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

REDDING, Calif., April 30, 2015 (GLOBE NEWSWIRE) -- Randall S. Eslick, President and Chief Executive Officer of Bank of Commerce Holdings (Nasdaq:BOCH) (the "Company"), a $985.4 million asset bank holding company and parent company of Redding Bank of Commerce (the "Bank"), today announced financial results for the quarter ended March 31, 2015. Net income available to common shareholders for the quarter ended March 31, 2015 was $1.8 million or $0.13 per share – diluted, compared with $515 thousand or $0.04 per share – diluted for the same period of 2014.

Financial highlights for the first quarter of 2015:

• Net income available to common shareholders of $1.8 million for the three months ended March 31, 2015 was a $1.2 million (240%) improvement over $515 thousand net income available to common shareholders earned during the first quarter of 2014; and a $118 thousand (7%) improvement over $1.6 million available to common shareholders earned during the previous quarter.
• Gross loans at March 31, 2015 totaled $699.2 million, an increase of $92.2 million (15%) since March 31, 2014; and an increase of $38.3 million (23% annualized) since December 31, 2014.
• Nonperforming assets at March 31, 2015 totaled $20.0 million, a decrease of $5.3 million compared to March 31, 2014; and a decrease of $2.2 million compared to December 31, 2014.
• The Company's net interest margin improved to 3.72% for the quarter ended March 31, 2015 from 3.63% for the first quarter of 2014 and 3.67% for the fourth quarter of 2014.
• Net loan loss recoveries of $476 thousand during the quarter ended March 31, 2015 negated the need for a provision for loan and lease losses.
• Noninterest bearing demand deposits for the quarter ended March 31, 2015 averaged $148.9 million, an increase of $17.4 million (13%) since the first quarter of 2014; and a decrease of $4.1 million (11% annualized) since the fourth quarter of 2014.
• The Company's tangible book value increased to $6.41 per common share at March 31, 2015 from $5.97 per common share at March 31, 2014 (7%); and from $6.29 per common share at December 31, 2014 (8% annualized).

Randall S. Eslick, President and CEO commented: "I am very pleased that we continue to successfully accomplish our primary objectives of growing the loan portfolio, reducing the level of non-performing assets, and improving the net interest margin in this protracted low interest rate environment. The efforts of our talented employees have resulted in these positive trends, and provide the foundation for improving profitability over the remainder of the year."

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 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 and the prior quarter 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 March 31, 2015, the Company had total consolidated assets of $985.4 million, gross loans of $699.2 million, allowance for loan and lease losses ("ALLL") of $11.3 million, total deposits of $762.0 million, and shareholders' equity of $105.4 million.

The Company recorded gross loan balances of $699.2 million at March 31, 2015, compared with $607.0 million and $660.9 million at March 31, 2014 and December 31, 2014; an increase of $92.2 million and $38.3 million, respectively. The increase in gross loans compared to the same period a year ago and the prior quarter was driven by strong organic loan originations and the purchase of wholesale loan pools. During the three months ended March 31, 2015, the Company purchased $14.1 million and $6.4 million in consumer and commercial real estate investor loan pools, respectively. During the 12 month period ended March 31, 2015, the Company purchased $43.6 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 $655 thousand in loan recoveries partially offset by $179 thousand in loan charge offs. These net recoveries negated the need for a provision for loan and lease losses during the first quarter of 2015. See table 8 for additional detail of the ALLL.

The Company's primary liquidity position tightened during the current reporting period. As of March 31, 2015, the Company maintained cash positions at the Federal Reserve Bank and correspondent banks in the amount of $19.3 million. The Company also held interest bearing deposits with other financial institutions in the amount of $10.8 million.

Available-for-sale investment securities totaled $166.9 million at March 31, 2015, compared with $204.0 and $187.0 million at March 31, 2014 and December 31, 2014, 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 first quarter of 2015, the Company purchased eight securities with a par value of $12.0 million and weighted average yield of 2.74% and sold twenty-two securities with a par value of $25.4 million and weighted average yield of 2.53%. The sales activity resulted in $215 thousand in net realized gains for the three months ended March 31, 2015. During the three months ended March 31, 2015, the Company also received $7.4 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 March 31, 2015 and 2014 were $213.9 million and 3.46% compared to $246.9 million and 3.48%, respectively. During the first quarter of 2015, reductions in the available-for-sale investment portfolio were used to fund higher yielding loan assets.

