Bank of Commerce Holdings Announces Results for the Second Quarter of 2015

REDDING, Calif., July 24, 2015 (GLOBE NEWSWIRE) -- Randall S. Eslick, President and Chief Executive Officer of Bank of Commerce Holdings (NASDAQ:BOCH) (the "Company"), a $983.1 million asset bank holding company and parent company of Redding Bank of Commerce (the "Bank"), today announced financial results for the quarter and the six months ended June 30, 2015. Net income available to common shareholders for the quarter ended June 30, 2015 was $2.3 million or $0.18 per share – diluted, compared with $2.2 million or $0.16 per share – diluted for the same period of 2014. Net income available to common shareholders for the six months ended June 30, 2015 was $4.1 million or $0.31 per share – diluted compared with $2.7 million or $0.19 per share – diluted for the same period of 2014.

Financial highlights for the second quarter of 2015:

• Net income available to common shareholders of $2.3 million for the three months ended June 30, 2015 was a an improvement of $184 thousand (8.5%) over $2.2 million net income available to common shareholders earned during the second quarter of 2014, and an improvement of $589 thousand (33.6%) over $1.8 million available to common shareholders earned during the previous quarter.
• Nonperforming assets at June 30, 2015 totaled $18.4 million, a decrease of $9.9 million (35.1%) compared to June 30, 2014, and a decrease of $1.7 million (33.6% annualized) compared to March 31, 2015.
• Average loans for the quarter increased $29.9 million to $703.0 million from $673.1 million for the first quarter of 2015.
• Net loan loss recoveries of $106 thousand combined with continuing improved asset quality resulted in no additional provision for loan and lease losses during the second quarter.
• The Company's book value per share increased to $6.49 per common share at June 30, 2015 from $6.07 per common share at June 30, 2014 (6.9%) and $6.41 at March 31, 2015 (5.0% annualized).
• The Company's net interest margin improved to 3.71% for the quarter ended June 30, 2015 from 3.62% for the second quarter of 2014.

Financial highlights for the six months ended June 30, 2015:

• Net income available to common shareholders of $4.1 million for the six months ended June 30, 2015 was an improvement of $1.4 million (53.2%) over $2.7 million net income available to common shareholders earned during the six months ended June 30, 2014.
• Nonperforming assets at June 30, 2015 totaled $18.4 million, a decrease of $3.8 million (34.6% annualized) compared to December 31, 2014.
• Gross loans at June 30, 2015 totaled $699.8 million, an increase of $38.9 million (12% annualized) since December 31, 2014.
• Net loan loss recoveries of $582 thousand combined with continuing improved asset quality resulted in no additional provision for loan and lease losses during the first six months of 2015.
• The Company's book value per share increased to $6.49 per common share at June 30, 2015 from $6.29 per common share at December 31, 2014 (6.4% annualized).
• The Company's net interest margin improved to 3.72% for the six months ended June 30, 2015 from 3.57% for the year ended December 31, 2014.
• The Company's efficiency ratio improved to 68.0% during the first six months of 2015 compared to 71.5% during the same period in 2014.

Randall S. Eslick, President and CEO commented: "We are pleased that the positive trends which began in 2014 have continued into the first six months of 2015. Our average loan totals continue to increase, our asset quality continues to improve and our efficiency ratio reflects the initial benefits of our cost control efforts. I applaud our employees for making these successes a reality."

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 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 and lease 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 fiscal year ended December 31, 2014 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. The Company undertakes no obligation and specifically disclaims any obligation, to revise or publicly release the results of any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date the statements were made.

The Company and the Bank continue to meet all capital adequacy requirements to which they are subject. The change in capital ratios during the current quarter compared to the same period a year ago is primarily due to repayment of junior subordinated debentures, repurchase of common stock, and a change in the calculation of the risk-weighted average assets in accordance with Basel III.

