Bank of Commerce Holdings Announces Results for the Second Quarter of 2019

SACRAMENTO, Calif., July 19, 2019 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (BOCH) (the “Company”), a $1.442 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter ended June 30, 2019. Net income for the quarter ended June 30, 2019 was $3.6 million or $0.20 per share – diluted, compared with net income of $3.6 million or $0.22 per share – diluted for the same period of 2018. Net income for the six months ended June 30, 2019 was $6.0 million or $0.33 per share – diluted, compared with net income of $6.9 million or $0.42 per share – diluted for the same period of 2018.

The current year includes the benefits of our January 31, 2019 acquisition of Merchants National Bank of Sacramento (“Merchants”). In May, we successfully converted all of Merchant’s computer records onto our core system. As previously announced, the Company’s subsidiary bank, which had been operating under multiple names, simultaneously changed the name for all locations to Merchants Bank of Commerce. To date, acquisition related costs have totaled $2.3 million and costs related to the name change have totaled $464 thousand. All significant costs for these two projects have now been absorbed.

Randall S. Eslick, President and CEO commented: “I am very pleased with our second quarter accomplishments which are the result of the hard work of our dedicated and talented employees. The changes made during the second quarter reflect the continued execution of our strategic plan. I am particularly excited that with the successful integration of Merchant’s data systems along with our name change, we now operate our bank under one name and one computer system. These changes will lead to greater efficiencies and reinforce a consistent message throughout our company.”

Financial highlights for the second quarter of 2019:

  • Net income of $3.6 million was an increase of $26 thousand (1%) from $3.6 million earned during the same period in the prior year. Earnings of $0.20 per share – diluted was a decrease of $0.02 (9%) from $0.22 per share – diluted earned during the same period in the prior year and reflects the impact of 1,834,142 shares of common stock issued during the first quarter of 2019 as part of our acquisition of Merchants.

  • Acquisition costs associated with our acquisition of Merchants totaled $376 thousand. Costs related to the name change of our subsidiary bank totaled $464 thousand.

  • Net interest income increased $1.9 million (17%) to $13.5 million compared to $11.6 million for the same period in the prior year.

  • Return on average assets decreased to 1.01% compared to 1.14% for the same period in the prior year.

  • Return on average equity decreased to 8.93% compared to 11.32% for the same period in the prior year.

  • Average loans totaled $1.028 billion, an increase of $106 million (11%) compared to average loans for the same period in the prior year.

  • Average earning assets totaled $1.353 billion, an increase of $145 million (12%) compared to average earning assets for the same period in the prior year.

  • Average deposits totaled $1.218 billion, an increase of $163 million (15%) compared to average deposits for the same period in the prior year.
    -Average non-maturing deposits totaled $1.054 billion, an increase of $170 million (19%) compared to the same period in the prior year.
    -Average certificates of deposit totaled $164.1 million, a decrease of $6.7 million (4%) compared to same period in the prior year.

  • The Company’s efficiency ratio was 65.9% compared to 61.2% during the same period in the prior year.
    -The Company’s efficiency ratio of 65.9% for the second quarter of 2019 includes $376 thousand in acquisition costs and $464 thousand in name change costs. The efficiency ratio excluding these non-recurring costs was 60.1%.

  • Nonperforming assets at June 30, 2019 totaled $13.5 million or 0.94% of total assets, an increase of $9.1 million since June 30, 2018. The increase in nonperforming assets results from one $10.3 million commercial real estate loan.

  • Book value per common share was $9.22 at June 30, 2019 compared to $7.97 at June 30, 2018.

  • Tangible book value per common share was $8.29 at June 30, 2019 compared to $7.85 at June 30, 2018.

Financial highlights for the six months ended June 30, 2019:

  • Net income of $6.0 million ($0.33 per share – diluted) was a decrease of $909 thousand (13%) from $6.9 million ($0.42 per share – diluted) earned during the same period in the prior year.

  • Acquisition costs associated with our acquisition of Merchants totaled $2.3 million. Costs related to the name change of our subsidiary bank totaled $464 thousand.

  • Net interest income increased $3.6 million (16%) to $26.5 million compared to $22.9 million for the same period in the prior year.

  • Return on average assets decreased to 0.83% compared to 1.10% for the same period in the prior year.

  • Return on average equity decreased to 7.59% compared to 10.84% for the same period in the prior year.

  • Average loans totaled $1.011 billion, an increase of $107 million (12%) compared to average loans for the same period in the prior year.

  • Average earning assets totaled $1.345 billion, an increase of $150 million (13%) compared the same period in the prior year.

  • Average deposits totaled $1.221 billion, an increase of $158 million (15%) compared the same period in the prior year.
    -Average non-maturing deposits totaled $1.055 billion, an increase of $169 million (19%) compared to the same period in the prior year.
    -Average certificates of deposit totaled $165.8 million, a decrease of $10.6 million (6%) compared to the same period in the prior year.

  • The Company’s efficiency ratio was 71.7% compared to 63.1% for the same period in the prior year.
    -The Company’s efficiency ratio of 71.7% for the first six months of 2019 includes $2.3 million in acquisition costs and $464 thousand in name change costs. The efficiency ratio excluding these non-recurring costs was 62.0%.

  • Nonperforming assets at June 30, 2019 totaled $13.5 million or 0.94% of total assets, an increase of $9.3 million since December 31, 2018. The increase in nonperforming assets results from one $10.3 million commercial real estate loan.

  • Book value per common share was $9.22 at June 30, 2019 compared to $8.47 at December 31, 2018.

  • Tangible book value per common share was $8.29 at June 30, 2019 compared to $8.36 at December 31, 2018.

Forward-Looking Statements

Bank of Commerce Holdings wishes to take advantage of the Safe Harbor provisions included in the Private Securities Litigation Reform Act of 1995. This news release includes statements by the Company, which describe management’s expectations and developments, which may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21B of the Securities Act of 1934, as amended. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in the Company's public filings, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national and international economic conditions are less favorable than expected or have a more direct and pronounced effect on the Company than expected and adversely affect the Company's ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new banks and/or branches are lower than expected; (4) our concentration in lending tied to real estate exposes us to the adverse effects of material increases in interest rates, declines in the general economy, tightening credit markets or declines in real estate values; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which the Company is engaged; and (7) technological changes could expose us to new risks.

