Bank of Commerce Holdings Announces Third Quarter Results

REDDING, Calif., Oct. 31, 2014 (GLOBE NEWSWIRE) -- Randall S. Eslick, President and Chief Executive Officer of Bank of Commerce Holdings (Nasdaq:BOCH), a $977.8 million bank holding company and parent company of Redding Bank of Commerce and Sacramento 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") of $0.09 for the third quarter 2014.

Financial highlights for the quarter:

• Net income available to common shareholders was $1.2 million for the three months ended September 30, 2014 compared with $1.8 million for the same period a year ago. The year-over-year decrease was driven by loan loss provisions.
• Portfolio loans increased $30.3 million compared to the prior quarter and $55.0 million compared to the third quarter of 2013. The sequential quarter over quarter increase was a combination of wholesale purchase activity and organic loan originations.
• Nonperforming assets decreased $3.4 million or 12% compared to the prior quarter and decreased $11.9 million or 32% compared to the third quarter of 2013.
• Non-maturing core deposits increased $17.2 million or 4% compared to the prior quarter.

Randall S. Eslick, President and CEO commented: "While our third quarter performance was short of our expectations, we are pleased with the strong loan and core deposit growth, and improvement in asset quality. These factors are consistent with our longer term objectives of stronger core earnings and solid credit metrics."

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 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
• A decline in the health of the economy 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 deterioration 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, 2013 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 September 30, 2014 and 2013, and June 30, 2014.

Bank of Commerce Holdings (the "Company") and the Bank continued to meet all capital adequacy requirements to which they are subject. At September 30, 2014, the Company's Tier 1 and Total risk based capital ratios measured 14.74% and 15.99% respectively, while the leverage ratio was 11.87%. The decrease in capital ratios during the current quarter compared to the prior quarter and the same period a year ago is primarily due to the repurchase of common stock and increased average assets.

Return on average assets ("ROA") and return on average equity ("ROE") for the current quarter was 0.51% and 4.99%, respectively, compared with 0.76% and 6.89%, respectively, for the same period a year ago. The 25 basis points ("bp") decrease in ROA over this period was attributed to both an increase in average assets and a decreased level of net income. The decrease in net income was the primary driver in the reduced ROE. However, the impact of decreased net income on ROE was partially offset by the decrease of weighted average shares resulting from the Company's stock buyback activities.

Balance Sheet Overview

As of September 30, 2014, the Company had total consolidated assets of $977.8 million, net portfolio loans of $639.5 million, allowance for loan and lease losses of $10.4 million, total deposits of $767.5 million, and stockholders' equity of $102.0 million.

The Company recorded net portfolio loans of $639.5 million at September 30, 2014, compared with $581.3 million at September 30, 2013, an increase of $58.2 million. The increase in net portfolio loans during the nine months ended months ended September 30, 2014 was primarily centered in the purchase of $49.3 million in consumer and SBA loan pools.  The $3.1 million decrease in the Allowance for Loan and Lease Losses ("ALLL") compared to the same period a year ago is primarily due to charge offs related to three significant borrowing relationships. The loans charged off for these three relationships were collateral dependent loans that were adequately reserved for at September 30, 2013, and subsequently charged off during the second quarter of 2014.

The Company continued to maintain a strong liquidity position during the reporting period. As of September 30, 2014, the Company maintained cash positions at the Federal Reserve Bank and correspondent banks in the amount of $31.2 million. The Company also held certificates of deposits with other financial institutions in the amount of $15.3 million.

Available-for-sale investment securities totaled $189.4 million at September 30, 2014, compared with $209.6 million at September 30, 2013. The Company's available-for-sale investment portfolio is currently being utilized as a secondary source of liquidity to fund other higher yielding asset opportunities, such as commercial and commercial real estate loan originations and wholesale loan purchases. During the third quarter of 2014, the Company purchased thirteen securities with a par value of $17.2 million and weighted average yield of 2.26% and sold seventeen securities with a par value of $12.6 million and weighted average yield of 2.56%. The net sales activity resulted in $32 thousand in realized gains. Average quarterly securities balances and weighted average tax equivalent yields at September 30, 2014 and 2013 were $223.6 million and 3.49% compared to $245.8 million and 3.35%, respectively.

