Bank of Commerce Holdings™ announces First Quarter 2012 Results

REDDING, Calif., April 27, 2012 /PRNewswire/ -- Patrick J. Moty, President & CEO of Bank of Commerce Holdings (NASDAQ: BOCH), a $930.6 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 $1.9 million and diluted earnings per share (EPS) of $0.11 for the first quarter 2012.

Financial Highlights

• Net income available to common shareholders of $1.9 million reflects a 31% increase over the $1.4 million reported for the quarter ended March 31, 2011, and a modest decrease over the $1.9 million recorded for the fourth quarter 2011.
• Diluted EPS of $0.11 compares to $0.08 reported for the same period a year ago and $0.12 for the prior quarter ended December 31, 2011.
• Loan loss provisions for the first quarter were $1.3 million compared to $2.4 million for the first quarter 2011 and $1.8 million for the prior quarter ended December 31, 2011.
• Nonperforming assets represented 2.45% of total assets in the current period versus 2.68% for the quarter ended December 31, 2011.
• Mortgage banking revenue for the three months ended March 31, 2012 increased by 95% compared to 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 first quarter results and maintain a generally positive outlook despite tepid demand for credit in our markets. We will continue to focus our efforts on enhancing shareholder value through capital management opportunities such as the Share Repurchase program announced in the first quarter. In addition, as we celebrate our 30th year anniversary, we remain fully committed to serving our local communities."

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 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 March 31, 2012 and 2011, and December 31, 2011.

As indicated in Table 1 above, Bank of Commerce Holdings (the "Company") remains well capitalized. At March 31, 2012, the Company's Tier 1 and Total risk based capital ratios measured 14.15% and 15.41% respectively, while the leverage ratio was 13.36%.

Return on average assets (ROA) and return on average equity (ROE) for the three months ended March 31, 2012, was 0.89% and 7.41%, respectively compared with 0.72% and 6.35% for the three months ended March 31, 2011. The increase in ROA and ROE for the three months ended March 31, 2012, compared with the same period a year ago, was primarily driven by reduced provision for loan and lease losses, increased mortgage banking revenue, and decreased basic and diluted weighted average shares. The increases in the aforementioned items were partially offset by decreased yields realized from the loan portfolio, and to a lesser extent, the available-for-sale securities portfolio. The Company continues to experience decreased yields in the loan portfolio due to the pay-off of higher yielding loans, downward rate adjustments of variable rate loans, and the transfer of existing loans to nonaccrual status.

Balance Sheet Overview

As of March 31, 2012, the Company had total consolidated assets of $930.6 million, total net portfolio loans of $579.4 million, allowance for loan and lease losses of $11.4 million, total deposits of $663.7 million, and stockholders' equity of $113.6 million.

Overall, the net portfolio loan balance increased modestly during the first three months of 2012. The Company's net loan portfolio was $579.4 million at March 31, 2012, compared with $574.1 million at December 31, 2011, an increase of $5.3 million, or 0.92%. The increase in net portfolio loans was primarily driven by net originations of commercial real estate loans, partially offset by increased allowance for loan and lease losses (ALLL).

The Company maintained a strong liquidity position during the reporting period. As of March 31, 2012, the Company maintained cash positions at the Federal Reserve Bank (FRB) and correspondent banks in the amount of $40.6 million. The Company also held certificates of deposits with other financial institutions in the amount of $24.2 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 $192.9 million at March 31, 2012, compared with $203.5 million at December 31, 2011. The $10.6 million, or 5% decrease reflects net sales activity relating to the sale of municipal bonds and mortgage backed securities, partially offset by purchase activity of corporate securities and other asset backed securities. During the current period, the Company continued to reposition the portfolio with the objective of preserving the net interest margin while reducing overall portfolio duration. Accordingly, the Company recorded $645 thousand in realized gains on the sales of securities.

At March 31, 2012, the Company's net unrealized gain on available-for-sale securities was $2.1 million, compared with $1.5 million net unrealized gains at December 31, 2011. The favorable change in net unrealized gains was primarily due to contraction in credit market spreads which increased the fair values of the Company's corporate and municipal bond portfolios.

First quarter 2012 average total deposits of $662.1 million increased 3% or $18.6 million from the first quarter in 2011. Non maturing core deposits increased $34.1 million or 11% year over year.