TABLE 1

SELECTED FINANCIAL INFORMATION - UNAUDITED

(amounts in thousands except per share data)

For The Three Months Ended

For The Six Months Ended

Net income, average assets and

June 30,

March 31,

June 30,

average shareholders' equity

2019

2018

2019

2019

2018

Net income

$

3,644

$

3,618

$

2,306

$

5,950

$

6,859

Average total assets

$

1,450,725

$

1,276,697

$

1,425,860

$

1,438,361

$

1,262,710

Average total earning assets

$

1,353,200

$

1,208,281

$

1,337,006

$

1,345,177

$

1,195,154

Average shareholders' equity

$

163,598

$

128,181

$

152,705

$

158,182

$

127,628

Selected performance ratios

Return on average assets

1.01

%

1.14

%

0.66

%

0.83

%

1.10

%

Return on average equity

8.93

%

11.32

%

6.12

%

7.59

%

10.84

%

Efficiency ratio

65.9

%

61.2

%

77.7

%

71.7

%

63.1

%

Share and per share amounts

Weighted average shares - basic (1)

18,134

16,245

17,489

17,816

16,237

Weighted average shares - diluted (1)

18,194

16,325

17,552

17,878

16,319

Earnings per share - basic

$

0.20

$

0.22

$

0.13

$

0.33

$

0.42

Earnings per share - diluted

$

0.20

$

0.22

$

0.13

$

0.33

$

0.42

At June 30,

At March 31,

Share and per share amounts

2019

2018

2019

Common shares outstanding (2)

18,214

16,318

18,213

Book value per common share (2)

$

9.22

$

7.97

$

8.90

Tangible book value per common share (2)(3)

$

8.29

$

7.85

$

7.96

Capital ratios (4)

Bank of Commerce Holdings

Common equity tier 1 capital ratio

12.56

%

12.15

%

12.40

%

Tier 1 capital ratio

13.41

%

13.07

%

13.25

%

Total capital ratio

15.35

%

15.20

%

15.19

%

Tier 1 leverage ratio

11.08

%

11.07

%

11.05

%

Tangible common equity ratio (5)

10.59

%

10.02

%

9.97

%

Merchants Bank of Commerce

Common equity tier 1 capital ratio

14.06

%

12.51

%

13.98

%

Tier 1 capital ratio

14.06

%

12.51

%

13.98

%

Total capital ratio

15.16

%

13.72

%

15.08

%

Tier 1 leverage ratio

11.61

%

10.60

%

11.66

%

(1) Excludes unvested restricted shares issued in accordance with the Company's equity incentive plan, as they are non participative in dividends or voting rights.

(2) Includes unvested restricted shares issued in accordance with the Company's equity incentive plan.

(3) Book value per share is computed by dividing total shareholders’ equity by shares outstanding. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

(4) The Company and the Bank continue to meet all capital adequacy requirements to which they are subject.

(5) Management believes the tangible common equity ratio is a useful measure of capital adequacy because it provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the capital of the Company and the ability of the Company to absorb potential losses. The tangible common equity ratio is calculated as total shareholders' equity less goodwill and core deposit intangible, net divided by total assets less goodwill and core deposit intangible, net.


BALANCE SHEET OVERVIEW

As of June 30, 2019, the Company had total consolidated assets of $1.442 billion, gross loans of $1.037 billion, allowance for loan and lease losses (“ALLL”) of $12 million, total deposits of $1.236 billion, and shareholders’ equity of $168 million.

TABLE 2

LOAN BALANCES BY TYPE - UNAUDITED

(amounts in thousands)

At June 30,

At March 31,

% of

% of

Change

% of

2019

Total

2018

Total

Amount

%

2019

Total

Commercial

$

152,303

15

%

$

139,670

15

%

$

12,633

9

%

$

149,575

14

%

Real estate - construction and land development

37,685

4

21,292

2

16,393

77

%

30,335

3

Real estate - commercial non-owner occupied

468,706

45

427,088

46

41,618

10

%

469,048

46

Real estate - commercial owner occupied

210,711

21

199,412

21

11,299

6

%

209,099

20

Real estate - residential - ITIN

35,162

3

39,424

4

(4,262

)

(11

)

%

36,145

3

Real estate - residential - 1-4 family mortgage

67,092

6

33,391

4

33,701

101

%

68,092

7

Real estate - residential - equity lines

23,656

2

28,879

3

(5,223

)

(18

)

%

26,162

3

Consumer and other

41,409

4

47,660

5

(6,251

)

(13

)

%

46,150

4

Gross loans

1,036,724

100

%

936,816

100

%

99,908

11

%

1,034,606

100

%

Deferred fees and costs

2,005

1,763

242

1,992

Loans, net of deferred fees and costs

1,038,729

938,579

100,150

1,036,598

Allowance for loan and lease losses

(12,445

)

(12,388

)

(57

)

(12,242

)

Net loans

$

1,026,284

$

926,191

$

100,093

$

1,024,356

Average loans

$

1,028,187

$

922,687

$

105,500

11

%

$

993,261

Average yield on loans during the quarter

5.01

%

4.85

%

0.16

4.91

%

Average yield on loans during the year

4.96

%

4.89

%

0.07

4.91

%

The Company recorded gross loan balances of $1.037 billion at June 30, 2019, compared with $937 million and $1.035 billion at June 30, 2018 and March 31, 2019, respectively, an increase of $100 million and $2 million, respectively. During the first quarter of 2019, Merchants Holding Company acquisition provided an additional $85.3 million of loans. At June 30, 2019, gross loans from the acquisition totaled $83.4 million.

