Bank of Commerce Holdings Announces Results for the First Quarter of 2020

SACRAMENTO, Calif., April 17, 2020 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (BOCH) (the “Company”), a $1.456 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter ended March 31, 2020. Net income for the quarter ended March 31, 2020 was $916 thousand or $0.05 per share – diluted, compared with net income of $2.3 million or $0.13 per share – diluted for the same period of 2019.

Significant Items for the first quarter of 2020:

  • $2.9 million provision for loan and lease losses.

  • $1.1 million in non-recurring costs.

  • 1,351,922 shares of common stock repurchased.

  • Initial impact of COVID-19.

Randall S. Eslick, President and CEO commented: “The current health crisis has changed our world and is impacting our company in many ways. Our employees need physical protection and work schedule flexibility, our borrowers need credit accommodation and everyone needs a little compassion. In response, we have taken many varied actions to assist borrowers, depositors, employees and our communities. Our company is stronger for these efforts and over the coming weeks and months we will continue to respond to needs and challenges as they arise.”

Financial highlights for the first quarter of 2020 compared to the same quarter a year ago:

  • Net income of $916 thousand was a decrease of $1.4 million (60%) from $2.3 million earned during the same period in the prior year. Earnings of $0.05 per share – diluted was a decrease of $0.08 (62%) from $0.13 per share – diluted earned during the same period in the prior year and reflects the impact of the following:

    • $2.9 million provision for loan and lease losses for the current quarter.

    • $1.1 million in non-recurring costs for the current quarter associated with the termination of a technology management services contract and a previously announced severance agreement.

    • $1.9 million in non-recurring costs recorded during the same period a year ago associated with our January 31, 2019 acquisition of Merchants Holding Company in Sacramento (“Merchants”).

  • Net interest income decreased $18 thousand (less than 1%) to $13.0 million compared to $13.0 million for the same period in the prior year.

  • Net interest margin declined to 3.86% compared to 3.94% for the same period in the prior year.

  • Return on average assets decreased to 0.25% compared to 0.66% for the same period in the prior year.

  • Return on average equity decreased to 2.14% compared to 6.12% for the same period in the prior year.

  • Average loans totaled $1.034 billion, an increase of $40 million (4%) compared to average loans for the same period in the prior year.

  • Average earning assets totaled $1.353 billion, an increase of $16 million (1%) compared to average earning assets for the same period in the prior year.

  • Average deposits totaled $1.245 billion, an increase of $21 million (2%) compared to average deposits for the same period in the prior year.

    • Average non-maturing deposits totaled $1.097 billion, an increase of $41 million (4%) compared to the same period in the prior year.

    • Average certificates of deposit totaled $147.2 million, a decrease of $20.2 million (12%) compared to same period in the prior year.

  • The Company’s efficiency ratio was 70.5% compared to 77.7% during the same period in the prior year.

    • The Company’s efficiency ratio of 70.5% for the first quarter of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 62.5%.

    • The Company’s efficiency ratio of 77.7% for the first quarter of 2019 included $1.9 million in non-recurring acquisition costs. The efficiency ratio excluding these non-recurring costs was 64.0%

  • Nonperforming assets at March 31, 2020 totaled $5.3 million or 0.36% of total assets, a decrease of $9.3 million (64%) since March 31, 2019. The decrease in nonperforming assets results from one $10.9 million commercial real estate loan which was placed in nonaccrual status in the first quarter and sold in the fourth quarter of 2019.

  • Book value per common share was $9.86 at March 31, 2020 compared to $8.90 at March 31, 2019.

  • Tangible book value per common share was $8.89 at March 31, 2020 compared to $7.96 at March 31, 2019.

Financial highlights for the first quarter of 2020 compared to prior quarter:

  • Net income of $916 thousand ($0.05 per share – diluted) was a decrease of $3.5 million (79%) from $4.4 million ($0.24 per share – diluted) earned during the prior quarter and reflects the impact of the following:

    • $2.9 million provision for loan and lease losses for the current quarter.

    • $1.1 million in non-recurring costs for the current quarter associated with the termination of a technology management services contract and a previously announced severance agreement.

  • Net interest income decreased $328 thousand (2%) to $13.0 million compared to $13.3 million for the prior quarter.

  • Net interest margin improved to 3.86% compared to 3.80% for the prior quarter.

  • Return on average assets decreased to 0.25% compared to 1.16% for the prior quarter.

  • Return on average equity decreased to 2.14% compared to 10.06% for the prior quarter.

  • Average loans totaled $1.034 billion, an increase of $2 million (1% annualized) compared to average loans for the prior quarter.

  • Average earning assets totaled $1.353 billion, a decrease of $37 million (11% annualized) compared the prior quarter.

  • Average deposits totaled $1.245 billion, a decrease of $38 million (12% annualized) compared the prior quarter.

    • Average non-maturing deposits totaled $1.097 billion, a decrease of $32 million (11% annualized) compared to the prior quarter.

    • Average certificates of deposit totaled $147.2 million, a decrease of $6.0 million (16% annualized) compared to the prior quarter.

  • The Company’s efficiency ratio was 70.5% compared to 58.7% for the prior quarter.

    • The Company’s efficiency ratio of 70.5% for the first quarter of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 62.5%.

  • Nonperforming assets at March 31, 2020 totaled $5.3 million or 0.36% of total assets, a decrease of $400 thousand (28% annualized) since December 31, 2019.

  • Book value per common share was $9.86 at March 31, 2020 compared to $9.62 at December 31, 2019.

  • Tangible book value per common share was $8.89 at March 31, 2020 compared to $8.71 at December 31, 2019.