BALANCE SHEET OVERVIEW

As of June 30, 2015, the Company had total consolidated assets of $983.1 million, gross loans of $699.8 million, allowance for loan and lease losses ("ALLL") of $11.4 million, total deposits of $760.0 million, and shareholders' equity of $106.6 million.

The Company recorded gross loan balances of $699.8 million at June 30, 2015, compared with $619.4 million and $699.2 million at June 30, 2014 and March 31, 2015, respectively, an increase of $80.4 million and $545 thousand, respectively. The increase in gross loans compared to the same period a year ago was driven by strong organic loan originations and the purchase of wholesale loan pools. During the three months ended June 30, 2015, the Company purchased $6.6 million in consumer loan pools. During the twelve-month period ended June 30, 2015, the Company purchased $44.5 million, $6.4 million and $18.5 million in consumer, commercial real estate investor and SBA loan pools, respectively.

The increase in the ALLL in the current quarter compared to the prior quarter resulted from net loan loss recoveries of $106 thousand. As a result of net recoveries and continued improved asset quality, no additional provision for loan and lease losses was deemed necessary during the current quarter. See table 8 for additional detail of the ALLL.

As of June 30, 2015, the Company maintained cash positions at the Federal Reserve Bank and correspondent banks in the amount of $25.3 million. The Company also held interest bearing deposits with other financial institutions in the amount of $7.5 million.

Available-for-sale investment securities totaled $160.8 million at June 30, 2015, compared with $188.7 million and $166.9 million at June 30, 2014 and March 31, 2015, respectively. The Company's available-for-sale investment portfolio provides the Company a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations and wholesale loan purchases. During the second quarter of 2015, the Company purchased six securities with a par value of $11.1 million and weighted average yield of 2.27% and sold eleven securities with a par value of $10.0 million and weighted average yield of 2.14%. The sales activity resulted in $61 thousand in net realized gains for the three months ended June 30, 2015. During the three months ended June 30, 2015, the Company received $4.7 million in proceeds from principal payments, calls and maturities within the available-for-sale investment securities portfolio. Average quarterly securities balances and weighted average tax equivalent yields at June 30, 2015 and 2014 were $197.9 million and 3.47% compared to $235.7 million and 3.53%, respectively.

During the current quarter, the Company's securities transactions were focused on improving credit quality and continuing to shorten the effective duration of the portfolio in anticipation of rising interest rates. Management will continue to actively seek out opportunities to reduce the overall duration of the portfolio and accelerate cash flows, while also improving credit quality and liquidity. This strategy could entail absorbing small losses within the portfolio to meet longer term objectives.

At June 30, 2015, the Company's net unrealized gains on available-for-sale investment securities were $1.5 million compared with $1.3 million and $3.1 million at June 30, 2014 and March 31, 2015, respectively. The decrease in net unrealized gains during the current quarter resulted primarily from decreases in the fair value of the Company's municipal bond and corporate securities portfolios, as a result of increases in interest rates.

Total deposits at June 30, 2015, increased $5.0 million or 0.67% to $760.0 million compared to June 30, 2014, and decreased $1.9 million or 0.25% compared to March 31, 2015. Non-maturing core deposits increased $10.2 million or 2% compared to the same date a year ago and increased $7.3 million or 2% compared to March 31, 2015. Management intends to continue to reduce reliance on certificates of deposit as a funding source.

In accordance with regulatory Call Report instructions, the Bank will file (or has filed) quarterly Call Reports which list brokered deposits of $76.1 million, $61.9 million and $70.3 million at June 30, 2015, June 30, 2014 and March 31, 2015, respectively. These amounts include reciprocal deposits obtained through the CDARS and ICS programs, which management does not consider to be brokered.

INCOME STATEMENT OVERVIEW

 Second Quarter of 2015 Compared With Second Quarter of 2014

Net income available to common shareholders for the second quarter of 2015 increased $184 thousand over the second quarter of 2014. In the current quarter, net interest income was $405 thousand higher and the provision for loan and lease losses was $1.5 million lower. These positive changes were partially offset by a decrease in noninterest income of $1.3 million, an increase in noninterest expense of $271 thousand and an increase in income tax expense of $145 thousand.