The average yield on loans during the quarter was 5.01% compared to 4.85% and 4.91% for the quarters ended June 30, 2018 and March 31, 2019, respectively. During the first quarter of 2019, a $10.3 million commercial real estate loan was placed on nonaccrual status. The uncollected interest on the loan was reversed which reduced our average yield on loans by 5 basis points. During the second quarter of 2019, we received a loan prepayment penalty that increased the average yield by 5 basis points.

Gross loan balances in the table above include a fair value discount for loans acquired from Merchants during the first quarter of 2019 of $2.0 million and $2.2 million at June 30, 2019 and March 31, 2019, respectively. We recorded $48 thousand and $195 thousand in accretion of the discount for these loans during the first and second quarters of 2019, respectively.

TABLE 3

CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED

(amounts in thousands)

At June 30,

At March 31,

% of

% of

Change

% of

2019

Total

2018

Total

Amount

%

2019

Total

Cash and due from banks

$

21,306

7

%

$

23,996

8

%

$

(2,690

)

(11

)

%

$

32,104

9

%

Interest-bearing deposits in other banks

19,319

6

15,690

5

3,629

23

%

30,425

9

Total cash and cash equivalents

40,625

13

39,686

13

939

2

%

62,529

18

Investment securities:

U.S. government and agencies

44,837

14

38,994

14

5,843

15

%

46,451

13

Obligations of state and political subdivisions

45,003

14

58,479

20

(13,476

)

(23

)

%

48,935

14

Residential mortgage backed securities and
collateralized mortgage obligations

168,085

50

121,218

43

46,867

39

%

171,814

47

Corporate securities

2,978

1

3,987

1

(1,009

)

(25

)

%

2,958

1

Commercial mortgage backed securities

24,868

8

24,742

9

126

1

%

23,864

7

Other asset backed securities

48

219

0

(171

)

(78

)

%

95

Total investment securities - AFS

285,819

87

247,639

87

38,180

15

%

294,117

82

Total cash, cash equivalents and
investment securities

$

326,444

100

%

$

287,325

100

%

$

39,119

14

%

$

356,646

100

%

Average yield on interest-bearing due
from banks and investment securities
during the quarter - nominal

2.81

%

2.56

%

0.25

2.83

%

Average yield on interest-bearing due
from banks and investment securities
during the quarter - tax equivalent

2.92

%

2.72

%

0.20

2.95

%

As of June 30, 2019, we maintained noninterest-bearing cash positions of $21.3 million and interest-bearing deposits of $19.3 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $285.8 million at June 30, 2019, compared with $247.6 million and $294.1 million at June 30, 2018 and March 31, 2019, respectively. During the first quarter of 2019, the Merchants acquisition included securities with a par value of $107.4 million. Management elected to sell securities with a par value of $67.8 million and $18.5 million during the first and second quarters of 2019, respectively. The sales resulted in net realized gains of $92 thousand and $33 thousand for the first and second quarters of 2019, respectively.

Average securities balances and weighted average tax equivalent yields for the quarters ended June 30, 2019 and 2018 were $289.4 million and 2.98% compared to $256.6 million and 2.82%, respectively.

At June 30, 2019, our net unrealized gains on available-for-sale investment securities were $3.4 million compared with net unrealized losses of $4.9 million and $701 thousand at June 30, 2018 and March 31, 2019, respectively. The changes in net unrealized losses on the investment securities portfolio were due to changes in market interest rates.

TABLE 4

DEPOSITS BY TYPE - UNAUDITED

(amounts in thousands)

At June 30,

At March 31,

% of

% of

Change

% of

2019

Total

2018

Total

Amount

%

2019

Total

Demand - noninterest-bearing

$

397,349

32

%

$

316,347

30

%

$

81,002

26

%

$

385,696

31

%

Demand - interest-bearing

238,175

19

217,674

21

20,501

9

%

241,292

19

Money market

300,847

24

247,413

23

53,434

22

%

311,853

25

Total demand

936,371

75

781,434

74

154,937

20

%

938,841

75

Savings

138,591

11

106,170

10

32,421

31

%

139,237

11

Total non-maturing deposits

1,074,962

86

887,604

84

187,358

21

%

1,078,078

86

Certificates of deposit

160,556

14

166,925

16

(6,369

)

(4

)

%

170,216

14

Total deposits

$

1,235,518

100

%

$

1,054,529

100

%

$

180,989

17

%

$

1,248,294

100

%

Total deposits at June 30, 2019, increased $181 million or 17% to $1.236 billion compared to June 30, 2018 and decreased $13 million or 4% annualized compared to March 31, 2019. Total non-maturing deposits increased $187.4 million or 21% compared to the same date a year ago and decreased $3.2 million or less than 1% annualized compared to March 31, 2019. Certificates of deposit decreased $6.4 million or 4% compared to the same date a year ago and decreased $9.7 million or 23% annualized compared to March 31, 2019.

During the first quarter of 2019, Merchants Holding Company acquisition provided an additional $190.2 million of deposits. The decrease in the acquired deposits of $16.5 million at June 30, 2019 is not attributable to the loss of any significant relationships. As illustrated in the following table, legacy deposits have experienced their seasonal decline, while wholesale time deposits have matured and were not renewed.

TABLE 5

YEAR TO DATE CHANGES IN DEPOSITS

(amounts in thousands)

Change In Acquired

Change In Legacy

Acquired

Deposits For The Five

Deposits For The Six

Legacy Deposits

Merchants Deposits

Months Ended

Months Ended

Deposits At

At December 31,

At January 31,

June 30,

June 30,

At June 30,

2018

2019

2019

2019

2019

Demand - noninterest-bearing

$

347,199

$

51,880

$

(2,777

)

$

1,047

$

397,349

Demand - interest-bearing

252,202

28,231

(5,695

)

(36,563

)

238,175

Money market

265,093

43,316

(1,805

)

(5,757

)

300,847

Total demand

864,494

123,427

(10,277

)

(41,273

)

936,371

Savings

114,840

28,786

(1,998

)

(3,037

)

138,591

Total non-maturing deposits

979,334

152,213

(12,275

)

(44,310

)

1,074,962

Certificates of deposit

152,382

38,003

(4,174

)

(25,655

)

160,556

Total deposits

$

1,131,716

$

190,216

$

(16,449

)

$

(69,965

)

$

1,235,518


TABLE 6

WHOLESALE AND RECIPROCAL DEPOSITS - UNAUDITED

(amounts in thousands)

At June 30,

At March 31,

2019

2018

2019

CDARS / ICS reciprocal deposits

$

60,492

$

60,538

$

65,192

Online listing service wholesale time deposits

248

25,491

1,683

Total wholesale and reciprocal deposits

$

60,740

$

86,029

$

66,875

For calendar quarters prior to April 1, 2018, CDARS/ ICS reciprocal deposits were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, this is no longer so.