Subsequent impacts of COVID-19:

  • We are participating in the federal Paycheck Protection Program (“PPP”) administered through the Small Business Administration (“SBA”). We expect to utilize liquidity provided by the Federal Reserve to fund the program. Through April 13, 2020, we had received approximately 580 loan applications for approximately $186 million and we have now stopped accepting applications. We do not expect that the growth in our assets resulting from the PPP will impact our regulatory capital ratios.

  • We have not experienced any unusual pressure on our deposit balances or on our liquidity position as a result of COVID-19. Should this change, in addition to our primary sources of liquidity, the Bank has credit arrangements as disclosed in our 2019 Form 10-K that provide secondary funding sources that totaled $517.8 million.

  • At March 31, 2019 our workforce totaled 216 employees of which 105 are working remotely.

  • All of our branch offices remain open, although they are operating under a reduced schedule.

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

Net income, average assets and

March 31,

December 31,

average shareholders' equity

2020

2019

2019

Net income

$

916

$

2,306

$

4,369

Average total assets

$

1,454,019

$

1,425,860

$

1,492,643

Average total earning assets

$

1,353,098

$

1,337,006

$

1,390,446

Average shareholders' equity

$

172,120

$

152,705

$

172,385

Selected performance ratios

Return on average assets

0.25

%

0.66

%

1.16

%

Return on average equity

2.14

%

6.12

%

10.06

%

Efficiency ratio

70.5

%

77.7

%

58.7

%

Share and per share amounts

Weighted average shares - basic (1)

17,695

17,489

18,068

Weighted average shares - diluted (1)

17,747

17,552

18,150

Earnings per share - basic

$

0.05

$

0.13

$

0.24

Earnings per share - diluted

$

0.05

$

0.13

$

0.24

At March 31,

At December 31,

Share and per share amounts

2020

2019

2019

Common shares outstanding (2)

16,796

18,213

18,137

Book value per common share (2)

$

9.86

$

8.90

$

9.62

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

$

8.89

$

7.96

$

8.71

Capital ratios (4)

Bank of Commerce Holdings

Common equity tier 1 capital ratio

12.02

%

12.40

%

13.19

%

Tier 1 capital ratio

12.85

%

13.25

%

14.04

%

Total capital ratio

14.93

%

15.19

%

15.97

%

Tier 1 leverage ratio

10.78

%

11.05

%

11.30

%

Tangible common equity ratio (5)

10.38

%

9.97

%

10.80

%

Merchants Bank of Commerce

Common equity tier 1 capital ratio

13.66

%

13.98

%

14.39

%

Tier 1 capital ratio

13.66

%

13.98

%

14.39

%

Total capital ratio

14.91

%

15.08

%

15.48

%

Tier 1 leverage ratio

11.45

%

11.66

%

11.58

%

(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 March 31, 2020, the Company had total consolidated assets of $1.456 billion, gross loans of $1.052 billion, allowance for loan and lease losses (“ALLL”) of $15 million, total deposits of $1.242 billion, and shareholders’ equity of $166 million.

TABLE 2

LOAN BALANCES BY TYPE - UNAUDITED

(amounts in thousands)

At March 31,

At December 31,

% of

% of

Change

% of

2020

Total

2019

Total

Amount

%

2019

Total

Commercial

$

138,870

13

%

$

149,575

14

%

$

(10,705

)

(7

)%

$

141,197

14

%

Real estate - construction and land development

34,394

3

30,335

3

4,059

13

%

26,830

3

Real estate - commercial non-owner occupied

514,052

49

477,798

47

36,254

8

%

493,920

48

Real estate - commercial owner occupied

217,319

21

200,349

19

16,970

8

%

218,833

21

Real estate - residential - ITIN

31,998

3

36,145

3

(4,147

)

(11

)%

33,039

3

Real estate - residential - 1-4 family mortgage

62,533

6

68,092

7

(5,559

)

(8

%

63,661

6

Real estate - residential - equity lines

23,158

2

26,162

3

(3,004

)

(11

)%

22,099

2

Consumer and other

29,921

3

46,150

4

(16,229

)

(35

)%

33,324

3

Gross loans

1,052,245

100

%

1,034,606

100

%

17,639

2

%

1,032,903

100

%

Deferred fees and costs

2,129

1,992

137

2,162

Loans, net of deferred fees and costs

1,054,374

1,036,598

17,776

1,035,065

Allowance for loan and lease losses

(15,067

)

(12,242

)

(2,825

)

(12,231

)

Net loans

$

1,039,307

$

1,024,356

$

14,951

$

1,022,834

Average loans during the quarter

$

1,033,689

$

993,261

$

40,428

4

%

$

1,031,702

Average yield on loans during the quarter

4.80

%

4.91

%

(0.11

)

4.86

%

Average yield on loans during the year

4.80

%

4.91

%

(0.11

)

4.95

%

The Company recorded gross loan balances of $1.052 billion at March 31, 2020, compared with $1.035 billion and $1.033 billion at March 31, 2019 and December 31, 2019, respectively, an increase of $18 million and $19 million, respectively.

The average yield on loans during the quarter was 4.80% compared to 4.91% and 4.86% for the quarters ended March 31, 2019 and December 31, 2019, respectively.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants of $1.5 million, $1.7 million and $2.3 million at March 31, 2020, December 31, 2019 and March 31, 2019, respectively. We recorded $163 thousand $188 thousand and $48 thousand in accretion of the discount for these loans during the quarters ended March 31, 2020, December 31, 2019 and March 31, 2019, respectively.