Net Interest Income

Net interest income increased $405 thousand over a year previous. Interest income for the three months ended June 30, 2015 increased $701 thousand or 8% to $9.8 million which reflects the increase in average earning assets and the reallocation of lower yielding assets into higher yielding loans. Interest expense for the three months ended June 30, 2015 increased $296 thousand or 34% to $1.2 million. Interest expense on deposits declined $92 thousand and interest expense on other borrowings decreased $44 thousand, but interest on the Bank's Federal Home Loan Bank of San Francisco borrowings increased $432 thousand due to the net settlement expense associated with the Bank's active interest rate swap.

In 2011, to mitigate interest rate and market risks, the Bank entered into four forward starting interest rate swaps to hedge interest rate risk associated with variable rate Federal Home Loan Bank Of San Francisco borrowings. The hedges converted the LIBOR based floating rate of interest on the $75.0 million Federal Home Loan Bank of San Francisco  borrowings to fixed interest rates. The fixed rates adjust each August and were/are 0.94% at August 2013, 1.84% at August 2014, 2.64% at August 2015 and 3.22% at August 2016. During the second quarter of 2014, the net cost of the Bank's Federal Home Loan Bank of San Francisco borrowings was also reduced when hedge gains from a previous set of interest rate swaps were reclassified out of other comprehensive income into earnings as a reduction of interest expense. As a result, interest expense on Federal Home Loan Bank of San Francisco borrowings for the second quarter of 2014 was a negative $69 thousand.

Interest expense on other borrowings, primarily junior subordinated debentures was $49 thousand and $93 thousand for the second quarter of 2015 and 2014, respectively. During December of 2014, the Company repaid $5.0 million of junior subordinated debentures resulting in a decrease in interest on other borrowings in 2015.

Noninterest Income

Noninterest income for the three months ended June 30, 2015 decreased $1.3 million compared to the same period a year ago. During the quarter ended June 30, 2014 the Company recorded $1.6 million in hedge gains in noninterest income. This decrease in noninterest income was partially offset by net gains on sale of available-for-sale investment securities during the current quarter of $61 thousand compared to a net loss of $39 thousand for the same period a year ago. There was also a $205 thousand special dividend on Federal Home Loan Bank of San Francisco stock included in other noninterest income during the three months ended June 30, 2015.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2015 increased $271 thousand compared to the same period a year ago. During the quarter ended June 30, 2015 the Company transferred land with a carrying value of $261 thousand previously held for construction of a new branch to OREO for disposition. The property was transferred to OREO at its fair value less expected selling costs resulting in a write down of $91 thousand. In the current period, professional services fees are $138 thousand higher than a year earlier.

Income Tax Provision

During the three months ended June 30, 2015, the Company recorded a provision for income tax expense of $964 thousand compared with $819 thousand for the same period a year ago. The increase in the current year is due to increased taxable income.

Second Quarter of 2015 Compared With First Quarter of 2015

Net income available to common shareholders for the second quarter of 2015 increased $589 thousand over the first quarter of 2015. In the current quarter, net interest income was higher by $226 thousand, noninterest income increased by $27 thousand and noninterest expense decreased $471 thousand. These positive changes were partially offset by an income tax provision that was higher by $135 thousand.

Net Interest Income

Net interest income increased $226 thousand over a quarter previous. Interest income for the three months ended June 30, 2015 increased $237 thousand to $9.8 million. The increase in interest income was due to increased average loan balances and the effect of a quarter that was one day longer than the first quarter of 2015 partially offset by decreased interest on securities due to decreased average securities balances. Interest expense for the three months ended June 30, 2015 increased $11 thousand or 1% to $1.2 million compared to the prior quarter. This increase was primarily due to increased interest expense on Federal Home Loan Bank of San Francisco borrowings.

