 million reported for the quarter ended June 30, 2011, and a slight increase over the $1.9 million recorded for the first quarter 2012.
• Diluted EPS of $0.12 compares to $0.07 reported for the same period a year ago and $0.11 for the prior quarter ended March 31, 2012.
• Loan loss provisions for the second quarter were $1.7 million compared to $2.6 million for the second quarter 2011 and $1.3 million for the prior quarter ended March 31, 2012.
• Nonperforming assets represented 2.41% of total assets in the current period versus 2.49% for the quarter ended June 30, 2011, and 2.45% for the quarter ended March 31, 2012.
• Mortgage banking revenue for the three months ended June 30, 2012 of $6.1 million reflects an increase of 141% over the $2.6 million reported for the same period a year ago; historically low interest rates continue to drive new loan originations and refinancing activities.

Patrick J. Moty, President and CEO commented:  "We are pleased with our financial results as we follow up a strong first quarter with an even stronger second quarter. Our Small Business loan portfolio grew by ten percent this quarter, reflecting our commitment to lend and assist our customers as they navigate out of this recession. Capital levels and capital generation remain strong."

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 June 30, 2012 and 2011, and March 31, 2012.

As indicated in Table 1 above, Bank of Commerce Holdings (the "Company") remains well capitalized. At June 30, 2012, the Company's Tier 1 and Total risk based capital ratios measured 13.64% and 14.89% respectively, while the leverage ratio was 13.26%.

Return on average assets (ROA) and return on average equity (ROE) for the three months ended June 30, 2012, was 0.96% and 8.14%, respectively, compared with 0.65% and 5.53%, respectively, for the three months ended June 30, 2011. The increase in ROA and ROE for the three months ended June 30, 2012, compared with the same period a year ago, was primarily driven by reduced provision for loan and lease losses, increased mortgage banking net income, and decreased basic and dilutive weighted average shares. The increases in the aforementioned items were partially offset by decreased yields realized from the loan portfolio. The Company continues to experience decreased yields in the loan portfolio due to the pay-off of higher yielding loans, originations and renewals at relatively lower rates, and the transfer of existing loans to nonaccrual status.

Balance Sheet Overview

As of June 30, 2012, the Company had total consolidated assets of $962.5 million, total net portfolio loans of $583.6 million, allowance for loan and lease losses of $12.5 million, total deposits of $682.5 million, and stockholders' equity of $113.6 million.

Overall, the net portfolio loan balance increased modestly during the second quarter. The Company's net loan portfolio was $583.6 million at June 30, 2012, compared with $579.4 million at March 31, 2012, an increase of $4.2 million, or 0.72%. The increase in net portfolio loans was primarily driven by net originations of commercial loans, partially offset by net payoffs of commercial real estate loans, and an increase to the allowance for loan and lease losses (ALLL). Commercial loan originations were diversified in amounts and geographic location, and were not related to any particularly large origination or concentration in either of our markets.

The Company maintained a strong liquidity position during the reporting period. As of June 30, 2012, the Company maintained cash positions at the Federal Reserve Bank (FRB) and correspondent banks in the amount of $41.2 million. The Company also held certificates of deposits with other financial institutions in the amount of $24.0 million, which the Company considers highly 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 mortgage loan originations when required. Investment securities totaled $201.3 million at June 30, 2012, compared with $192.9 million at March 31, 2012. During the second quarter of 2012, the Company continued to reposition the portfolio to shorten duration while maintaining marginal yields. Specifically, during the period, the Company focused on decreasing duration in the municipal portfolio, and to a lesser extent the residential mortgage backed portfolio. In addition, principal and maturity cash flows received from mortgage backed securities were not only reinvested in additional mortgage backed securities, but also relatively short term financial institution corporate bonds, and tax exempt municipal bonds. As such, decreases in the amortized cost basis of other asset backed securities were more than offset by increases in the amortized cost basis of corporate bonds, tax exempt municipal bonds, and mortgage backed securities. During the second quarter 2012, the Company purchased forty-one securities with a weighted average yield of 3.37%, and sold twenty-six securities with a weighted yield of 2.87%. The Company will continue to seek opportunities to shorten portfolio duration in the foreseeable future in accordance to the Company's overall rate view. Pursuant to the sales activity, the Company recorded $542 thousand in realized gains on the sales of securities during the three months ended June 30, 2012.