TABLE 3

CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED

(amounts in thousands)

At March 31,

At December 31,

% of

% of

Change

% of

2020

Total

2019

Total

Amount

%

2019

Total

Cash and due from banks

$

21,127

6

%

$

32,104

9

%

$

(10,977

)

(34

)%

$

21,338

6

%

Interest-bearing deposits in other banks

22,813

7

30,425

9

(7,612

)

(25

)%

59,266

16

Total cash and cash equivalents

43,940

13

62,529

18

(18,589

)

(30

)%

80,604

22

Investment securities:

U.S. government and agencies

36,043

11

46,451

13

(10,408

)

(22

)%

38,733

11

Obligations of state and political subdivisions

63,263

19

48,935

14

14,328

29

%

42,098

11

Residential mortgage backed securities and
collateralized mortgage obligations

160,439

50

171,814

47

(11,375

)

(7

)%

180,835

49

Corporate securities

2,983

1

2,958

1

25

1

%

2,966

1

Commercial mortgage backed securities

17,428

5

23,864

7

(6,436

)

(27

)%

19,307

5

Other asset backed securities

4,921

1

95

4,826

5,080

%

3,011

1

Total investment securities - AFS

285,077

87

294,117

82

(9,040

)

(3

)%

286,950

78

Total cash, cash equivalents and
investment securities

$

329,017

100

%

$

356,646

100

%

$

(27,629

)

(8

)%

$

367,554

100

%

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

2.53

%

2.83

%

(0.30

)

2.39

%

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

2.62

%

2.95

%

(0.33

)

2.47

%

As of March 31, 2020, we maintained noninterest-bearing cash positions of $21.1 million and interest-bearing deposits of $22.8 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $285.1 million at March 31, 2020, compared with $294.1 million and $287.0 million at March 31, 2019 and December 31, 2019, respectively. During the first quarter of 2020, we repositioned a portion of the Bank’s investment securities portfolio to take advantage of widening credit spreads on municipal securities. We purchased securities with a par value of $37.9 million and weighted average yield of 2.85% and sold securities with a par value of $28.6 million and weighted average yield of 2.24%. The sales resulted in net realized gains of $84 thousand for the quarter ended March 31, 2020.

Average securities balances for the quarters ended March 31, 2020, December 31, 219 and March 31, 2019 were $272.3 million, $277.6 million and $303.5 million, respectively. Weighted average yields on securities balances for those same periods were 2.74%, 2.61% and 2.87%, respectively.

At March 31, 2020, our net unrealized gains on available-for-sale investment securities were $8.4 million compared with net unrealized losses of $701 thousand and net unrealized gains of $3.7 million at March 31, 2019 and December 31, 2019, respectively. The changes in net unrealized gains / losses on the investment securities portfolio were due to changes in market interest rates.


TABLE 4

DEPOSITS BY TYPE - UNAUDITED

(amounts in thousands)

At March 31,

At December 31,

% of

% of

Change

% of

2020

Total

2019

Total

Amount

%

2019

Total

Demand - noninterest-bearing

$

419,315

34

%

$

385,696

31

%

$

33,619

9

%

$

432,680

34

%

Demand - interest-bearing

231,276

19

241,292

19

(10,016

)

(4

)%

239,258

19

Money market

314,687

25

311,853

25

2,834

1

%

307,559

24

Total demand

965,278

78

938,841

75

26,437

3

%

979,497

77

Savings

133,552

11

139,237

11

(5,685

)

(4

)%

135,888

11

Total non-maturing deposits

1,098,830

89

1,078,078

86

20,752

2

%

1,115,385

88

Certificates of deposit

143,557

11

170,216

14

(26,659

)

(16

)%

151,786

12

Total deposits

$

1,242,387

100

%

$

1,248,294

100

%

$

(5,907

)

0

%

$

1,267,171

100

%

Total deposits at March 31, 2020, decreased $6 million or less than 1% to $1.242 billion compared to March 31, 2019 and decreased $25 million or 8% annualized compared to December 31, 2019. Total non-maturing deposits increased $20.8 million or 2% compared to the same date a year ago and decreased $16.6 million or 6% annualized compared to December 31, 2019. The decrease in non-maturing deposits from December 31, 2019 to March 31, 2020 was less than the seasonal declines we have experienced during the first quarter of prior years. Certificates of deposit decreased $26.7 million thousand or 16% compared to the same date a year ago and decreased $8.2 million or 22% annualized compared to December 31, 2019.


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

TABLE 5

AVERAGE COST OF FUNDS - UNAUDITED

For The Three Months Ended

March 31,

December 31,

September 30,

June 30,

March 31,

December 31,

September 30,

June 30,

2020

2019

2019

2019

2019

2018

2018

2018

Interest-bearing deposits

0.53

%

0.56

%

0.56

%

0.54

%

0.49

%

0.45

%

0.42

%

0.41

%

Interest-bearing deposits and noninterest-bearing demand

0.35

%

0.38

%

0.38

%

0.37

%

0.34

%

0.31

%

0.29

%

0.29

%

All interest-bearing liabilities

0.65

%

0.68

%

0.68

%

0.74

%

0.67

%

0.61

%

0.64

%

0.68

%

All interest-bearing liabilities and noninterest-bearing demand

0.43

%

0.46

%

0.46

%

0.52

%

0.46

%

0.42

%

0.45

%

0.50

%

Stock Repurchase Program

We previously announced a program to repurchase 1.5 million common shares. During the first quarter of 2020 and the fourth quarter of 2019 we repurchased 1,351,922 and 90,501 shares of common stock, respectively. The remaining 57,577 shares under the program were repurchased during the first week of April 2020. All 1.5 million shares were repurchased at a total cost of $13.6 million including commissions, or an average of $9.11 per share.


