Bank of Commerce Holdings Announces Results for the Fourth Quarter of 2014

REDDING, Calif., Jan. 30, 2015 (GLOBE NEWSWIRE) -- Randall S. Eslick, President and Chief Executive Officer of Bank of Commerce Holdings (Nasdaq:BOCH) (the "Company"), a $997.2 million asset bank holding company and parent company of Redding Bank of Commerce (the "Bank"), today announced financial results for the fourth quarter and year ended December 31, 2014. Net income available to common shareholders for the quarter ended December 31, 2014 was $1.6 million or $0.12 per share – diluted, compared with $2.0 million or $0.14 per share – diluted for the same period of 2013. Net income available to common shareholders for the year ended December 31, 2014 was $5.5 million or $0.14 per share – diluted compared with $7.7 million or $0.52 for the same period of 2013.

Financial highlights for the full year 2014:

• Net income available to common shareholders was $5.5 million for the year ended December 31, 2014 compared with $7.7 million for the same period a year ago.
• Loans increased $62.8 million or 10% compared to the prior year.
• Nonperforming assets decreased $8.5 million or 28% compared to the prior year.
• Total deposits increased $42.7 million or 6% compared to the prior year.
• Book value per share increased to $6.29 compared to $5.86 for the prior year.

Financial highlights for the fourth quarter of 2014:

• Net income available to common shareholders was $1.6 million for the three months ended December 31, 2014 compared with $2.0 million for the same period a year ago and $1.2 million for the prior quarter.
• Nonperforming assets decreased $2.7 million or 11% compared to the prior quarter.
• Total deposits increased $21.5 million or 3% compared to the prior quarter.
• Loans increased $11.2 million or 2% compared to the prior quarter.
• Gain of $406 thousand from the discounted repayment of $5.0 million of junior subordinated debentures.
• The quarter includes severance costs of $1.0 million associated with the retirement of a former executive.

Randall S. Eslick, President and CEO commented: "I am very pleased with our achievements during a challenging 2014. The executive management team is energized and our loan and deposit sales force is focused. On a year over year basis, we were able to increase total deposits 6%, increase loans 10% and make sizeable decreases in our nonperforming assets. We are poised to build on these successes in 2015."

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 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 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. 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. At December 31, 2014, the Company's Tier 1 and Total risk based capital ratios were 13.91% and 15.16% respectively, while the leverage ratio was 11.59%. The decrease in capital ratios during the current quarter compared to the same period a year ago and the prior quarter is primarily due to repayment of junior subordinated debentures, repurchase of common stock, and increased average assets.

BALANCE SHEET OVERVIEW

As of December 31, 2014, the Company had total consolidated assets of $997.2 million, net loans of $650.2 million, allowance for loan and lease losses ("ALLL") of $10.8 million, total deposits of $789.0 million, and shareholders' equity of $103.6 million.

The Company recorded gross loan balances of $660.9 at December 31, 2014, compared with $598.0 at December 31, 2013, an increase of $62.9 million. The increase in gross loans during the year ended December 31, 2014 was driven by strong organic loan originations and the purchase of wholesale loan pools. During 2014, the Company purchased $42.2 million and $18.5 million in consumer and SBA loan pools, respectively.

The decrease in the ALLL primarily resulted from $5.8 million in charge offs related to three significant borrowing relationships partially offset by $3.2 million in provision to the allowance for loan and lease losses. The loans associated with these three borrowers were collateral dependent, were adequately reserved for at December 31, 2013, and were subsequently charged-off during the second quarter of 2014. See table 7 for additional detail of the ALLL.

The Company continued to maintain a strong liquidity position during the reporting period. As of December 31, 2014, the Company maintained cash positions at the Federal Reserve Bank and correspondent banks in the amount of $43.9 million. The Company also held certificates of deposits with other financial institutions in the amount of $14.5 million.

Available-for-sale investment securities totaled $187.0 million at December 31, 2014, compared with $216.6 million at December 31, 2013 and $189.4 million at September 30, 2014. 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 fourth quarter of 2014, the Company purchased twelve securities with a par value of $14.9 million and weighted average yield of 3.29% and sold nine securities with a par value of $11.4 million and weighted average yield of 2.44%. The sales activity resulted in $93 thousand in net realized gains for the three months ended December 31, 2014. Average quarterly securities balances and weighted average tax equivalent yields at December 31, 2014 and 2013 were $226.1 million and 3.40% compared to $252.7 million and 3.30%, respectively.