At June 30, 2012, the Company's net unrealized gain on available-for-sale securities was $2.8 million, compared with $2.1 million net unrealized gains at March 31, 2012. The favorable change in net unrealized gains was primarily a result of favorable changes in unrealized gains relating to the municipal bond portfolio, caused by changes in market interest rates or the contraction of market spreads subsequent to the initial purchase of these bonds.

Second quarter 2012 average total deposits of $667.6 million increased 4% or $27.2 million from the second quarter in 2011. Non maturing core deposits increased $68.0 million or 21% year over year.  Insured Cash Sweep (ICS) deposits totaling $18.2 million as of June 30, 2012 are included in interest bearing demand.  ICS deposits are brokered money market deposit accounts which are considered non core.

Operating Results for the Second 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 despite continued 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 $2.3 million for the three months ended June 30, 2012, compared with $2.1 million for the three months ended March 31, 2012, and $1.5 million for the three months ended June 30, 2011. Net income available to common shareholders was $2.0 million for the three months ended June 30, 2012, compared with $1.9 million for the three months ended March 31, 2012, and $1.3 million for the three months ended June 30, 2011. During the second quarter of 2012, diluted earnings per share increased $0.01 per share when compared to the first quarter of 2012, and increased $0.05 per share compared to the second 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 June 30, 2012 was $8.7 million, an increase of $194 thousand or 2% compared to the same period in 2011, and an increase of $246 thousand compared with the three months ended March 31, 2012. The increase in net interest income during the three months ended June 30, 2012 compared to the same period a year ago was primarily driven by decreased cost of funds resulting from the re-pricing of deposits into lower rates and a lower volume of interest bearing liabilities, 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 June 30, 2012, the ITIN portfolio with a current quarterly average balance of $63.0 million yielded 3.5% compared to a yield of 5.2% during the same period a year ago.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 4.03% for the three months ended June 30, 2012, an increase of 6 basis points compared to the same period a year ago. The increase in net interest margin during the three months ended June 30, 2012 compared to the same period a year ago primarily resulted from a decreased cost of funds due to the re-pricing of deposits, partially offset by lower yields in the loan portfolio. During the three months ended June 30, 2012, the tax equivalent yield on earning assets decreased from 4.93% to 4.86% or 7 basis points compared to the same period a year ago. The decrease in yield on earning assets was more than offset by a decrease in interest expense to average earning assets. Interest expense as a percent of average earning assets decreased from 0.97% to 0.83% or 14 basis points on a quarter-over-quarter basis. As a result, the Company realized a moderate widening of the net interest margin during the three months ended June 30, 2012 compared to the same period a year ago.

Noninterest income for the three months ended June 30, 2012 was $7.2 million, an increase of $3.5 million or 97% when compared to the same period a year ago. The following table presents the key components of noninterest income for the three months ended June 30, 2012 and 2011, and March 31, 2012:

Payroll and benefit processing fees increased by $16 thousand for the three months ended June 30, 2012 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. As a result of the transaction, the Company has recognized increased payroll and benefit processing fees during the current period.

Gains on the sale of investment securities decreased by $113 thousand for the three months ended June 30, 2012 compared to the same period a year ago. During the second quarter of 2012, the Company sold twenty-six securities compared to thirty-three during the same period a year ago. The sales activity during the second quarter of 2012 resulted in gross gains of $571 thousand and gross losses of $29 thousand.

Merchant credit card service income was $38 thousand and $33 thousand for the three months ended June 30, 2012 and 2011, respectively.