During the current quarter, 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 bonds, short term corporate floating rate 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. Sales were also focused on those bonds likely to be less liquid in the event of a market shock. 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, while also improving credit quality and liquidity. This strategy could entail absorbing small losses within the portfolio to meet longer term objectives.

At March 31, 2015, the Company's net unrealized gain on available-for-sale securities was $3.1 million compared with $643 thousand net unrealized loss and $2.6 million net unrealized gain at March 31, 2014 and December 31, 2014, respectively. The favorable change in net unrealized gains resulted primarily from increases in the fair values of the Company's municipal bond and corporate securities portfolios, due to declines in interest rates.

Total deposits at March 31, 2015, increased $265 thousand to $762.0 million compared to March 31, 2014, and decreased $27.0 million or 3% compared to December 31, 2014. Non-maturing core deposits increased $14.5 million or 3% compared to the same date a year ago and decreased $35.6 million or 7% compared to December 31, 2014.

In accordance with regulatory Call Report instructions, the Bank has filed quarterly Call Reports which listed brokered deposits of $70.3 million, $73.5 million and $97.9 million at March 31, 2015, March 31, 2014 and December 31, 2014, respectively. These amounts include deposits obtained through the CDARS and ICS programs, which management does not consider to be brokered.

INCOME STATEMENT OVERVIEW

First Quarter of 2015 Compared With First Quarter of 2014

Net income available to common shareholders for the first quarter of 2015 increased $1.2 million over the first quarter of 2014. In the current year, net interest income was $196 thousand higher, noninterest income was $490 thousand higher and noninterest expenses were $1.0 million lower. These positive changes were partially offset by an income tax provision that was higher by $497 thousand.

Net Interest Income

Net interest income increased $196 thousand over a year previous. Interest income for the three months ended March 31, 2015 increased $526 thousand or 6% to $9.5 million which reflects the increase in average earnings assets and the reallocation of lower yielding assets into higher yielding loans. Interest expense for the three months ended March 31, 2015 increased $330 thousand or 40% to $1.2 million. Interest expense on deposits declined $79 thousand, interest expense on other borrowings decreased $47 thousand, but interest on the Bank's Federal Home Loan Bank of San Francisco ("FHLB") borrowings increased $456 thousand.

During the first quarter of 2014, the net cost of the Bank's FHLB borrowings was reduced when hedge gains were reclassified out of other comprehensive income into earnings as a reduction of interest expense. As a result, interest expense on FHLB borrowings for the first quarter of 2014 was a negative $107 thousand. This accounting treatment ceased during the second quarter of 2014. Interest expense on FHLB borrowings for the first quarter of 2015 was $349 thousand.  Interest expense on other borrowings was $47 thousand and $94 for the first quarter of 2015and 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.

Noninterest Income

Noninterest income for the three months ended March 31, 2015 increased $490 thousand compared to the same period a year ago. The Company recognized net gains on sale of available-for-sale investment securities during the current quarter of $215 thousand compared to a net loss of $245 thousand, for the same period a year ago.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2015 decreased $1.0 million compared to the same period a year ago. During the quarter ended March 31, 2014 the Company negotiated the settlement of a note receivable from its former mortgage subsidiary which resulted in a loss of $1.4 million and also wrote down $290 thousand of other real estate owned ("OREO"). In the current period, salaries and benefits are $288 thousand higher than a year earlier.

Income Tax Provision

During the three months ended March 31, 2015, the Company recorded a provision for income tax expense of $829 thousand compared with $332 thousand for the same period a year ago. The increase in the current year is due to increased pretax income.

First Quarter of 2015 Compared With Fourth Quarter of 2014

Net income available to common shareholders for the first quarter of 2015 increased $118 thousand over the fourth quarter of 2014. In the current year, net interest income was $79 thousand higher, the provision for loan and lease losses was $675 thousand lower and noninterest expenses were $579 thousand lower. These positive changes were partially offset by noninterest income that was $290 thousand lower and an income tax provision that was higher by $925 thousand.

Net Interest Income

Net interest income increased $79 thousand over a quarter previous. Interest income for the three months ended March 31, 2015 decreased $3 thousand to $9.5 million. The Bank's improved yield on assets offset the negative effect of a quarter that was two days shorter than the fourth quarter of 2014. Interest expense for the three months ended March 31, 2015 decreased $82 thousand or 7% to $1.2 million compared to the prior quarter. This decrease was a combination of reduced interest expense on junior subordinated debentures and the shorter quarter.