AVERAGE COST OF FUNDS

The following table presents the average cost of interest-bearing deposits, all deposits and all interest-bearing liabilities for the periods indicated.

TABLE 7

AVERAGE COST OF FUNDS - UNAUDITED

For The Three Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,

March 31,

December 31,

September 30,

2019

2019

2018

2018

2018

2018

2017

2017

Interest-bearing deposits

0.54

%

0.49

%

0.45

%

0.42

%

0.41

%

0.41

%

0.42

%

0.43

%

Interest-bearing deposits and
noninterest-bearing demand

0.37

%

0.34

%

0.31

%

0.29

%

0.29

%

0.29

%

0.30

%

0.31

%

All interest-bearing liabilities

0.74

%

0.67

%

0.61

%

0.64

%

0.68

%

0.60

%

0.59

%

0.60

%

All interest-bearing liabilities and
noninterest-bearing demand

0.52

%

0.46

%

0.42

%

0.45

%

0.50

%

0.43

%

0.42

%

0.43

%


INCOME STATEMENT OVERVIEW

TABLE 8

SUMMARY INCOME STATEMENT - UNAUDITED

(amounts in thousands, except per share data)

For The Three Months Ended

June 30,

Change

March 31,

Change

2019

2018

Amount

%

2019

Amount

%

Interest income

$

15,127

$

12,990

$

2,137

16

%

$

14,427

$

700

5

%

Interest expense

1,632

1,410

222

16

%

1,423

209

15

%

Net interest income

13,495

11,580

1,915

17

%

13,004

491

4

%

Provision for loan
and lease losses

%

%

Noninterest income

1,100

962

138

14

%

1,057

43

4

%

Noninterest expense

9,611

7,671

1,940

25

%

10,923

(1,312

)

(12

)

%

Income before provision
for income taxes

4,984

4,871

113

2

%

3,138

1,846

59

%

Provision for income taxes

1,340

1,253

87

7

%

832

508

61

%

Net income

$

3,644

$

3,618

$

26

1

%

$

2,306

$

1,338

58

%

Basic earnings per share

$

0.20

$

0.22

$

(0.02

)

(9

)

%

$

0.13

$

0.07

54

%

Average basic shares

18,134

16,245

1,889

12

%

17,489

645

4

%

Diluted earnings per share

$

0.20

$

0.22

$

(0.02

)

(9

)

%

$

0.13

$

0.07

54

%

Average diluted shares

18,194

16,325

1,869

11

%

17,552

642

4

%

Dividends declared per
common share

$

0.05

$

0.04

$

0.01

25

%

$

0.04

$

0.01

25

%

Second Quarter of 2019 Compared With Second Quarter of 2018

Net income for the second quarter of 2019 increased $26 thousand compared to the second quarter of 2018. In the current quarter, net interest income was $1.9 million higher and noninterest income was $138 thousand higher. These positive changes were offset by noninterest expenses that were $1.9 million higher and the provision for income taxes was $87 thousand higher.

Net Interest Income

Net interest income increased $1.9 million compared to the same period a year ago.

Interest income for the second quarter of 2019 increased $2.1 million or 16% to $15.1 million.

  • Interest and fees on loans increased $1.7 million due to a $105.5 million increase in average loan balances and a 16 basis point increase in the average yield on the loan portfolio.

  • Interest on securities increased $370 thousand due to a $32.9 million increase in average securities balances and a 21 basis point increase in average yield on the securities portfolio.

  • Interest on interest-bearing deposits due from banks increased $84 thousand due to a $6.6 million increase in average interest-bearing deposit balances, and a 60 basis point increase in average yield.

Interest expense for the second quarter of 2019 increased $222 thousand or 16% to $1.6 million.

  • Interest expense on interest bearing deposits increased $362 thousand. Average interest-bearing demand and savings deposit balances increased $99.7 million, while average certificate of deposit balances decreased $6.7 million. The average rate paid on interest-bearing deposits increased 13 basis points.

  • Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased $75 thousand. Average Federal Home Loan Bank of San Francisco borrowings outstanding in the current quarter were $30.0 million compared to $55.3 million in the same quarter a year ago.

  • Interest expense on other term debt and junior subordinated debentures decreased $65 thousand. During the current quarter, we completed the early repayment of our variable rate senior debt.

Provision for loan and lease losses

As illustrated in Table 10, the nonaccrual status of a $10.3 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. However, net loan loss recoveries totaled $203 thousand for the current quarter and no provision for loan and lease losses was necessary. There was no provision for loan and lease losses in the second quarter of 2018.

Noninterest Income

Noninterest income for the three months ended June 30, 2019 increased $138 thousand compared to the second quarter for 2018. Gains on sale of investment securities increased $29 thousand and dividends on Federal Home Loan Bank of San Francisco stock increased $29 thousand.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2019 increased $1.9 million compared to the same period a year previous, which included:

  • $464 thousand in costs related to the name change.

  • $376 thousand in acquisition costs.

  • $739 thousand increase in operating expenses from the Merchants acquisition.

The Company’s efficiency ratio was 65.9% for the second quarter of 2019 (60.1% (non-GAAP) exclusive of non-recurring acquisition and name change costs). The ratio during the same period in 2018 was 61.2%. Management believes the efficiency ratio exclusive of non-recurring acquisition and name change cost is a useful measure because it provides more meaningful period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the Company’s performance.