Mortgage banking revenue is primarily derived from net origination fees on residential mortgage loans and net revenue derived from the sale of mortgage loans to financial institutions. Net mortgage banking revenue includes gain on sale of loans, revenue from brokers, mortgage loan origination fees, and direct mortgage loan costs. Loan origination fees and broker revenue are recorded as income when the loans are sold. Mortgage banking revenue during the three months ended June 30, 2012 increased $3.6 million or 141% compared to the same period a year ago. During second quarter of 2012 the Company benefited from increased closed loan volume as a result of the historically low interest rate environment. For the three months ended June 30, 2012, closed loan volume was $283.5 million compared to $125.0 million during the same period a year ago. During the three months ended June 30, 2012 the Company recorded $8.5 million in gains on sale of mortgage loans compared to $3.0 million during the same period a year ago.

The major components of other income are fees earned on ATM, online banking services, wire transfers, and FHLB dividends. The increases in other income were primarily driven by changes of the various components, and are a result of normal operating activities.

Noninterest expense for the three months ended June 30, 2012 was $10.7 million, an increase of $2.8 million or 36% compared to the same period a year ago. The following table presents the key elements of noninterest expense for the three months ended June 30, 2012 and 2011, and March 31, 2012:

Salaries and related benefits expense for the three months ended June 30, 2012 was $6.5 million, an increase of $2.5 million or 61% compared to the same period a year ago. The increase in salary and related benefit expense during the second quarter compared to the same period a year ago was primarily driven by a $2.0 million increase in salaries and bonuses paid out from our mortgage subsidiary, and a $390 thousand increase in the employee cash incentive program accrued at the Bank. The increase in salaries and bonuses paid out by the mortgage subsidiary was driven by increased volume and the commensurate increase in full time equivalents.

Although there has been an easing of velocity of declining real estate values, depressed values continue to detrimentally affect our loan portfolio and have led to a continued elevated level of foreclosures on related properties and movement of the properties into OREO. Particularly impacted by the depressed real estate market are our ITIN loans, which consist of 1-4 family mortgages. At June 30, 2012, eleven 1-4 family residential properties consisting of an aggregate principal balance of $697 thousand were held in OREO. These properties are generally sold within four months from foreclosure, and generally have not had further impairment subsequent to transferring into OREO. At June 30, 2012 two commercial real estate properties consisting of an aggregate principal balance of $2.0 million were held in OREO as well. These properties carry significantly higher appraised values than 1-4 family residential properties, and have much longer disposition times. Accordingly, all of the subsequent impairment of the Company's OREO is related to the commercial properties. During the three months ended June 30, 2012, further impairment was deemed necessary for one commercial property in the amount of $425 thousand. During the same period a year ago, impairment was deemed necessary for three commercial real estate properties in the amount of $370 thousand.

The decrease in FDIC assessments during the three months ended June 30, 2012, compared to the same period a year ago resulted from improvements in the Bank's overall deposit assessment risk profile. Additional discussion on FDIC insurance assessments is provided in our most recent 10K filed on March 9, 2012, in Item 1 under the caption Federal Deposit Insurance Premiums.

Data processing fees for the three months ended June 30, 2012, increased by $24 thousand or 26% compared to the same period a year ago. The increase in data processing fees was primarily driven by activity associated with the Bank's online banking platform. Subsequent to June 30, 2011, three new products were added to the platform, resulting in additional subscription fees paid to the third party provider. In addition, customer usage of the platform has increased during the three months ended June 30, 2012 compared to the same period a year ago. Accordingly, the increase in usage has led to additional fees paid to the third party provider.

Professional service fees encompass audit, legal and consulting fees. Professional service fees for the three months ended June 30, 2012 was $639 thousand, an increase of $44 thousand or 7% compared to the same period a year ago. The increase was primarily driven by $40 thousand of expenses incurred by the Bank for the recruitment of certain banking professionals.