Provision for Loan and Lease Losses

During the current quarter net recoveries on charged off loans negated the need for a provision for loan and lease losses compared to the provision for loan and lease loss of $675 thousand in the prior quarter.

Noninterest Income

Noninterest income for the three months ended March 31, 2015 decreased $290 thousand compared to the prior quarter. The Company recognized a net gain on sale of available-for-sale investment securities during the current quarter of $215 thousand compared to a $93 thousand net gain in the prior quarter. During the quarter ended December 31, 2014, the Company also recognized a $406 thousand gain on the discounted repayment of junior subordinated debentures included in other income.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2015 decreased $579 thousand compared to the prior quarter. The Company recognized severance costs associated with the retirement of a former executive during the fourth quarter of 2014.

Income Tax Provision

During the three months ended March 31, 2015, the Company recorded a provision for income tax expense of $829 thousand compared with provision for income tax benefit of $96 thousand for the prior quarter. During the quarter ended December 31, 2014 the Company revised the estimated annual effective tax rate used in the provision for income tax expense.

Diluted earnings per share were $0.13 for the three months ended March 31, 2015 compared with $0.04 for the same period a year ago, and $0.12 for the prior period. Earnings per share increased during the three months ended March 31, 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 3.86% for the three months ended March 31, 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 22 basis point increase in tax-equivalent yield on average earning assets offset by a 14 basis point increase in interest expense to fund 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 reallocate the asset mix into higher yielding assets by pursuing organic loan growth, making wholesale loan purchases, and actively managing the investment securities portfolio within our accepted risk tolerance.

The Company realized net loan loss recoveries of $476 thousand in the current quarter compared with net loan charge offs of $255 thousand in the prior quarter and net loan charge offs of $4.4 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 quarters of 2015 and 2014, compared to a provision of $675 thousand for the prior quarter. The Company's ALLL as a percentage of gross loans was 1.62% as of March 31, 2015 compared to 1.61% as of March 31, 2014 and 1.64% as of December 31, 2014. At March 31, 2015, given the banks 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 March 31, 2015, the recorded investment in loans classified as impaired totaled $27.7 million, with a corresponding valuation allowance of $1.5 million compared to impaired loans of $36.7 million with a corresponding valuation allowance of $1.8 million at March 31, 2014 and impaired loans of $31.4 million, with a corresponding valuation allowance of $1.6 million at December 31, 2014. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans. The $3.7 million decrease in impaired loans during the three months ended March 31, 2015 is centered in a $1.2 million principal payment on one commercial loan relationship, the acceptance of 6 deeds in lieu of foreclosure on a $1.3 million commercial loan relationship and a $486 thousand payoff of an impaired purchased mortgage.

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 March 31, 2015, the Company restructured four loans to grant payment deferrals. The loans were classified as a troubled debt restructurings and three of the loans were placed on nonaccrual status. As of March 31, 2015, the Company had $21.4 million in troubled debt restructurings compared to $23.5 million as of December 31, 2014. As of March 31, 2015, the Company had 121 restructured loans that qualified as troubled debt restructurings, of which 99 were performing according to their restructured terms. Troubled debt restructurings represented 3.06% of gross loans as of March 31, 2015 compared with 3.55% at December 31, 2014.

Nonperforming loans, which include nonaccrual loans and accruing loans past due more than 90 days, totaled $18.5 million or 2.65% of gross loans as of March 31, 2015, compared to $21.7 million, or 3.28% of gross loans at December 31, 2014. The decrease in nonperforming loans in the current quarter compared to the prior quarter was primarily due to a $1.2 million principal payment on one commercial loan relationship; $1.3 million for a commercial loan relationship attributed to moving six properties into OREO and a $486 thousand payoff of a nonperforming purchased mortgage. Nonperforming assets, which include nonperforming loans and OREO, totaled $20.0 million, or 2.03% of total assets as of March 31, 2015, compared with $22.2 million, or 2.22% of total assets as of December 31, 2014.

At March 31, 2015, March 31, 2014 and December 31, 2014, the recorded investment in OREO was $1.5 million, $623 thousand and $502 thousand, respectively. The March 31, 2015 OREO balance consists of twelve properties, of which five are secured by 1-4 family residential real estate in the amount of $370 thousand and seven are secured by nonfarm nonresidential properties in the amount of $1.1 million.

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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