INCOME STATEMENT OVERVIEW

TABLE 6

SUMMARY INCOME STATEMENT - UNAUDITED

(amounts in thousands, except per share data)

For The Three Months Ended

March 31,

Change

December 31,

Change

2020

2019

Amount

%

2019

Amount

%

Interest income

$

14,345

$

14,427

$

(82

)

(1

)%

$

14,808

$

(463

)

(3

)%

Interest expense

1,359

1,423

(64

)

(4

)%

1,494

(135

)

(9

)%

Net interest income

12,986

13,004

(18

)

0

%

13,314

(328

)

(2

)%

Provision for loan
and lease losses

2,850

2,850

100

%

2,850

100

%

Noninterest income

892

1,057

(165

)

(16

)%

1,021

(129

)

(13

)%

Noninterest expense

9,783

10,923

(1,140

)

(10

)%

8,421

1,362

16

%

Income before provision
for income taxes

1,245

3,138

(1,893

)

(60

)%

5,914

(4,669

)

(79

)%

Provision for income taxes

329

832

(503

)

(60

)%

1,545

(1,216

)

(79

)%

Net income

$

916

$

2,306

$

(1,390

)

(60

)%

$

4,369

$

(3,453

)

(79

)%

Earnings per share - basic

$

0.05

$

0.13

$

(0.08

)

(62

)%

$

0.24

$

(0.19

)

(79

)%

Weighted average shares - basic

17,695

17,489

206

1

%

18,068

(373

)

(2

)%

Earnings per share - diluted

$

0.05

$

0.13

$

(0.08

)

(62

)%

$

0.24

$

(0.19

)

(79

)%

Weighted average shares - diluted

17,747

17,552

195

1

%

18,150

(403

)

(2

)%

Dividends declared per
common share

$

0.05

$

0.04

$

0.01

25

%

$

0.05

$

%


First Quarter of 2020 Compared With First Quarter of 2019

Net income for the first quarter of 2020 decreased $1.4 million compared to the first quarter of 2019. In the current quarter, net interest income was $18 thousand lower, provision for loan and lease losses was $2.9 million higher and noninterest income was $165 thousand lower. These decreases to pre-tax income were partially offset by noninterest expense that was $1.1 million lower and income taxes that were $503 thousand lower.

Net Interest Income

Net interest income decreased $18 thousand compared to the same period a year ago.

Interest income for the first quarter of 2020 decreased $82 thousand million or 1% to $14.3 million.

  • Interest and fees on loans increased $307 thousand due to a $40.4 million increase in average loan balances partially offset by an 11 basis point decrease in the average yield on the loan portfolio.

  • Interest on investment securities decreased $298 thousand due to a $31 thousand decrease in average securities balances and a 14 basis point decrease in average yield on the securities portfolio.

  • Interest on interest-bearing deposits due from banks decreased $91 thousand due to a 116 basis point decrease in average yield that was partially offset by a $6.9 million increase in average interest-bearing deposit balances.

Interest expense for the first quarter of 2020 decreased $64 thousand or 5% to $1.4 million.

  • Interest expense on interest-bearing deposits increased $69 thousand. Average interest-bearing demand and savings deposit balances increased $8.6 million, while average certificate of deposit balances decreased $20.2 million. The average rate paid on interest-bearing deposits decreased three basis points.

  • Interest expense on FHLB borrowings decreased $55 thousand. Average FHLB borrowings were $220 thousand in the current quarter compared to $8.8 million for the same period a year ago.

  • Interest expense on other term debt decreased $55 thousand. During the second quarter of 2019, we completed the early repayment of our variable rate senior debt.

  • Interest expense on junior subordinated debentures decreased $23 thousand. The average rate paid on junior subordinated debentures decreased 93 basis points.

Provision for Loan and Lease Losses

Net loan loss charge-offs were only $14 thousand for the current quarter compared $50 thousand for the same period a year ago. As illustrated in Table 8 asset quality metrics improved during the three months ended March 31, 2020 when compared to the same period a year ago. However, based on our analysis of the potential economic effects of the COVID-19 we recorded a provision for loan and lease losses of $2.9 million for the first quarter of 2020. There was no provision for loan and lease losses in the first quarter of 2019. A discussion of our provision is provided following Table 8 below.

Noninterest Income

Noninterest income for the three months ended March 31, 2020 decreased $165 thousand compared to the first quarter for 2019. The decrease was primarily due to a $132 thousand loss on disposal of ATM equipment which is included in “other noninterest income”.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2020 decreased $1.1 million compared to the same period a year previous. During the current quarter we recorded $700 thousand in non-recurring costs related to the termination of a technology management services contract and $414 thousand in non-recurring costs related to a severance agreement. The first quarter of 2019 included $1.9 million in non-recurring acquisition costs. Excluding the non-recurring costs in both periods, noninterest expense decreased $324 thousand for the three months ended March 31, 2020 compared to the same period a year previous. This decrease was primarily due to salary and benefit cost savings.

The Company’s efficiency ratio was 70.5% for the first quarter of 2020 (62.5% excluding $1.1 million in non-recurring costs). The ratio during the same period in 2019 was 77.7% (64.0% excluding $1.9 million of non-recurring costs).

Income Tax Provision

For the three months ended March 31, 2020, our income tax provision of $329 thousand on pre-tax income of $1.2 million was an effective tax rate of 26.4%. The tax provision for the first quarter of the prior year was $832 thousand on pre-tax income of $3.1 million for an effective rate of 26.5%.

First Quarter of 2020 Compared With Fourth Quarter of 2019

Net income for the first quarter of 2020 decreased $3.5 million compared to the fourth quarter of 2019. In the current quarter, net interest income was $328 thousand lower, provision for loan and lease losses was $2.9 million higher, noninterest income was $129 thousand lower and noninterest expense was $1.4 million higher. These changes were partially offset by a provision for income taxes that was $1.2 million lower.

