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

SACRAMENTO, Calif., Oct. 18, 2019 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings BOCH (the "Company"), a $1.472 billion asset bank holding company and parent company of Merchants Bank of Commerce (the "Bank"), today announced financial results for the quarter ended September 30, 2019. Net income for the quarter ended September 30, 2019 was $4.6 million or $0.26 per share – diluted, compared with net income of $4.0 million or $0.25 per share – diluted for the same period of 2018. Net income for the nine months ended September 30, 2019 was $10.6 million or $0.59 per share – diluted, compared with net income of $10.9 million or $0.67 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 $2.2 million and costs related to the name change have totaled $501 thousand. All significant costs for these two projects have now been absorbed.

Randall S. Eslick, President and CEO commented: "The Company performed solidly during the third quarter which reflects the benefits derived from our acquisition of Merchants National Bank earlier in the year. With the successful integration of Merchants now complete, we are again wholly focused on leveraging our talented business relationship teams to meet customer needs and achieve our organic growth goals."

Financial highlights for the third quarter of 2019:

• Net income of $4.6 million was an increase of $610 thousand (15%) from $4.0 million earned during the same period in the prior year. Earnings of $0.26 per share – diluted was an increase of $0.01 (4%) from $0.25 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.
• Net interest income increased $1.6 million (13%) to $13.7 million compared to $12.1 million for the same period in the prior year.
• Net interest margin improved to 4.00% compared to 3.91% for the same period in the prior year
• Return on average assets increased to 1.26% compared to 1.23% for the same period in the prior year.
• Return on average equity decreased to 10.86% compared to 12.16% for the same period in the prior year.
• Average loans totaled $1.030 billion, an increase of $99 million (11%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.360 billion, an increase of $130 million (11%) compared to average earning assets for the same period in the prior year.
• Average deposits totaled $1.255 billion, an increase of $145 million (13%) compared to average deposits for the same period in the prior year.
  º  Average non-maturing deposits totaled $1.097 billion, an increase of $151 million (16%) compared to the same period in the prior year.
  º  Average certificates of deposit totaled $157.6 million, a decrease of $5.7 million (3%) compared to same period in the prior year.
• The Company's efficiency ratio was 56.4% compared to 58.4% during the same period in the prior year.
• Nonperforming assets at September 30, 2019 totaled $12.8 million or 0.87% of total assets, an increase of $9.0 million since September 30, 2018. The increase in nonperforming assets results from one $10.1 million commercial real estate loan.
• Book value per common share was $9.42 at September 30, 2019 compared to $8.14 at September 30, 2018.
• Tangible book value per common share was $8.51 at September 30, 2019 compared to $8.03 at September 30, 2018.

Financial highlights for the nine months ended September 30, 2019:

• Net income of $10.6 million ($0.59 per share – diluted) was a decrease of $299 thousand (3%) from $10.9 million ($0.67 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 $2.2 million. Costs related to the name change of our subsidiary bank totaled $501 thousand.
• Net interest income increased $5.2 million (15%) to $40.2 million compared to $35.1 million for the same period in the prior year.
• Net interest margin improved to 3.98% compared to 3.88% for the same period in the prior year.
• Return on average assets decreased to 0.98% compared to 1.14% for the same period in the prior year.
• Return on average equity decreased to 8.74% compared to 11.29% for the same period in the prior year.
• Average loans totaled $1.017 billion, an increase of $104 million (11%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.350 billion, an increase of $143 million (12%) compared the same period in the prior year.
• Average deposits totaled $1.232 billion, an increase of $154 million (14%) compared the same period in the prior year.
  º  Average non-maturing deposits totaled $1.069 billion, an increase of $163 million (18%) compared to the same period in the prior year.
  º  Average certificates of deposit totaled $163.0 million, a decrease of $8.9 million (5%) compared to the same period in the prior year.
• The Company's efficiency ratio was 66.5% compared to 61.5% for the same period in the prior year.
  º  The Company's efficiency ratio of 66.5% for the first nine months of 2019 includes $2.2 million in acquisition costs and $501 thousand in name change costs. The efficiency ratio excluding these non-recurring costs was 60.3%.
• Nonperforming assets at September 30, 2019 totaled $12.8 million or 0.87% of total assets, an increase of $8.7 million since December 31, 2018. The increase in nonperforming assets results from one $10.1 million commercial real estate loan.
• Book value per common share was $9.42 at September 30, 2019 compared to $8.47 at December 31, 2018.
• Tangible book value per common share was $8.51 at September 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.