During the year ended December 31, 2014, the Company's securities purchases were focused on moderate term maturities, 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. Management continues to actively seek out opportunities to reduce the overall duration of the portfolio and accelerate cash flows. This strategy could entail recognizing small losses within the portfolio to meet these longer term objectives.

At December 31, 2014, the Company's net unrealized gains on available-for-sale securities were $2.6 million compared with $3.7 million net unrealized loss at December 31, 2013 and $1.8 million net unrealized gains at September 30, 2014. The favorable change in net unrealized gains resulted primarily from increases in the fair values of the Company's municipal bond, and US government securities portfolios, caused by declines in long-term interest rates.

Total deposits for the year ended December 31, 2014, increased 6% or $42.7 million to $789.0 million compared to the same period a year ago and 3% or $21.5 million compared to the prior quarter. Non-maturing core deposits increased $7.8 million or 2% compared to the same period a year ago and 3% or $11.6 million compared to the prior quarter.

Brokered deposits totaled $97.9 million at December 31, 2014 compared with $70.3 million at December 31, 2013, and $80.0 million at September 30, 2014. Brokered deposits included reciprocal deposits of $90.3 million, $55.1 million, and $66.4 million for the same periods respectively.

Deposits obtained through the use of a deposit listing service that are not considered brokered deposits totaled $67.5 million at December 31, 2014 compared with $68.0 million at September 30, 2014 and $42.7 million at December 31, 2013.

INCOME STATEMENT OVERVIEW

Net income available to common shareholders was $1.6 million for the three months ended December 31, 2014 compared with $2.0 million for the same period a year ago. 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 increased loan loss provisions and increased noninterest expense partially offset by increased noninterest income and a decreased provision for income taxes.

Net income available to common shareholders increased $410 thousand to $1.6 million during the three months ended December 31, 2014 compared to $1.2 million in the prior quarter. Increased operating income, decreased provision for loan and lease losses and decreased provision for tax expense were partially offset by increased noninterest expense.

Return on average assets and return on average equity for the current quarter was 0.68% and 6.50%, respectively, compared with 0.89% and 8.18%, respectively, for the same period a year ago. The 21 basis point decrease in return on average assets between these periods is mostly attributed to decreased earnings. The decrease in return on average equity was primarily driven by decreased net income, partially offset by the decrease in weighted average shares resulting from the Company's publically announced common stock repurchase plans.

Net interest Income

Interest income for the three months ended December 31, 2014 was $9.5 million, an increase of $228 thousand or 2% compared to the same period a year ago and an increase of $427 thousand or 5% compared to the prior quarter. The increase in interest income compared to the same period a year ago was driven by increased volume in the loan portfolio and increased yield in the investment securities portfolio, partially offset by decreased volume in the investment securities portfolio and decreased yield in the loan portfolio. The increase in interest income compared to the prior quarter was primarily due to increased volume and yield in the loan portfolio.

Interest expense for the three months ended December 31, 2014 was $1.2 million, an increase of $432 thousand or 54% compared to the same period a year ago and an increase of $85 thousand or 7% compared to the prior quarter. During the second quarter of 2014 the Company concluded that the remaining hedged forecasted interest costs from FHLB advances associated with the final two legs of a terminated forward starting interest rate swap were no longer probable. Accordingly, the remaining hedge gains recorded in other comprehensive income relating to the interest rate swap were immediately recognized in other noninterest income. Prior to this determination the Company had been reclassifying the hedge gains out of other comprehensive income into earnings as an adjustment to interest expense.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.74% for the three months ended December 31, 2014, a decrease of 21 basis points as compared to the same period a year ago. The decrease in net interest margin resulted from a 3 basis point decline in yield on average earning assets and an 18 basis point 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. 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 yields on earning assets.