Operating Results for the First Quarter 2012

Due to conservative underwriting, active servicing of problem credits, and the maintenance of a relatively solid net interest margin, the Company has remained profitable during the economic downturn. Accordingly, the Company continues to be well positioned to take advantage of strategic growth opportunities. Net income attributable to Bank of Commerce Holdings was $2.1 million for the three months ended March 31, 2012, compared with $2.1 million for the three months ended December 31, 2011, and $1.7 million for the three months ended March 31, 2011. Net income available to common stockholders was $1.9 million for the three months ended March 31, 2012, compared with $1.9 million for the three months ended December 31, 2011, and $1.4 million for the three months ended March 31, 2011. During the first quarter of 2012, diluted earnings per share decreased $0.01 per share when compared to the fourth quarter of 2011, and increased $0.03 per share compared to the first 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 March 31, 2012 was $8.5 million, a decrease of $200 thousand or 2% compared to the same period in 2011, and an increase of $6 thousand compared with the three months ended December 31, 2011. The decrease in net interest income during the current period is attributable to decreased interest income realized from the loan portfolio and the available-for-sale securities portfolio, partially offset by declining costs associated with interest bearing deposits.  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 March 31, 2012, the ITIN portfolio yielded 3.34% compared to a yield of 5.59% during the same period a year ago, while also incurring a $5.7 million decrease in average balances. During the current period, interest expense associated with savings deposits and certificate of deposits continued to decline, which partially mitigated the affects of declining interest income from the loan portfolio.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.98% for the three months ended March 31, 2012, a decrease of 4 basis points as compared to the same period a year ago. The quarter-over-quarter modest decrease in net interest margin primarily resulted from decreased yields on the loan portfolio and the available-for-sale securities portfolio, partially offset by declining costs associated with interest bearing deposits. Loan yields continue to decline due to payoffs of higher yielding loans, downward rate adjustments on variable rate loans, and transfers to nonaccrual status. As a result, the tax equivalent yield on earning assets decreased from 5.03% for the three months ended March 31, 2011 to 4.94% or 9 basis points for three months ended March 31, 2012.

The decrease in yield on earning assets was substantially offset by a decrease in interest expense to average earning assets. Interest expense as a percent of average earning assets decreased from 1.01% to 0.96% or 5 basis points on a quarter-over-quarter basis. As a result, the Company was able to maintain a relatively consistent net interest margin during the three months ended March 31, 2012 compared to the same period a year ago.

Noninterest income for the three months ended March 31, 2012 was $6.1 million, an increase of $2.6 million or 75% 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, 2012 and 2011:

Payroll and benefit processing fees increased by $27 thousand for the three months ended March 31, 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 increased $387 thousand to $645 thousand for the three months ended March 31, 2012, compared to $258 thousand for the same period a year ago. Management continued to reposition the portfolio during the current period with the objective of shortening duration while reasonably maintaining the net interest margin. As such, the Company sold twenty-two securities during the three months ended March 31, 2012, compared to the sale of sixteen securities during the same period a year ago. The security sales were centered in municipal bonds, corporate securities, and collateralized mortgage obligations.

The Company recorded merchant credit card service income of $35 thousand and $270 thousand for the three months ended March 31, 2012 and 2011, respectively. During the first quarter of 2011, approximately 50% of the merchant credit card portfolio was sold to an independent third party, resulting in additional revenues of $225 thousand. Accordingly, merchant credit card income decreased by 87% from the same period a year ago.

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. Mortgage banking revenue includes gain on sale of loans, net commissions paid to brokers, mortgage loan origination fees, and direct mortgage loan costs. Direct mortgage loan costs, loan origination fees and net commissions paid to brokers are recorded as income when the loans are sold. Mortgage banking revenue during the three months ended March 31, 2012 increased $2.4 million to $4.9 million, compared to $2.5 million during the same period a year ago. During the current period the Company benefited from increased originations and closed loan volume as a result of the historically low interest rate environment. Closed loan volume was $262.4 million and $153.8 million for the three months ended March 31, 2012 and 2011, respectively. The Company recorded $7.6 million and $3.0 million in gains on sale of mortgage loans for the three months ended March 31, 2012 and 2011, respectively. Gains on sale of mortgage loans are included under the caption mortgage banking revenue in the Consolidated Statement of Operations filed in our annual 10K and quarterly 10Q filings.

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 March 31, 2012 was $9.9 million, an increase of $2.2 million or 29% 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, 2012 and 2011:

Salaries and related benefits expense for the three months ended March 31, 2012 was $6.0 million, an increase of $1.8 million or 42% compared to the same period a year ago. During the three months ended March 31, 2012 the Bank paid early retirement benefits to four employees, increased accrued employee cash rewards, and increased FTE's compared to the three months ended March 31, 2011. During the second quarter of 2011, our mortgage banking subsidiary transitioned existing loan officers from a commission based compensation plan to a salary based compensation plan, which resulted in increased salary expense. Prior to the transition, commission expenses were recorded in net mortgage banking revenues. As a result, first quarter 2012 salary expense associated with our mortgage subsidiary increased by $1.0 million compared to the same period a year ago.

Occupancy and equipment expense for the three months ended March 31, 2012 was $862 thousand, an increase of $134 thousand or 18% compared to the same period a year ago. The increase in this expense is primarily driven by increased rent expense associated with our mortgage subsidiary. During third and fourth quarters of 2011, and the first quarter of 2012, the mortgage subsidiary expanded their leased square footage pertaining to their existing headquarters, and added several new branches. As a result, mortgage subsidiary rent expense increased by $82 thousand during the three months ended March 31, 2012, compared to the same period a year ago.