Noninterest Income

Noninterest income for the three months ended June 30, 2015 increased $27 thousand compared to the prior quarter. The Company recognized a $205 thousand special dividend on Federal Home Loan Bank of San Francisco stock included in other income during the three months ended June 30, 2015. Net gains recognized on the sale of available-for-sale investment securities during the current quarter decreased by $154 thousand to $61 thousand compared to a $215 thousand net gain in the prior quarter.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2015 decreased $471 thousand compared to the prior quarter. The decrease is driven by decreased salary costs and a decrease in the cost of the Bank's supplemental executive retirement plans.

Income Tax Provision

During the three months ended June 30, 2015, the Company recorded a provision for income tax expense of $964 thousand compared with provision for income tax expense of $829 thousand for the prior quarter. The increase in the current quarter is due to increased taxable income.

Earnings Per Share

Diluted earnings per share were $0.18 for the three months ended June 30, 2015 compared with $0.16 for the same period a year ago, and $0.13 for the prior period. Earnings per share increased during the three months ended June 30, 2015 compared to the same period a year ago as a result of increased net income and decreased weighted average shares. The decrease in weighted average shares resulted from the repurchase of 700,000 common shares from a repurchase plan announced and completed during the six months ended June 30, 2014. All repurchased shares were retired subsequent to purchase.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.85% for the three months ended June 30, 2015, an increase of eight basis points as compared to the same period a year ago. The increase in net interest margin resulted from a 19 basis point increase in tax-equivalent yield on average earning assets offset by an 11 basis point increase in interest expense to fund average earning assets. Maintaining our net interest margin in a historically low interest rate environment and while confronted with known increased Federal Home Loan Bank of San Francisco borrowing costs will be challenging in the foreseeable future. Management will continue to reallocate the asset mix into higher yielding assets by pursuing organic loan growth, and actively managing the investment securities portfolio within our accepted risk tolerance.

The Company realized net loan loss recoveries of $106 thousand in the current quarter compared with net loan loss recoveries of $476 thousand in the prior quarter and net loan charge offs of $1.3 million for the same period a year ago.

The Company continues to monitor credit quality, and adjust the ALLL to ensure that the ALLL is maintained at a level that is adequate to cover estimated credit losses in the loan and lease portfolio. The Company made no provision for loan and lease losses during the first two quarters of 2015 compared to a provision of $1.5 million during quarter ended June 30, 2014. The Company's ALLL as a percentage of gross loans was 1.63% as of June 30, 2015 compared to 1.59% as of June 30, 2014 and 1.62% as of March 31, 2015. At June 30, 2015, the Bank's ALLL methodology, which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, management believes the Company's ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses.

At June 30, 2015, the recorded investment in loans classified as impaired totaled $25.0 million, with a corresponding valuation allowance of $1.3 million compared to impaired loans of $35.5 million with a corresponding valuation allowance of $1.0 million at June 30, 2014 and impaired loans of $27.7 million, with a corresponding valuation allowance of $1.5 million at March 31, 2015. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.

Loans are reported as a troubled debt restructuring 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, either principal or interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by calculating 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 of the ALLL.

During the three months ended June 30, 2015, the Company restructured three loans to grant rate and payment deferrals. The loans were classified as troubled debt restructurings and placed on nonaccrual status. As of June 30, 2015, the Company had 121 restructured loans that qualified as troubled debt restructurings, of which 103 were performing according to their restructured terms.

At June 30, 2015, June 30, 2014 and March 31, 2015, the recorded investment in OREO was $1.4 million, $826 thousand and $1.5 million, respectively. The June 30, 2015 OREO balance consists of eight properties, of which four are 1-4 family residential real estate in the amount of $283 thousand, three are nonfarm nonresidential properties in the amount of $953 thousand and one is an undeveloped commercial property in the amount of $170 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".