Audit of Sarasota-based Bank of Commerce highlights financial problems

SARASOTA -- An outside financial audit of the holding company that owns Sarasota-based Bank of Commerce has questioned whether the bank can remain viable without raising additional capital.

The report, which must be done every year by law, was issued to share holders of Bank of Commerce Holdings Inc. a few days before its annual meeting last week. The holding company now has a net worth of negative $2.9 million.

The audit says the bank's ability to continue operating at its current rate of losses depends largely on its ability to raise new capital -- a move that could greatly delude the value of its current shares, according a copy of the report obtained by the Herald on Thursday.

Bank of Commerce President and CEO Charles Murphy vows the company is working to overcome the financial losses from bad mortgages issued during the boom.

"We've seen some difficulties, but the bank is still solid," he said. "The question is will the losses continue at this level, and the answer is no. We have identified our problems, and we're working through them."

Bank of Commerce reported a $8.12 million loss for 2011. The financial blow was muscled by gross devaluations in the residential and commercial real estate markets, where in many cases, values now are 60 percent lower than the time loans were issued in 2004 and 2005.

Nearly $5.5 million of the loss also was due to valuation allowances for a deferred tax asset, or the result of net operating losses that enable a business to record future tax breaks on its books -- somewhat like an accounts receivable, Murphy said.

The bank received a zero-star showing in Bauer Financial rankings in March. It has been operating under a consent order by the FDIC for the past year, which requires the company to meet certain standards, including raising capital.

Murphy plans to accomplish that through a stock offering of 15 million additional shares at $1 a piece, he said.

The bank currently has 1.289 million shares, most of which were issued during the original offering in 2000 at a price of $10 a piece, raising just more than $9 million at the time, records show.

If the company's fundraising efforts are successful, current shareholders only would own about 8 percent of the company if current share holders opt not to participate in the share offering.

"There would be some dilution, but I'm still optimistic in our ability to raise this," Murphy said. "We have had a tremendous decline since the peak of 2008 and 2009 on our distressed assets. We're confident we have identified our issues."

Bank of Commerce started to turn the corner in the first quarter that ended March 31, reporting $435,270 in profits.

The company has incurred $10.3 million in debt through a trust preferred security, which was borrowed through another lender to raise required regulatory capital, according to the audit.

The trust preferred security is an unsecured obligation that's one of the best options for banks trying to drum up capital, said Mike Woody, a Florida banking consultant.

Woody also said the share offer is not uncommon for lenders still trying to work their way out of the housing crisis.

"Economically (trust preferred securities) is the best option possible because of the cost and flexibility," Woody said. "Politically it's somewhat of a grenade because the regulators don't like it."

Josh Salman, Herald business writer, can be reached at 941-745-7095. Follow him on Twitter@JoshSalman.