Net Interest Income

Net interest income decreased $328 thousand over the prior quarter.

Interest income for the three months ended March 31, 2020 decreased $463 thousand or 3% to $14.3 million.

  • Interest and fees on loans decreased $305 thousand due to a 6 basis point decrease in the average yield on the loan portfolio partially offset by a $2.0 million increase in average loan balances.

  • Interest on investment securities increased $28 thousand due to a 14 basis point increase in average yield on the investment portfolio partially offset by a $5.4 million decrease in average securities balances.

  • Interest on interest-bearing deposits due from banks decreased $186 thousand due to a $34.0 million decrease in average balances and a 35 basis point decrease in the average yield on interest-bearing deposits due from banks.

Interest expense for the three months ended March 31, 2020 decreased $135 thousand or 9% to $1.4 million.

  • Interest expense on interest-bearing deposits decreased $129 thousand. Average interest-bearing demand and savings deposit balances decreased $24.1 million, while average certificates of deposit decreased $6.0 million. The average rate paid on interest-bearing deposits decreased by three basis points.

  • Interest expense on other term debt and junior subordinated debentures decreased $6 thousand.

Provision for Loan and Lease Losses

Net loan charge offs were $14 thousand in the current quarter compared to $54 thousand in the prior quarter. As illustrated in Table 8 asset quality metrics improved during the three months ended March 31, 2020 when compared to the previous quarter. However, based on our analysis of the potential economic effects of the COVID-19 we recorded a provision for loan and lease losses of $2.9 million for the first quarter of 2020. There was no provision for loan and lease losses in the prior quarter. A discussion of our provision is provided following Table 8 below.

Noninterest Income

Noninterest income for the three months ended March 31, 2020 decreased $129 thousand, the decrease was primarily due to a $132 thousand loss on disposal of ATM equipment which is included in “other noninterest income”.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2020 increased $1.4 million compared to the prior quarter. Increases in noninterest expense included:

  • $700 thousand in non-recurring costs related to the termination of a technology management services contract.

  • $414 thousand non-recurring costs related to a previously disclosed severance agreement.

  • $441 thousand in salaries and benefits.

The Company’s efficiency ratio was 70.5% for the first quarter of 2020 (62.5% excluding $1.1 million in non-recurring costs.) compared with 58.7% for the prior quarter.

Income Tax Provision

For the three months ended March 31, 2020, our income tax provision of $329 thousand on pre-tax income of $1.2 million was an effective tax rate of 26.4%. The income tax provision for the prior quarter of $1.5 million on pre-tax income of $5.9 million was an effective tax rate of 26.1%.


Earnings Per Share

Diluted earnings per share were $0.05 for the three months ended March 31, 2020 compared with diluted earnings per share of $0.13 for the same period a year ago and diluted earnings per share of $0.24 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in Table 6 presented earlier in this press release.

TABLE 7

NET INTEREST MARGIN - UNAUDITED

(amounts in thousands)

For The Three Months Ended

March 31, 2020

March 31, 2019

December 31, 2019

Average
Balance

Interest(1)

Yield /
Rate (5)

Average
Balance

Interest(1)

Yield /
Rate (5)

Average
Balance

Interest(1)

Yield /
Rate (5)

Interest-earning assets:

Net loans (2)

$

1,033,689

$

12,338

4.80

%

$

993,261

$

12,031

4.91

%

$

1,031,702

$

12,643

4.86

%

Taxable securities

237,405

1,582

2.68

%

253,068

1,764

2.83

%

245,487

1,567

2.53

%

Tax-exempt securities (3)

34,869

271

3.13

%

50,454

387

3.11

%

32,158

258

3.18

%

Interest-bearing deposits
in other banks

47,135

154

1.31

%

40,223

245

2.47

%

81,099

340

1.66

%

Average interest-
earning assets

1,353,098

14,345

4.26

%

1,337,006

14,427

4.38

%

1,390,446

14,808

4.23

%

Cash and due from banks

21,987

21,392

24,083

Premises and equipment, net

15,753

14,581

16,049

Goodwill

11,671

7,902

11,671

Other intangible assets, net

4,701

3,970

4,890

Other assets

46,809

41,009

45,504

Average total assets

$

1,454,019

$

1,425,860

$

1,492,643

Interest-bearing liabilities:

Interest-bearing demand

$

233,375

100

0.17

%

$

243,376

126

0.21

%

$

244,276

108

0.18

%

Money market

307,587

403

0.53

%

293,396

289

0.40

%

318,127

479

0.60

%

Savings

135,504

118

0.35

%

131,081

111

0.34

%

138,155

128

0.37

%

Certificates of deposit

147,241

464

1.27

%

167,463

490

1.19

%

153,223

499

1.29

%

Federal Home Loan Bank of San Francisco borrowings

220

%

8,778

55

2.54

%

%

Other borrowings net of unamortized debt issuance costs

9,963

184

7.43

%

12,889

239

7.52

%

9,952

183

7.30

%

Junior subordinated
debentures

10,310

90

3.51

%

10,310

113

4.44

%

10,310

97

3.73

%

Average interest-
bearing liabilities

844,200

1,359

0.65

%

867,293

1,423

0.67

%

874,043

1,494

0.68

%

Noninterest-bearing demand

420,847

388,410

428,420

Other liabilities

16,852

17,452

17,795

Shareholders’ equity

172,120

152,705

172,385

Average liabilities and
shareholders’ equity

$

1,454,019

$

1,425,860

$

1,492,643

Net interest income and
net interest margin (4)

$

12,986

3.86

%

$

13,004

3.94

%

$

13,314

3.80

%

(1) Interest income on loans includes deferred fees and costs of approximately $257 thousand, $181 thousand, and $224 thousand for the three months ended March 31, 2020 and 2019 and December 31, 2019, respectively.