Noninterest Income

Noninterest income for the three months ended December 31, 2014 was $1.1 million, an increase of $425 thousand and $473 thousand when compared to the same period a year ago and the previous quarter respectively. The increase in noninterest income in the current quarter compared to the same period a year ago and prior quarter is primarily due to a $406 thousand gain on discounted repayment of junior subordinated debentures recognized during the quarter ended December 31, 2014. The debentures were issued to Bank of Commerce Holdings Trust. All of the debentures issued to the Trust, less the common stock of the Trust, qualified as Tier 1 capital, under guidance issued by the Federal Reserve Board.

Noninterest Expense

Noninterest expense for the three months ended December 31, 2014 increased $1.7 million compared to the same period a year ago, and increased $1.4 million compared to the prior quarter. The increase in noninterest expense in the current quarter is primarily due to severance costs associated with the retirement of a former executive, and an overall increase in the number of employees.

During the three months ended December 31, 2014, the Company recorded a provision for income tax benefit of $334 thousand compared with a provision for income tax expense of $1.4 million for the same period a year ago and a provision for income tax expense of $264 thousand for the prior quarter. The tax benefit recorded in the current quarter was driven by a change in the Company's estimated annual effective tax rate. In addition, tax return to accrual adjustments were recognized as a result of an adjustment to 2013 permanent book tax differences. During the current quarter, the recorded tax benefit of $334 thousand was comprised of $164 thousand in tax expense derived from applying the adjusted estimated effective tax rate, a tax benefit of $390 thousand, resulting from a change in the estimated effective tax rate, and a tax benefit of $108 thousand resulting from tax return to accrual adjustments.

Diluted earnings per share was $0.12 for the three months ended December 31, 2014 compared with $0.14 for the same period a year ago, and $0.09 for the prior period. Earnings per share decreased during the three months ended December 31, 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 the repurchase of 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. The weighted average number of dilutive common shares outstanding decreased by 502 thousand shares during the year ended December 31, 2014.

The Company realized net charge offs of $255 thousand in the current quarter compared with net charge offs of $532 thousand in the prior quarter and net recoveries of $630 thousand for 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 portfolio. As such, the Company recognized $675 thousand in provisions for loan and lease losses during the fourth quarter of 2014, compared to $1.1 million for the prior quarter. The Company's ALLL as a percentage of gross loans was 1.64% at December 31, 2014 compared to 1.60% as of September 30, 2014. At December 31, 2014, management believes the Company's ALLL is adequately funded given the current level of credit risk.

At December 31, 2014, the recorded investment in loans classified as impaired totaled $31.4 million, with a corresponding valuation allowance of $1.6 million compared to impaired loans of $34.3 million, with a corresponding valuation allowance of $1.2 million at September 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 December 31, 2014 compared to the prior quarter is primarily due to principal payments on two commercial loan relationships.

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, 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 measuring 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, 2014, the Company restructured one loan to grant a rate and maturity concession. The loan was classified as a troubled debt restructuring and placed on nonaccrual status. As of December 31, 2014, the Company had $23.5 million in troubled debt restructurings compared to $25.7 million as of September 30, 2014. As of December 31, 2014, the Company had one hundred eighteen restructured loans that qualified as troubled debt restructurings, of which ninety-seven were performing according to their restructured terms. Troubled debt restructurings represented 3.55% of gross loans as of December 31, 2014 compared with 3.95% at September 30, 2014.

Nonperforming loans, which include nonaccrual loans and accruing loans past due more than 90 days, totaled $21.7 million or 3.28% of gross loans as of December 31, 2014, compared to $24.9 million, or 3.77% of gross loans at September 30, 2014. The decrease in nonperforming loans in the current quarter compared to the prior quarter primarily resulted from $1.7 million in payments received from a commercial loan relationship. Nonperforming assets, which include nonperforming loans and other real estate owned ("OREO"), totaled $22.2 million, or 2.22% of total assets as of December 31, 2014, compared with $24.9 million, or 2.54% of total assets as of September 30, 2014.

At December 31, 2014, and September 30, 2014, the recorded investment in OREO was $502 thousand and $393 thousand, respectively. The December 31, 2014 OREO balance consists of six properties, of which five are secured by 1-4 family residential real estate in the amount of $341 thousand and one commercial nonfarm residential property in the amount of $161 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".