Income Tax Provision

For the three months ended June 30, 2019, our income tax provision of $1.3 million on pre-tax income of $5.0 million was an effective tax rate of 26.9%. The tax provision for the second quarter of the prior year was $1.3 million on pre-tax income of $4.9 million for an effective tax rate of 25.7%. The current quarter includes $28 thousand, of acquisition costs which are not tax deductible.

Second Quarter of 2019 Compared With First Quarter of 2019

Net income for the second quarter of 2019 increased $1.3 million compared to the first quarter of 2019. In the current quarter, net interest income was $491 thousand higher, noninterest income was $43 thousand higher and noninterest expense was $1.3 million lower. These positive changes were offset by the provision for income taxes that was $508 thousand higher.

Net Interest Income

Net interest income increased $491 thousand over the prior quarter. The second quarter includes three months of income and expense associated with the January 31, 2019 acquisition of Merchants. The first quarter includes two months.

Interest income for the three months ended June 30, 2019 increased $700 thousand or 5% to $15.1 million.

  • Interest and fees on loans increased $816 thousand due to a $34.9 million increase in average loan balances and a ten basis point increase in the average yield on the loan portfolio.

  • Interest on investment securities decreased $90 thousand due to a $14.1 million decrease in average securities balances partially offset by a 27 basis point increase in average yield on the investment portfolio.

  • Interest on interest-bearing deposits due from banks decreased $26 thousand due to a $4.6 million decrease in average balances.

Interest expense for the three months ended June 30, 2019 increased $209 thousand or 15% to $1.6 million.

  • Interest expense on deposits increased $113 thousand as average interest-bearing demand and savings deposits increased $6.6 million, average certificates of deposit decreased $3.4 million and the average rate paid on these deposits increased by five basis points.

  • Interest expense on borrowings from the Federal Home Loan Bank of San Francisco increased $137 thousand. Average Federal Home Loan Bank of San Francisco borrowings outstanding in the current quarter were $30.0 million, compared to $8.8 million in the prior quarter

  • Interest expense on other term debt and junior subordinated debentures decreased $41 thousand. During the second quarter of 2019 we completed the early repayment and termination of our senior debt agreement.

Provision for loan and lease losses

As illustrated in Table 10, the nonaccrual status of a $10.3 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. However, net loan loss recoveries totaled $203 thousand for the current quarter and no provision for loan and lease losses was necessary. There was no provision for loan and lease losses in the first quarter of 2019.

Noninterest Income

Noninterest income for the three months ended June 30, 2019 increased $43 thousand, the increase was not concentrated in any one item.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2019 decreased $1.3 million. The decrease was due to a $1.6 million decrease in acquisition costs partially offset by $464 thousand increase in name change costs.

The Company’s efficiency ratio was 65.9% for the second quarter of 2019 (60.1% (non-GAAP) exclusive of non-recurring acquisition and name change costs). The ratio during the prior quarter was 77.7% (64.0% exclusive of acquisition costs). Management believes the efficiency ratio exclusive of non-recurring acquisition and name change cost is a useful measure because it provides more meaningful period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the Company’s performance.

Income Tax Provision

For the three months ended June 30, 2019, our income tax provision of $1.3 million on pre-tax income of $5.0 million was an effective tax rate of 26.9%. The income tax provision for the prior quarter of $832 thousand on pre-tax income of $3.1 million was an effective tax rate of 26.5%. The current and prior quarter include $28 thousand and $150 thousand, respectively, of acquisition costs which are not tax deductible.

Earnings Per Share

Diluted earnings per share were $0.20 for the three months ended June 30, 2019 compared with diluted earnings per share of $0.22 for the same period a year ago and diluted earnings per share of $0.13 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in Table 8 presented earlier in this press release.

TABLE 9a

NET INTEREST MARGIN - UNAUDITED

(amounts in thousands)

For The Three Months Ended

June 30, 2019

June 30, 2018

March 31, 2019

Average

Yield /

Average

Yield /

Average

Yield /

Balance

Interest(1)

Rate (5)

Balance

Interest(1)

Rate (5)

Balance

Interest(1)

Rate (5)

Interest-earning assets:

Net loans (2)

$

1,028,187

$

12,847

5.01

%

$

922,687

$

11,164

4.85

%

$

993,261

$

12,031

4.91

%

Taxable securities

249,907

1,733

2.78

%

206,247

1,278

2.49

%

253,068

1,764

2.83

%

Tax-exempt securities

39,501

328

3.33

%

50,306

413

3.29

%

50,454

387

3.11

%

Interest-bearing deposits
in other banks

35,605

219

2.47

%

29,041

135

1.86

%

40,223

245

2.47

%

Average interest-
earning assets

1,353,200

15,127

4.48

%

1,208,281

12,990

4.31

%

1,337,006

14,427

4.38

%

Cash and due from banks

21,942

19,880

21,392

Premises and equipment, net

15,819

14,167

14,581

Goodwill and core deposit intangible, net

16,995

1,943

11,872

Other assets

42,769

32,426

41,009

Average total assets

$

1,450,725

$

1,276,697

$

1,425,860

Interest-bearing liabilities:

Interest-bearing demand

$

238,840

129

0.22

%

$

225,927

80

0.14

%

$

243,376

126

0.21

%

Money market

296,326

380

0.51

%

241,724

135

0.22

%

293,396

289

0.40

%

Savings

139,307

123

0.35

%

107,108

64

0.24

%

131,081

111

0.34

%

Certificates of deposit

164,084

497

1.21

%

170,824

488

1.15

%

167,463

490

1.19

%

Federal Home Loan Bank of San Francisco borrowings

30,000

192

2.57

%

55,275

267

1.94

%

8,778

55

2.54

%

Other borrowings net of unamortized debt issuance costs

10,841

201

7.44

%

15,614

279

7.17

%

12,889

239

7.52

%

Junior subordinated
debentures

10,310

110

4.28

%

10,310

97

3.77

%

10,310

113

4.44

%

Average interest-
bearing liabilities

889,708

1,632

0.74

%

826,782

1,410

0.68

%

867,293

1,423

0.67

%

Noninterest-bearing demand

379,173

309,199

388,410

Other liabilities

18,246

12,535

17,452

Shareholders’ equity

163,598

128,181

152,705

Average liabilities and
shareholders’ equity

$

1,450,725

$

1,276,697

$

1,425,860

Net interest income and
net interest margin (4)

$

13,495

4.00

%

$

11,580

3.84

%

$

13,004

3.94

%

Tax equivalent net
interest margin (3)

4.03

%

3.88

%

3.98

%

(1) Interest income on loans includes deferred fees and costs of approximately $91 thousand, $145 thousand and $181 thousand for the three months ended June 30, 2019 and 2018 and March 31, 2019, respectively.