BALANCE SHEET OVERVIEW

As of September 30, 2019, the Company had total consolidated assets of $1.472 billion, gross loans of $1.033 billion, allowance for loan and lease losses ("ALLL") of $12 million, total deposits of $1.262 billion, and shareholders' equity of $172 million.

The Company recorded gross loan balances of $1.033 billion at September 30, 2019, compared with $927 million and $1.037 billion at September 30, 2018 and June 30, 2019, respectively, an increase of $106 million and a decrease of $4 million, respectively. During the first quarter of 2019,     the Merchants acquisition provided an additional $85.3 million of loans.

The average yield on loans during the quarter was 5.01% compared to 4.93% and 5.01% for the quarters ended September 30, 2018 and June 30, 2019, respectively.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants during the first quarter of 2019 of $1.9 million and $2.1 million at September 30, 2019 and June 30, 2019, respectively. We recorded $190 thousand and $193 thousand in accretion of the discount for these loans during the second and third quarters of 2019, respectively.

As of September 30, 2019, we maintained noninterest-bearing cash positions of $32.5 million and interest-bearing deposits of $56.1 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $272.3 million at September 30, 2019, compared with $239.6 million and $285.8 million at September 30, 2018 and June 30, 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 $13.8 million and $100.1 million during the three and nine months ended September 30, 2019, respectively. The sales resulted in net realized gains of $12 thousand and $137 thousand for the three and nine months ended September 30, 2019, respectively.

Average securities balances and weighted average tax equivalent yields for the quarters ended September 30, 2019 and 2018 were $271.6 million and 2.85% compared to $248.4 million and 2.74%, respectively.

At September 30, 2019, our net unrealized gains on available-for-sale investment securities were $3.3 million compared with net unrealized losses of $5.8 million and unrealized gains of $3.4 million at September 30, 2018 and June 30, 2019, respectively. The changes in net unrealized losses on the investment securities portfolio were due to changes in market interest rates.

Total deposits at September 30, 2019, increased $117 million or 10% to $1.262 billion compared to September 30, 2018 and increased $27 million or 9% annualized compared to June 30, 2019. Total non-maturing deposits increased $123.1 million or 13% compared to the same date a year ago and increased $31.6 million or 12% annualized compared to June 30, 2019. Certificates of deposit decreased $5.7 million or 4% compared to the same date a year ago and decreased $4.9 million or 12% annualized compared to June 30, 2019.

During the first quarter of 2019, the Merchants acquisition provided an additional $190.2 million of deposits. The decrease in the acquired deposits of $23.2 million at September 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.

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.

INCOME STATEMENT OVERVIEW

Third Quarter of 2019 Compared With Third Quarter of 2018

Net income for the third quarter of 2019 increased $610 thousand compared to the third quarter of 2018. In the current quarter, net interest income was $1.6 million higher and noninterest income was $63 thousand higher. These positive changes were offset by noninterest expenses that were $666 thousand higher and the provision for income taxes was $382 thousand higher.

Net Interest Income

Net interest income increased $1.6 million compared to the same period a year ago.

Interest income for the third quarter of 2019 increased $1.8 million or 13% to $15.2 million.

• Interest and fees on loans increased $1.4 million due to an $11.6 million increase in average loan balances and an 8 basis point increase in the average yield on the loan portfolio.
• Interest on investment securities increased $271 thousand due to a $23.1 million increase in average securities balances and an 18 basis point increase in average yield on the securities portfolio.
• Interest on interest-bearing deposits due from banks increased $54 thousand due to an $8.5 million increase in average interest-bearing deposit balances, and an 8 basis point increase in average yield.

Interest expense for the third quarter of 2019 increased $175 thousand or 13% to $1.5 million.

• Interest expense on interest-bearing deposits increased $350 thousand. Average interest-bearing demand and savings deposit balances increased $88.8 million, while average certificate of deposit balances decreased $5.7 million. The average rate paid on interest-bearing deposits increased 14 basis points.
• Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased $121 thousand. There were no Federal Home Loan Bank of San Francisco borrowings in the current quarter compared to average borrowings of $22.3 million in the same quarter a year ago.
• Interest expense on other term debt and junior subordinated debentures decreased $80 thousand. During the second quarter of 2019, 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 $10.1 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. The loan is current and management believes it is adequately collateralized. Net loan loss charge-offs were only $160 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 third quarter of 2018.