The Company's purchases continue to focus on moderate term maturity securities, taking advantage of the steepness of the yield curve which moderates the Company's exposure to rising interest rates, while still providing an acceptable yield. Sales were focused on longer term municipal and corporate bonds, as well as mortgage-backed and asset-backed securities with extended cash flows or with a high probability of cash flows extending as interest rates increase.

Overall, management's investment strategy reflects the continuing expectation of rising rates across the yield curve. As such, management will continue to actively seek out opportunities to reduce the overall duration of the portfolio and improve cash flows. Given the current shape of the yield curve, this strategy could entail absorbing small losses within the portfolio to meet this longer term objective.

At September 30, 2014, the Company's net unrealized gains on available-for-sale securities were $1.8 million compared with $1.3 million net unrealized gains at June 30, 2014. The favorable change in net unrealized gains was primarily due to increases in the fair values of the Company's municipal bond, and US government securities portfolios. The increases in the fair values of the Company's investment securities portfolio were primarily driven by the narrowing of market spreads and changes in market interest rates.

During the third quarter, average total deposits increased 8% or $57.2 million to $764.6 million compared to the same period a year ago. Average non-maturing core deposits increased $17.2 million or 36% during the current quarter compared to the same period a year ago.

Brokered certificates of deposits totaled $13.5 million at September 30, 2014, and were structured with both fixed rate terms and adjustable rate terms, and had remaining maturities ranging from four to six years. Furthermore, brokered certificates of deposits with adjustable rate terms were structured with call features allowing the Company to redeem the certificates should interest rates dictate such action. These call features are generally exercisable within six to twelve months of issuance date and quarterly thereafter.

Operating results for the third quarter of 2014

Net income available to common shareholders was $1.2 million for the three months ended September 30, 2014 compared with $1.8 million for the same period a year ago and $2.2 million for the prior quarter. The decrease in net income available to common shareholders in the current quarter compared to the same period a year ago was primarily driven by a decrease in net interest income, increased provision for loan losses, and a decrease in the gains recognized on sale of securities partially offset by a decrease in provision for income taxes.

Net interest income for the three months ended September 30, 2014 was $7.9 million compared to $8.5 million during the same period a year ago.

Interest income for the three months ended September 30, 2014 was $9.1 million, a decrease of $219 thousand or 2% compared to the same period a year ago. The decrease in interest income during the three months of 2014 compared to the same period a year ago was driven by decreased yields in the loan portfolio and decreased volume in the investment securities portfolio, partially offset by increased volume in the loan portfolio and increased yield of investment securities.

Interest expense for the nine months ended September 30, 2014 was $1.2 million, an increase of $329 thousand or 40% compared to the same period a year ago. During the second quarter of 2014 the Company concluded the remaining hedged forecasted FHLB advances associated with the final two legs of the interest rate swaps were no longer probable. Accordingly, the remaining gains recorded in OCI relating to the final two legs of the interest rate swaps were immediately recognized in other noninterest income and are no longer being reclassified from OCI to earnings as a credit to interest expense.

Noninterest income for the three months ended September 30, 2014 was $671 thousand, a decrease of $303 thousand when compared to the same period a year ago. The decrease in noninterest income in the current quarter compared to the same period a year ago is primarily due to a $304 thousand decrease in gains recognized on sale of available for sale investment securities. The decrease in noninterest income of $1.5 million in the current quarter when compared to the prior quarter is due to $1.6 million in gains recorded in other income during the prior quarter, as a result of the Company's determination that the remaining hedged forecasted FHLB advances associated with the final two legs of certain interest rate swaps were no longer probable.

Provision for income tax was $264 thousand for the three months ended September 30, 2014 compared with $1.4 million for the same period a year ago. In the prior year the provision for income tax included the correction of an under-accrual of taxes that resulted from incorrectly accounting for the book tax timing differences relating to the sale of the Company's former mortgage subsidiary. As a result, the Company recognized additional income tax, interest and penalties expense totaling $429 thousand, relating to 2012 tax year during the three months ended September 30, 2013.