(2) Net loans includes average nonaccrual loans of $5.5 million, $8.5 million and $11.4 million for the three months ended March 31, 2020 and 2019 and December 31, 2019, respectively.

(3) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.

(4) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the three months ended March 31, 2020 and 2019 and December 31, 2019 included $163 thousand, $48 thousand and $188 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 6, 2 and 7 basis points, respectively.

(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 8

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

(amounts in thousands)

For The Three Months Ended

March 31,

December 31,

September 30,

June 30,

March 31,

2020

2019

2019

2019

2019

Beginning balance ALLL

$

12,231

$

12,285

$

12,445

$

12,242

$

12,292

Provision for loan and lease losses

2,850

Loans charged-off

(169

)

(174

)

(319

)

(659

)

(348

)

Loan loss recoveries

155

120

159

862

298

Ending balance ALLL

$

15,067

$

12,231

$

12,285

$

12,445

$

12,242

At March 31,

At December 31,

At September 30,

At June 30,

At March 31,

2020

2019

2019

2019

2019

Nonaccrual loans:

Commercial

$

39

$

61

$

139

$

194

$

1,018

Real estate - commercial non-owner occupied

10,099

10,690

10,878

Real estate - commercial owner occupied

3,103

3,103

Real estate - residential - ITIN

1,878

2,221

2,339

2,389

2,392

Real estate - residential - 1-4 family mortgage

184

191

198

217

182

Real estate - residential - equity lines

42

Consumer and other

39

40

21

22

23

Total nonaccrual loans

5,243

5,616

12,796

13,512

14,535

Accruing troubled debt restructured loans:

Commercial

592

595

629

1,092

1,187

Real estate - commercial non-owner occupied

791

793

Real estate - residential - ITIN

3,891

3,957

4,072

4,300

4,342

Real estate - residential - equity lines

226

231

236

242

358

Total accruing troubled debt restructured loans

4,709

4,783

4,937

6,425

6,680

All other accruing impaired loans

Total impaired loans

$

9,952

$

10,399

$

17,733

$

19,937

$

21,215

Gross loans outstanding at period end

$

1,052,245

$

1,032,903

$

1,033,082

$

1,036,724

$

1,034,606

Impaired loans to gross loans

0.95

%

1.01

%

1.72

%

1.92

%

2.05

%

Nonaccrual loans to gross loans

0.50

%

0.54

%

1.24

%

1.30

%

1.40

%

Allowance for loan and lease losses as a percent of:

Gross loans

1.43

%

1.18

%

1.19

%

1.20

%

1.18

%

Nonaccrual loans

287.37

%

217.79

%

96.01

%

92.10

%

84.22

%

Impaired loans

151.40

%

117.62

%

69.28

%

62.42

%

57.70

%


Provision for Loan and Lease Losses

We monitor credit quality and the general economic environment to ensure that the ALLL is maintained at a level that is adequate to cover estimated credit losses in the loan and lease portfolio. Our review of ALLL adequacy utilizes both quantitative and qualitative factors. The quantitative analysis relies on historical loss rates which, unfortunately, are not indicative of potential losses related to a pandemic such as we are currently experiencing with COVID-19. In response to quantitative data deficiencies, we have placed greater reliance on qualitative factors (Q-Factors).

At March 31, 2020, our review of the adequacy of our allowance for loan and lease losses (ALLL) focused on our Q-Factor for “changes in international, national, regional and local conditions”. We considered concentrations of credit in industries that are more likely to be significantly impacted by the effects of COVID-19. We evaluated our C&I portfolio by NAICS code and our CRE portfolio for concentrations of tenants in higher risk industries or for loans with higher LTVs. We also completed analyses on individual borrowers who may be higher risk and utilized the most current or projected economic indicators possible. After completing this work, we significantly increased our Q-Factor for “changes in international, national, regional and local conditions”. The increase, expressed as a percent, varied from 50% to 200%.

Our ALLL methodology, adjusted for the revised Q-Factor discussed above necessitated an ALLL of $15.1 million at March 31, 2020, an increase of 23% compared to our ALLL of $12.2 million at December 31, 2019. A provision for loan and lease losses of $2.9 million was recorded during the quarter. There was no provision for loan and lease loss during the prior quarter or during the same quarter a year ago. Our ALLL as a percentage of gross loans was 1.43% as of March 31, 2020 compared to 1.18% as of March 31, 2019 and December 31, 2019.

Management believes the Company’s ALLL is adequate at March 31, 2020. 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 March 31, 2020, the recorded investment in loans classified as impaired totaled $10.0 million, with a corresponding specific reserve of $318 thousand compared to impaired loans of $21.2 million with a corresponding specific reserve of $1.4 million at March 31, 2019 and impaired loans of $10.4 million, with a corresponding specific reserve of $324 thousand at December 31, 2019.

TABLE 9

TROUBLED DEBT RESTRUCTURINGS - UNAUDITED

(amounts in thousands)

At March 31,

At December 31,

At September 30,

At June 30,

At March 31,

2020

2019

2019

2019

2019

Nonaccrual

$

1,611

$

1,680

$

1,746

$

1,828

$

2,725

Accruing

4,709

4,783

4,937

6,425

6,680

Total troubled debt restructurings

$

6,320

$

6,463

$

6,683

$

8,253

$

9,405

Troubled debt restructurings as a percentage of total gross loans

0.60

%

0.63

%

0.65

%

0.80

%

0.91

%

There were no new troubled debt restructurings during the three months ended March 31, 2020. As of March 31, 2020, we had 97 restructured loans that qualified as troubled debt restructurings, of which 93 were performing according to their restructured terms.