Other expenses for the three months ended June 30, 2012 were $1.8 million, an increase of $348 thousand or 23% compared to the same period a year ago. The increase in other expenses was primarily driven by increased overhead and marketing expenses as a result of increased volume at the mortgage subsidiary. With the historically low interest rates driving additional refinancing and originations volume, the mortgage subsidiary has incurred increased variable costs such as utilities, telephone, office supplies, meals, travel, and marketing.

The ALLL totaled $12.5 million and $11.4 million at June 30, 2012 and March 31, 2012, respectively. The increase in the ALLL as of June 30, 2012 as compared to March 31, 2012 is principally attributable to provisions for loan and lease losses exceeding net charge offs for the current period. 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 overall stabilization of our existing loan portfolio.

Net charge offs were $526 thousand for the three months ended June 30, 2012, compared with net charge offs of $549 thousand for the three months ended March 31, 2012. The second quarter charge offs were centered in commercial real estate, 1-4 family residential, and home equity loans. Overall, the loan portfolio is showing some signs of stabilization, however there are lingering weaknesses where the borrower's business revenue is tied to real estate. At June 30^, 2012, the loan portfolio reflects a slight decrease in total past due loans and impaired loans, compared to March 31, 2012. However, during the second quarter of 2012, there was a net migration of loans from an internal risk rating of special mention to substandard. The commercial real estate loan portfolio and commercial loan portfolio will continue to be influenced by weakness in real estate values, the effects of high unemployment levels, and general overall weakness in 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. Despite the current level of charge offs, management believes the Company's ALLL is adequately funded given the current level of credit risk.

At June 30, 2012, the recorded investment in loans classified as impaired totaled $37.0 million, with a corresponding valuation allowance (included in the ALLL) of $3.7 million. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans. At March 31, 2012, the total recorded investment in impaired loans was $39.3 million, with a corresponding valuation allowance (included in the ALLL) of $2.4 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 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 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 June 30, 2012, the Company restructured five loans, two of which were restructured to grant interest rate concessions; the three remaining restructured loans were restructured in a manner that granted a combination of either interest rate, maturity, or payment deferral concessions. During the three months ended June 30, 2011, the Company restructured sixteen loans, all of which were restructured to grant interest rate concessions.

As of June 30, 2012, the Company had $29.6 million in TDRs compared to $31.2 million as of March 31, 2012.  As of June 30, 2012, the Company had one hundred and four restructured loans that qualified as TDRs, of which seventy-six were performing according to their restructured terms. TDRs represented 4.97% of gross portfolio loans as of June 30, 2012, compared with 5.29% at March 31, 2012. 

Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, totaled $20.6 million or 3.45% of total portfolio loans as of June 30, 2012, as compared to $20.9 million, or 3.54% of total loans at March 31, 2012. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $23.2 million, or 2.41% of total assets as of June 30, 2012, compared with $22.8 million, or 2.45% of total assets as of March 31, 2012.

As of June 30, 2012, nonperforming assets of $23.2 million have been written down by 34%, or $7.8 million, from their original balance of $33.2 million.

At June 30, 2012, the recorded investment in OREO was $2.6 million compared to $1.9 million at March 31, 2012. For the three months ended June 30, 2012, the Company transferred foreclosed property from eleven loans in the amount of $2.2 million to OREO and adjusted the balances through charges to the ALLL in the amount of $394 thousand relating to the transferred foreclosed property. During this period, the Company sold nine properties with balances of $658 thousand for a net loss of $170 thousand. The June 30, 2012 OREO balance consists of thirteen properties, of which eleven are secured with 1-4 family residential real estate in the amount of $697 thousand. The remaining two properties consist of improved commercial land in the amount of $750 thousand, and a commercial building in the amount of $1.2 million.  During the three months ended June 30, 2012, further impairment was deemed necessary for the improved commercial land property in the amount of $425 thousand. During the same period a year ago, impairment was deemed necessary for three commercial real estate properties in the amount of $370 thousand.

The following table presents an income statement summary for the periods indicated below.

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 (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, Oregon 97204 (866) 662-0351

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

SOURCE Bank of Commerce Holdings