Diluted EPS was $0.09 for the three months ended September 30, 2014 compared with $0.12 for the same period a year ago, and $0.16 for the prior period. EPS decreased during the three months ended September 30, 2014 compared to the same period a year ago primarily due to a decrease in net income partially offset by a decrease in weighted average shares. The decrease in weighted average shares resulted from the repurchase of 2.0 million common shares through two separate repurchase plans announced and completed in 2013 and 700,000 common shares from another repurchase plan announced and completed during the six months ended June 30, 2014. All repurchased shares were retired subsequent to purchase. As such, the weighted average number of dilutive common shares outstanding decreased by 1.4 million shares during the nine months ended September 30, 2014.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.56% for the three months ended September 30, 2014, a decrease of 37 bp as compared to the same period a year ago. The decrease in net interest margin resulted from a 23 bp decline in yield on average earning assets and a 14 bp increase 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 continue to be challenging. 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. 

The Company realized net charge offs of $532 thousand in the current quarter compared with net charge offs of $1.3 million in the prior quarter and net recoveries of $109 thousand in the same period a year ago. Charge offs in the current quarter are primarily related to one commercial loan relationship.

The Company continues to monitor credit quality, and adjust the ALLL accordingly to ensure that the ALLL is maintained at a level that is adequate to cover estimated credit losses in the loan and lease portfolios. As such, the Company made $1.1 million additional provisions for loan losses during the third quarter of 2014, compared with $300 thousand during the same period a year ago. The Company's ALLL as a percentage of gross portfolio loans was 1.60% at September 30, 2014 compared to 2.28% as of period ended September 30, 2013.

Management is cautiously optimistic that given continuing improvement in local and national economic conditions, the Company's nonperforming assets including impaired loans will continue to trend down. However, the commercial real estate and commercial loan portfolios continue to be influenced by weak real estate values and the effects of relatively high unemployment levels in our local markets. At September 30, 2014, management believes the Company's ALLL is adequately funded given the current level of credit risk.

At September 30, 2014, the recorded investment in loans classified as impaired totaled $34.3 million, with a corresponding valuation allowance of $1.2 million compared to impaired loans of $35.5 million, with a corresponding valuation allowance of $1.0 million at June 30, 2014. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans. The decrease in impaired loans during the three months ended September 30, 2014 is primarily due to charge offs for one commercial loan relationship.

During the current quarter, the Company restructured two loans to grant a rate concession and two loans to grant a rate and maturity concession. The loans were classified as TDR and placed on nonaccrual status. As of September 30, 2014, the Company had $25.7 million in TDRs compared to $27.9 million as of June 30, 2014. As of September 30, 2014, the Company had one hundred and eighteen restructured loans that qualified as TDRs, of which one hundred were performing according to their restructured terms. TDRs represented 3.95% of gross portfolio loans as of September 30, 2014 compared with 4.50% at June 30, 2014.

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.

Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, totaled $24.5 million or 3.77% of portfolio loans as of September 30, 2014, compared to $27.5 million, or 4.23% of portfolio loans at June 30, 2014. The decrease in nonperforming loans in the current quarter primarily resulted from $3.1 million in payments received on two commercial loan relationships. Nonperforming assets, which include nonperforming loans and other real estate owned ("OREO"), totaled $24.9 million, or 2.54% of total assets as of September 30, 2014, compared with $28.3 million, or 2.89% of total assets as of June 30, 2014. As of September 30, 2014, nonperforming assets of $24.9 million have been written down by 24%, or $5.9 million, from their original balance of $37.9 million.

At September 30, 2014, and June 30, 2014, the recorded investment in OREO was $393 thousand and $826 thousand, respectively. The September 30, 2014 OREO balance consists of four properties, of which three are secured by 1-4 family residential real estate in the amount of $231 thousand and one commercial nonfarm residential property in the amount of $162 thousand. During the current quarter the Company transferred two ITIN properties with a carrying value of $169 thousand into OREO and sold two ITIN properties and one improved commercial land property with a total carrying value of $602 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 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 four 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".

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