TDR Guidance

On March 22, 2020, financial institution regulators released guidance in response to the COVID-19 pandemic which provided clarification on the treatment of short term loan modifications for borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. The guidance presented a change to the existing accounting for troubled debt restructurings (“TDR”) stating that short-term modifications made in response to COVID-19, to borrowers who are considered current, should not be considered a TDR. The guidance provided examples of short-term (six months or less) modifications including; payment deferrals, fee waivers and extensions of repayment terms. The guidance noted that institutions can presume that borrowers who were current on payments were not experiencing financial difficulties, and as such, the loans don’t meet the TDR classification criteria. The guidance also clarified that modification or deferral programs mandated by the federal or state government related to COVID-19 would not be within the scope of TDR accounting.

We are responding to the needs of our borrowers in accordance with the regulatory guidance to grant short term COVID-19 related loan modifications. Deferral periods are either 3 or 6 months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19.

The following table presents approved loan modification and pending loan modification requests at March 31, 2020, none of which meet the definition of a TDR.

TABLE 10

COVID-19 LOAN MODIFICATIONS - UNAUDITED

(dollars in thousands)

At March 31, 2020

Commercial

Residential

Commercial

Real Estate

Real Estate

Consumer

Total

In process

$

2,613

$

10,404

$

$

$

13,017

Approved

6,649

13,580

3,271

14

23,514

Total

$

9,262

$

23,984

$

3,271

$

14

$

36,531

Number of contracts in process

11

9

20

Number of contracts approved

13

19

4

1

37

Total

24

28

4

1

57


The following table presents nonperforming assets at the dates indicated.

TABLE 11

NONPERFORMING ASSETS - UNAUDITED

(amounts in thousands)

At March 31,

At December 31,

At September 30,

At June 30,

At March 31,

2020

2019

2019

2019

2019

Total nonaccrual loans

$

5,243

$

5,616

$

12,796

$

13,512

$

14,535

90 days past due and still accruing

2

Total nonperforming loans

5,245

5,616

12,796

13,512

14,535

Other real estate owned ("OREO")

8

35

58

34

Total nonperforming assets

$

5,253

$

5,651

$

12,854

$

13,512

$

14,569

Nonperforming loans to gross loans

0.50

%

0.54

%

1.24

%

1.30

%

1.40

%

Nonperforming assets to total assets

0.36

%

0.38

%

0.87

%

0.94

%

0.99

%


The following table summarizes when loans are projected to reprice by year and rate index as of March 31, 2020.

TABLE 12

LOANS BY RATE INDEX AND PROJECTED REPAYMENT - UNAUDITED

(amounts in thousands)

At March 31, 2020

Years 6

Through

Beyond

Year 1

Year 2

Year 3

Year 4

Year 5

Year 10

Year 10

Total

Rate Index:

Fixed

$

49,987

$

52,031

$

58,887

$

53,363

$

28,366

$

171,005

$

38,479

$

452,118

Variable:

Prime

92,700

6,103

8,011

6,263

6,987

1,604

121,668

5 Year Treasury

30,691

62,962

79,234

72,404

92,052

50,407

387,750

7 Year Treasury

773

7,776

4,831

5,690

361

13,739

33,170

1 Year LIBOR

21,225

21,225

Other Indexes

4,088

2,924

1,799

1,737

9,913

12,067

672

33,200

Nonaccrual

572

514

498

479

456

1,850

874

5,243

Total

$

200,036

$

132,310

$

153,260

$

139,936

$

138,135

$

250,672

$

40,025

$

1,054,374


For variable rate loans, the following table summarizes those that are at or above their floor rate, and those that do not possess a contractual floor rate.

TABLE 13

LOAN FLOORS - UNAUDITED

(amounts in thousands)

At March 31, 2020

Loans At

Loans Above

Floor Rate

Floor Rate

Total

Variable rate loans with floors:

Prime

$

63,481

$

5,280

$

68,761

5 year Treasury

302,583

50,386

352,969

7 Year Treasury

33,170

33,170

1 Year LIBOR

741

741

Other Indexes

14,299

1,287

15,586

$

413,533

$

57,694

471,227

Variable rate loans without floors:

Prime

52,907

5 year Treasury

34,781

7 Year Treasury

1 Year LIBOR

20,484

Other Indexes

17,614

125,786

Total variable rate loans

597,013

Fixed rate loans

452,118

Nonaccrual loans

5,243

Total loans

$

1,054,374


TABLE 14

UNAUDITED CONSOLIDATED

BALANCE SHEET

(amounts in thousands, except per share data)

At March 31,

Change

At December 31,

2020

2019

$

%

2019

Assets:

Cash and due from banks

$

21,127

$

32,104

$

(10,977

)

(34

)%

$

21,338

Interest-bearing deposits in other banks

22,813

30,425

(7,612

)

(25

)%

59,266

Total cash and cash equivalents

43,940

62,529

(18,589

)

(30

)%

80,604

Securities available-for-sale, at fair value

285,077

294,117

(9,040

)

(3

)%

286,950

Loans, net of deferred fees and costs

1,054,374

1,036,598

17,776

2

%

1,035,065

Allowance for loan and lease losses

(15,067

)

(12,242

)

(2,825

)

(23

)%

(12,231

)

Net loans

1,039,307

1,024,356

14,951

1

%

1,022,834

Premises and equipment, net

15,452

15,391

61

%

15,906

Other real estate owned

8

34

(26

)