Weakness in the housing industry and the commercial real estate market continues to detrimentally affect our residential real estate portfolio and commercial real estate portfolio; in turn, the level of real estate foreclosures remains elevated, and consequently the movement of the properties into other real estate owned (OREO). Through 2011, declines in the market values of these properties after foreclosure resulted in additional losses on the sale of the properties or by valuation adjustments. As a result, during the three months ended March 31, 2011, the Company incurred impairments of OREO of $187 thousand. Additional impairments were not deemed necessary during the three months ended March 31, 2012.

The decrease in FDIC assessments during the three months ended March 31, 2012, compared to the same period a year ago resulted from a slightly decreased assessment base and 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.

Professional service fees encompass audit, legal and consulting fees. Professional service fees for the three months ended March 31, 2012 was $663 thousand, an increase of $89 thousand or 16% compared to the same period a year ago. The increase in professional fees was primarily driven by increased legal and consulting fees relating to ongoing regulatory compliance requirements, certain litigation with a previous mortgage loan investor, and information technology improvements. The increases in these expenses were partially offset by decreased legal expenses recognized by the Bank.

Other expenses for the three months ended March 31, 2012 were $1.8 million, an increase of $589 thousand or 50% compared to the same period a year ago. The increase in other expenses was primarily driven by increased losses on sale of OREO, and $150 thousand in additional provisions provided to the reserve for unfunded commitments. During the three months ended March 31, 2012, the Bank sold a commercial OREO property, resulting in a $353 thousand loss on sale.

During the three months ended March 31, 2012, the Bank was required to perform on a stand by letter of credit. As such, subsequent to the transaction, the Bank provided additional provisions to the reserve for unfunded commitments. The remaining increases in other expenses were primarily driven by increases in overhead associated with our mortgage subsidiary, and general growth in operations.

The ALLL totaled $11.4 million and $10.6 million at March 31, 2012 and December 31, 2011, respectively. The increase in the ALLL as of March 31, 2012 as compared to December 31, 2011 is principally attributable to provisions for loan and leases exceeding net charge offs for the current year. There were a number of factors that contributed to the decreased net charge offs including less impairment charges on both existing impaired loans and newly classified impaired loans, and generally improved credit quality indicators.

The majority of loan charge offs in the current year were primarily centered in 1-4 family real estate and commercial real estate related credits. These charge offs were largely driven by economic conditions coupled with declining real estate values in our markets. The majority of all charge offs taken in the current period relate to borrowers that were directly affected by the housing market downturn or indirectly impacted from the contraction of real estate dependent businesses.

At March 31, 2012, the recorded investment in loans classified as impaired totaled $39.3 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 December 31, 2011, the total recorded investment in impaired loans was $39.8 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 March 31, 2012, the Company restructured seven loans, six of which were restructured to grant interest rate concessions, and one loan was restructured to grant interest rate and principal concessions. During the three months ended March 31, 2011, the Company restructured eighteen loans, seventeen of which were restructured to grant interest rate concessions, and one loan was restructured to grant both interest rate and maturity concessions.

As of March 31, 2012, the Company had $31.2 million in TDRs compared to $31.3 million as of December 31, 2011. As of March 31, 2012, the Company had one hundred and four restructured loans that qualified as TDRs, of which seventy-seven were performing according to their restructured terms. TDRs represented 5.29% of gross portfolio loans as of March 31, 2012, compared with 5.35% at December 31, 2011. The Company did not have any defaults during the three months ended March 31, 2012 and 2011, on loans that were restructured within the previous twelve months of their respective reporting periods.

Our loan portfolio continues to be impacted by an anemic economic recovery and continued significant weaknesses in our local real estate markets. Nonperforming loans, which include nonaccrual loans and accruing loans past due 90 days or more, totaled $20.9 million or 3.54% of total portfolio loans as of March 31, 2012, as compared to $21.5 million, or 3.68% of total loans at December 31, 2011. Nonperforming assets, which include nonperforming loans and foreclosed real estate ("OREO"), totaled $22.8 million, or 2.45% of total assets as of March 31, 2012, compared with $25.2 million, or 2.68% of total assets as of December 31, 2011.

As of March 31, 2012, nonperforming assets of $22.8 million have been written down by 33%, or $7.6 million, from their original balance of $32.1 million.

At March 31, 2012, and December 31, 2011, the recorded investment in OREO was $1.9 million and $3.7 million, respectively. For the three months ended March 31, 2012, the Company transferred foreclosed property from two loans in the amount of $178 thousand to OREO and adjusted the balances through charges to the ALLL in the amount of $44 thousand relating to the transferred foreclosed property. During this period, the Company sold five properties with balances of $2.0 million for a net loss of $369 thousand. The March 31, 2012 OREO balance consists of eleven properties, of which ten are secured with 1-4 family residential real estate in the amount of $738 thousand. The remaining property consists of improved commercial land in the amount of $1.2 million.