(2) Net loans includes average nonaccrual loans of $13.7 million, $4.2 million and $8.5 million for the three months ended June 30, 2019 and 2018 and March 31, 2019, respectively.

(3) Tax-exempt income has been adjusted to tax equivalent basis at a 21% tax rate for 2019 and 2018. The amount of such adjustments was an addition to recorded income of approximately $87 thousand, $110 thousand and $103 thousand for the three months ended June 30, 2019 and 2018 and March 31, 2019, respectively.

(4) Net interest margin is annualized net interest income expressed as a percentage of average interest-earning assets.

(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.


TABLE 9b

NET INTEREST MARGIN - UNAUDITED

(amounts in thousands)

For The Six Months Ended

June 30, 2019

June 30, 2018

Average

Yield /

Average

Yield /

Balance

Interest(1)

Rate (5)

Balance

Interest(1)

Rate (5)

Interest-earning assets:

Net loans (2)

$

1,010,821

$

24,878

4.96

%

$

903,389

$

21,893

4.89

%

Taxable securities

251,479

3,497

2.80

%

205,777

2,487

2.44

%

Tax-exempt securities

44,947

715

3.21

%

55,021

876

3.21

%

Interest-bearing deposits
in other banks

37,930

464

2.47

%

30,967

264

1.72

%

Average interest-
earning assets

1,345,177

29,554

4.43

%

1,195,154

25,520

4.31

%

Cash and due from banks

21,640

18,767

Premises and equipment, net

15,203

14,361

Goodwill and core deposit intangible, net

14,447

1,971

Other assets

41,894

32,457

Average total assets

$

1,438,361

$

1,262,710

Interest-bearing liabilities:

Interest-bearing demand

$

241,095

255

0.21

%

$

230,075

169

0.15

%

Money market

294,869

669

0.46

%

238,963

267

0.23

%

Savings

135,217

234

0.35

%

108,907

123

0.23

%

Certificates of deposit

165,764

987

1.20

%

176,332

983

1.12

%

Federal Home Loan Bank of San Francisco borrowings

19,448

247

2.56

%

33,978

314

1.86

%

Other borrowings net of unamortized debt issuance costs

11,859

440

7.48

%

16,069

560

7.03

%

Junior subordinated
debentures

10,310

223

4.36

%

10,310

179

3.50

%

Average interest-
bearing liabilities

878,562

3,055

0.70

%

814,634

2,595

0.64

%

Noninterest-bearing demand

383,766

308,304

Other liabilities

17,851

12,144

Shareholders’ equity

158,182

127,628

Average liabilities and shareholders’ equity

$

1,438,361

$

1,262,710

Net interest income and
net interest margin (4)

$

26,499

3.97

%

$

22,925

3.87

%

Tax equivalent net
interest margin (3)

4.00

%

3.91

%

(1) Interest income on loans includes deferred fees and costs of approximately $272 thousand and $282 thousand for the six months ended June 30, 2019 and 2018, respectively.

(2) Net loans includes average nonaccrual loans of $11.1 million and $4.5 million for the six months ended June 30, 2019 and 2018, respectively.

(3) Tax-exempt income has been adjusted to tax equivalent basis at a 21% tax rate for 2019 and 2018. The amount of such adjustments was an addition to recorded income of approximately $190 thousand and $233 thousand for the six months ended June 30, 2019 and 2018, respectively.

(4) Net interest margin is annualized net interest income expressed as a percentage of average interest-earning assets.

(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.


TABLE 10

ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS - UNAUDITED

(amounts in thousands)

For The Three Months Ended

June 30,

March 31,

December 31,

September 30,

June 30,

2019

2019

2018

2018

2018

Beginning balance ALLL

$

12,242

$

12,292

$

12,392

$

12,388

$

12,295

Provision for loan and lease losses

Loans charged-off

(659

)

(348

)

(279

)

(198

)

(382

)

Loan loss recoveries

862

298

179

202

475

Ending balance ALLL

$

12,445

$

12,242

$

12,292

$

12,392

$

12,388

At June 30,

At March 31,

At December 31,

At September 30,

At June 30,

2019

2019

2018

2018

2018

Nonaccrual loans:

Commercial

$

194

$

1,018

$

959

$

899

$

1,358

Real estate - construction and land development

Real estate - commercial non-owner occupied

10,690

10,878

Real estate - commercial owner occupied

548

Real estate - residential - ITIN

2,389

2,392

2,388

2,571

2,613

Real estate - residential - 1-4 family mortgage

217

182

185

179

184

Real estate - residential - equity lines

42

43

44

44

Consumer and other

22

23

23

24

33

Total nonaccrual loans

13,512

14,535

4,146

3,717

4,232

Accruing troubled debt restructured loans:

Commercial

1,092

1,187

1,224

1,291

1,420

Real estate - commercial non-owner occupied

791

793

795

797

799

Real estate - residential - ITIN

4,300

4,342

4,484

4,535

4,592

Real estate - residential - equity lines

242

358

363

367

372

Total accruing troubled debt restructured loans

6,425

6,680

6,866

6,990

7,183

All other accruing impaired loans

Total impaired loans

$

19,937

$

21,215

$

11,012

$

10,707

$

11,415

Gross loans outstanding at period end

$

1,036,724

$

1,034,606

$

946,251

$

927,480

$

936,816

Impaired loans to gross loans

1.92

%

2.05

%

1.16

%

1.15

%

1.22

%

Nonaccrual loans to gross loans

1.30

%

1.40

%

0.44

%

0.40

%

0.45

%

Allowance for loan and lease losses as a percent of:

Gross loans

1.20

%

1.18

%

1.30

%

1.34

%

1.32

%

Nonaccrual loans

92.10

%

84.22

%

296.48

%

333.39

%

292.72

%

Impaired loans

62.42

%

57.70

%

111.62

%

115.74

%

108.52

%

We continue 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. As illustrated in Table 10, the nonaccrual status of a $10.3 million commercial real estate loan has resulted in a deterioration in our asset quality metrics for the first two quarters of 2019. Net loan loss recoveries totaled $203 thousand for the quarter ended June 30, 2019 and no provision for loan and lease losses was necessary for the quarter. There was no provision for loan and lease loss during the prior quarter or during the same quarter a year ago.

The loans acquired from Merchants were recorded at fair value which included a discount for credit risk which is not a part of the ALLL. As a result, our ALLL as a percentage of gross loans declined to 1.20% as of June 30, 2019 compared to 1.32% as of June 30, 2018 and increased compared to 1.18% as of March 31, 2019.

Based on the Bank’s ALLL methodology, which uses criteria such as risk factors and historical loss rates, and given the ongoing improvements in asset quality, management believes the Company’s ALLL is adequate at June 30, 2019. 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 future charges to the provision for loan and lease losses.

At June 30, 2019, the recorded investment in loans classified as impaired totaled $19.9 million, with a corresponding specific reserve of $727 thousand compared to impaired loans of $11.4 million with a corresponding specific reserve of $1.2 million at June 30, 2018 and impaired loans of $21.2 million, with a corresponding specific reserve of $1.4 million at March 31, 2019. The increase in loans classified as impaired compared to the same period a year ago results from one $10.3 million commercial real estate loan.

TABLE 11

TROUBLED DEBT RESTRUCTURINGS - UNAUDITED

(amounts in thousands)

At June 30,

At March 31,

At December 31,

At September 30,

At June 30,

2019

2019

2018

2018

2018

Nonaccrual

$

1,828

$

2,725

$

2,693

$

2,720

$

3,218

Accruing

6,425

6,680

6,866

6,990

7,183

Total troubled debt restructurings

$

8,253

$

9,405

$

9,559

$

9,710

$

10,401

Troubled debt restructurings as a percentage of total gross loans

0.80

%

0.91

%

1.01

%

1.05

%

1.11

%

There were two new troubled debt restructurings to grant a payment deferral modification and a maturity modification during the three months ended June 30, 2019. As of June 30, 2019, we had 103 restructured loans that qualified as troubled debt restructurings, of which 101 were performing according to their restructured terms.

TABLE 12

NONPERFORMING ASSETS - UNAUDITED

(amounts in thousands)

At June 30,

At March 31,

At December 31,

At September 30,

At June 30,

2019

2019

2018

2018

2018

Total nonaccrual loans

$

13,512

$

14,535

$

4,146

$

3,717

$

4,232

90 days past due and still accruing

Total nonperforming loans

13,512

14,535

4,146

3,717

4,232

Other real estate owned ("OREO")

34

31

136

140

Total nonperforming assets

$

13,512

$

14,569

$

4,177

$

3,853

$

4,372

Nonperforming loans to gross loans

1.30

%

1.40

%

0.44

%

0.40

%

0.45

%

Nonperforming assets to total assets

0.94

%

0.99

%

0.32

%

0.29

%

0.34

%



The following table summarizes as of June 30, 2019 when loans are projected to reprice by year and rate index.

TABLE 13

LOANS BY RATE INDEX AND PROJECTED REPAYMENT - UNAUDITED

(amounts in thousands)

At June 30, 2019

Years 6

Through

Beyond

Year 1

Year 2

Year 3

Year 4

Year 5

Year 10

Year 10

Total

Rate Index:

Fixed

$

48,588

$

56,475

$

47,676

$

62,631

$

41,420

$

160,327

$

35,466

$

452,583

Variable:

Prime

107,931

2,634

6,032

7,495

9,420

1,737

135,249

5 Year Treasury

29,766

29,299

81,885

89,985

67,317

38,093

336,345

7 Year Treasury

892

943

11,370

4,855

5,671

14,005

37,736

1 Year LIBOR

23,347

23,347

Other Indexes

8,328

1,943

4,503

2,082

1,496

19,682

1,923

39,957

Nonaccrual

1,515

10,019

292

277

256

826

327

13,512

Total

$

220,367

$

101,313

$

151,758

$

167,325

$

125,580

$

234,670

$

37,716

$

1,038,729


TABLE 14

UNAUDITED CONSOLIDATED

BALANCE SHEET

(amounts in thousands, except per share data)

At June 30,

Change

At March 31,

2019

2018

$

%

2019

Assets:

Cash and due from banks

$

21,306

$

23,996

$

(2,690

)

(11

)

%

$

32,104

Interest-bearing deposits in other banks

19,319

15,690

3,629

23

%

30,425

Total cash and cash equivalents

40,625

39,686

939

2

%

62,529

Securities available-for-sale, at fair value

285,819

247,639

38,180

15

%

294,117

Loans, net of deferred fees and costs

1,038,729

938,579

100,150

11

%

1,036,598

Allowance for loan and lease losses

(12,445

)

(12,388

)

(57

)

%

(12,242

)

Net loans

1,026,284

926,191

100,093

11

%

1,024,356

Premises and equipment, net

15,836

13,908

1,928

14

%

15,391

Other real estate owned

140

(140

)

(100

)

%

34

Life insurance

23,449

22,155

1,294

6

%

23,294

Deferred tax asset, net

4,791

7,815

(3,024

)

(39

)