(76

)%

35

Life insurance

23,824

23,294

530

2

%

23,701

Deferred tax asset, net

3,149

6,072

(2,923

)

(48

)%

4,553

Goodwill

11,671

11,710

(39

)

%

11,671

Other intangible assets, net

4,618

5,384

(766

)

(14

)%

4,809

Other assets

28,834

28,604

230

1

%

28,553

Total assets

$

1,455,880

$

1,471,491

$

(15,611

)

(1

)%

$

1,479,616

Liabilities and shareholders' equity:

Demand - noninterest-bearing

$

419,315

$

385,696

$

33,619

9

%

$

432,680

Demand - interest-bearing

231,276

241,292

(10,016

)

(4

)%

239,258

Money market

314,687

311,853

2,834

1

%

307,559

Savings

133,552

139,237

(5,685

)

(4

)%

135,888

Certificates of deposit

143,557

170,216

(26,659

)

(16

)%

151,786

Total deposits

1,242,387

1,248,294

(5,907

)

%

1,267,171

Term debt:

Federal Home Loan Bank of San Francisco borrowings

10,000

20,000

(10,000

)

(50

)%

Other borrowings

10,000

12,596

(2,596

)

(21

)%

10,000

Unamortized debt issuance costs

(31

)

(79

)

48

61

%

(43

)

Net term debt

19,969

32,517

(12,548

)

(39

)%

9,957

Junior subordinated debentures

10,310

10,310

%

10,310

Other liabilities

17,556

18,272

(716

)

(4

)%

17,700

Total liabilities

1,290,222

1,309,393

(19,171

)

(1

)%

1,305,138

Shareholders' equity:

Common stock

59,067

71,966

(12,899

)

(18

)%

71,311

Retained earnings

100,644

90,626

10,018

11

%

100,566

Accumulated other comprehensive income (loss), net of tax

5,947

(494

)

6,441

1,304

%

2,601

Total shareholders' equity

165,658

162,098

3,560

2

%

174,478

Total liabilities and shareholders' equity

$

1,455,880

$

1,471,491

$

(15,611

)

(1

)%

$

1,479,616

Total interest-earning assets

$

1,353,822

$

1,361,841

$

(8,019

)

(1

)%

$

1,377,588

Shares outstanding

16,796

18,213

(1,417

)

(8

)%

18,137

Book value per share (1)

$

9.86

$

8.90

$

0.96

11

%

$

9.62

Tangible book value per share (1)

$

8.89

$

7.96

$

0.93

12

%

$

8.71

(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

March 31,

Change

December 31,

2020

2019

$

%

2019

Interest income:

Interest and fees on loans

$

12,338

$

12,031

$

307

3

%

$

12,643

Interest on taxable securities

1,582

1,764

(182

)

(10

)%

1,567

Interest on tax-exempt securities

271

387

(116

)

(30

)%

258

Interest on interest-bearing deposits in other banks

154

245

(91

)

(37

)%

340

Total interest income

14,345

14,427

(82

)

(1

)%

14,808

Interest expense:

Interest on demand deposits

100

126

(26

)

(21

)%

108

Interest on money market

403

289

114

39

%

479

Interest on savings

118

111

7

6

%

128

Interest on certificates of deposit

464

490

(26

)

(5

)%

499

Interest on Federal Home Loan Bank of
San Francisco borrowings

55

(55

)

(100

)%

Interest on other borrowings

184

239

(55

)

(23

)%

183

Interest on junior subordinated debentures

90

113

(23

)

(20

)%

97

Total interest expense

1,359

1,423

(64

)

(4

)%

1,494

Net interest income

12,986

13,004

(18

)

%

13,314

Provision for loan and lease losses

2,850

2,850

100

%

Net interest income after provision
for loan and lease losses

10,136

13,004

(2,868

)

(22

)%

13,314

Noninterest income:

Service charges on deposit accounts

169

168

1

1

%

198

ATM and point of sale fees

268

265

3

1

%

282

Payroll and benefit processing fees

170

171

(1

)

(1

)%

183

Life insurance

123

129

(6

)

(5

)%

126

Gain on investment securities, net

84

92

(8

)

(9

)%

49

Federal Home Loan Bank of
San Francisco dividends

130

121

9

7

%

131

(Loss) gain on sale of OREO

(23

)

23

(46

)

(200

)%

21

Other (loss) income

(29

)

88

(117

)

(133

)%

31

Total noninterest income

892

1,057

(165

)

(16

)%

1,021


TABLE 15 - CONTINUED

UNAUDITED

INCOME STATEMENT

(amounts in thousands, except per share data)

For The Three Months Ended

March 31,

Change

December 31,

2020

2019

$

%

2019

Noninterest expense:

Salaries and related benefits

5,887

5,729

158

3

%

4,924

Premises and equipment

854

975

(121

)

(12

)%

916

Federal Deposit Insurance Corporation
insurance premium

36

100

(64

)

(64

)%

Data processing

531

576

(45

)

(8

)%

739

Professional services

334

303

31

10

%

309

Telecommunications

171

173

(2

)

(1

)%

190

Acquisition and merger

1,930

(1,930

)

(100

)%

Other expenses

1,970

1,137

833

73

%

1,343

Total noninterest expense

9,783

10,923

(1,140

)

(10

)%

8,421

Income before provision for income taxes

1,245

3,138

(1,893

)

(60

)%

5,914

Provision for income taxes

329

832

(503

)

(60

)%

1,545

Net income

$

916

$

2,306

$

(1,390

)

(60

)%

$

4,369

Earnings per share - basic

$

0.05