%

6,072

Goodwill and core deposit intangible, net

16,900

1,920

14,980

780

%

17,094

Other assets

28,282

22,050

6,232

28

%

28,604

Total assets

$

1,441,986

$

1,281,504

$

160,482

13

%

$

1,471,491

Liabilities and shareholders' equity:

Demand - noninterest-bearing

$

397,349

$

316,347

$

81,002

26

%

$

385,696

Demand - interest-bearing

238,175

217,674

20,501

9

%

241,292

Money market

300,847

247,413

53,434

22

%

311,853

Savings

138,591

106,170

32,421

31

%

139,237

Certificates of deposit

160,556

166,925

(6,369

)

(4

)

%

170,216

Total deposits

1,235,518

1,054,529

180,989

17

%

1,248,294

Term debt:

Federal Home Loan Bank of San Francisco borrowings

60,000

(60,000

)

(100

)

%

20,000

Other borrowings

10,000

15,296

(5,296

)

(35

)

%

12,596

Unamortized debt issuance costs

(67

)

(115

)

48

(42

)

%

(79

)

Net term debt

9,933

75,181

(65,248

)

(87

)

%

32,517

Junior subordinated debentures

10,310

10,310

%

10,310

Other liabilities

18,372

11,406

6,966

61

%

18,272

Total liabilities

1,274,133

1,151,426

122,707

11

%

1,309,393

Shareholders' equity:

Common stock

72,087

52,043

20,044

39

%

71,966

Retained earnings

93,363

81,475

11,888

15

%

90,626

Accumulated other comprehensive income (loss), net of tax

2,403

(3,440

)

5,843

(170

)

%

(494

)

Total shareholders' equity

167,853

130,078

37,775

29

%

162,098

Total liabilities and shareholders' equity

$

1,441,986

$

1,281,504

$

160,482

13

%

$

1,471,491

Total interest-earning assets

$

1,340,456

$

1,206,791

$

133,665

11

%

$

1,361,841

Shares outstanding

18,214

16,318

1,896

12

%

18,213

Book value per share

$

9.22

$

7.97

$

1.25

16

%

$

8.90

Tangible book value per share (1)

$

8.29

$

7.85

$

0.44

6

%

$

7.96

(1) Book value per share is computed by dividing total shareholders’ equity by shares outstanding. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.


TABLE 15

UNAUDITED

INCOME STATEMENT

(amounts in thousands, except per share data)

For The Three Months Ended

For The Six Months Ended

June 30,

Change

March 31,

June 30,

2019

2018

$

%

2019

2019

2018

Interest income:

Interest and fees on loans

$

12,847

$

11,164

$

1,683

15

%

$

12,031

$

24,878

$

21,893

Interest on taxable securities

1,733

1,278

455

36

%

1,764

3,497

2,487

Interest on tax-exempt securities

328

413

(85

)

(21

)

%

387

715

876

Interest on interest-bearing deposits in other banks

219

135

84

62

%

245

464

264

Total interest income

15,127

12,990

2,137

16

%

14,427

29,554

25,520

Interest expense:

Interest on demand deposits

129

80

49

61

%

126

255

169

Interest on money market

380

135

245

181

%

289

669

267

Interest on savings

123

64

59

92

%

111

234

123

Interest on certificates of deposit

497

488

9

2

%

490

987

983

Interest on Federal Home Loan Bank of San Francisco borrowings

192

267

(75

)

(28

)

%

55

247

314

Interest on other borrowings

201

279

(78

)

(28

)

%

239

440

560

Interest on junior subordinated debentures

110

97

13

13

%

113

223

179

Total interest expense

1,632

1,410

222

16

%

1,423

3,055

2,595

Net interest income

13,495

11,580

1,915

17

%

13,004

26,499

22,925

Provision for loan and lease losses

%

Net interest income after provision for loan and lease losses

13,495

11,580

1,915

17

%

13,004

26,499

22,925

Noninterest income:

Service charges on deposit accounts

187

175

12

7

%

168

355

351

ATM and point of sale fees

318

300

18

6

%

265

583

566

Fees on payroll and benefit processing

157

146

11

8

%

171

328

315

Life insurance

155

127

28

22

%

129

284

256

Gain on investment securities, net

33

4

29

725

%

92

125

40

Federal Home Loan Bank of San Francisco dividends

124

95

29

31

%

121

245

175

Gain on sale of OREO

18

18

100

%

23

41

16

Other income

108

115

(7

)

(6

)

%

88

196

225

Total noninterest income

1,100

962

138

14

%

1,057

2,157

1,944


TABLE 15 - CONTINUED

UNAUDITED

INCOME STATEMENT

(amounts in thousands, except per share data)

For The Three Months Ended

For The Six Months Ended

June 30,

Change

March 31,

June 30,

2019

2018

$

%

2019

2019

2018

Noninterest expense:

Salaries and related benefits

5,146

4,513

633

14

%

5,729

10,875

9,368

Premises and equipment

945

1,016

(71

)

(7

)

%

992

1,937

2,087

Federal Deposit Insurance Corporation
insurance premium

95

93

2

2

%

100

195

189

Data processing fees

621

471

150

32

%

559

1,180

903

Professional service fees

535

314

221

70

%

303

838

659

Telecommunications

180

178

2

1

%

173

353

394

Acquisition

376

376

100

%

1,930

2,306

Other expenses

1,713

1,086

627

58

%

1,137

2,850

2,104

Total noninterest expense

9,611

7,671

1,940

25

%

10,923

20,534

15,704

Income before provision for income taxes

4,984

4,871

113

2

%

3,138

8,122

9,165

Provision for income taxes

1,340

1,253

87

7

%

832

2,172

2,306

Net income

$

3,644

$

3,618

$

26

1

%

$

2,306

$

5,950

$

6,859

Basic earnings per share

$

0.20

$

0.22

$

(0.02

)

(9

)

%

$

0.13

$

0.33

$

0.42

Average basic shares

18,134

16,245

1,889

12

%

17,489

17,816

16,237

Diluted earnings per share