Noninterest Income

Noninterest income for the three months ended September 30, 2019 increased $63 thousand compared to the third quarter for 2018. The change was not concentrated in any one item.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2019 increased $666 thousand compared to the same period a year previous. The increase was primarily due to increased operating costs from our Merchants acquisition and $191 thousand in amortization of the core deposit intangible for the deposits acquired from Merchants. The increases were partially offset by $193 thousand in Small Bank Assessment Credits from the FDIC.

The Company's efficiency ratio was 56.4% for the third quarter of 2019; the ratio during the same period in 2018 was 58.4%.

Income Tax Provision

For the three months ended September 30, 2019, our income tax provision of $1.8 million on pre-tax income of $6.4 million was an effective tax rate of 27.8%. The tax provision for the third quarter of the prior year was $1.4 million on pre-tax income of $5.4 million for an effective tax rate of 25.8%. The Company's effective tax rate has increased as muni income, tax credits and permanent deductions arising from investments in low income housing partnerships comprise a smaller percentage of pre-tax income. The increase during the current quarter was also due to the write-off of a $41 thousand deferred tax asset resulting from expiration of a capital loss carryforward.

Third Quarter of 2019 Compared With Second Quarter of 2019

Net income for the third quarter of 2019 increased $998 thousand compared to the second quarter of 2019. In the current quarter net interest income was $227 thousand higher and noninterest expense was $1.3 million lower. These positive changes were partially offset by noninterest income that was $94 thousand lower and the provision for income taxes that was $446 thousand higher.

Net Interest Income

Net interest income increased $227 thousand over the prior quarter.

Interest income for the three months ended September 30, 2019 increased $74 thousand or less than one percent to $15.2 million.

• Interest and fees on loans increased $166 thousand due to a $1.3 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 $181 thousand due to a $17.8 million decrease in average securities balances partially offset by an 11 basis point increase in average yield on the investment portfolio.
• Interest on interest-bearing deposits due from banks increased $89 thousand due to a $23.3 million increase in average balances.
• The third quarter of 2019 was one day longer than the second quarter of 2019.

Interest expense for the three months ended September 30, 2019 decreased $153 thousand or 9% to $1.5 million.

• Interest expense on interest-bearing deposits increased $61 thousand. Average interest-bearing demand and savings deposit balances increased $16.6 million, while average certificates of deposit decreased $6.5 million. The average rate paid on interest-bearing deposits increased by two basis points.
• Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased $192 thousand. There were no Federal Home Loan Bank of San Francisco borrowings outstanding in the current quarter, compared to average borrowings of $30.0 million in the prior quarter
• Interest expense on other term debt and junior subordinated debentures decreased $22 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 a result of improvements in our asset quality metrics and loan loss charge-offs totaling only $160 thousand for the current quarter, no provision for loan and lease losses was necessary during current quarter. There was no provision for loan and lease losses in the prior quarter.

Noninterest Income

Noninterest income for the three months ended September 30, 2019 decreased $94 thousand, the decrease was not concentrated in any one item.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2019 decreased $1.3 million. The decrease was due to:

• $803 thousand in costs related to the acquisition and name change in the prior quarter that did not recur.
• $263 thousand in decreased salaries and benefit cost.
• $193 thousand in Small Bank Assessment Credits from the FDIC.

The Company's efficiency ratio was 56.4% for the third quarter of 2019; the ratio during the prior quarter was 65.9%.

Income Tax Provision

For the three months ended September 30, 2019, our income tax provision of $1.8 million on pre-tax income of $6.4 million was an effective tax rate of 27.8%. The income tax provision for the prior quarter of $1.3 million on pre-tax income of $5.0 million was an effective tax rate of 26.9%. The Company's effective tax rate has increased as credits and deductions comprised a smaller percentage of pre-tax income. The increase during the current quarter was also due to the write-off of a $41 thousand deferred tax asset resulting from expiration of a capital loss carryforward.

Earnings Per Share

Diluted earnings per share were $0.26 for the three months ended September 30, 2019 compared with diluted earnings per share of $0.25 for the same period a year ago and diluted earnings per share of $0.20 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. During the third quarter of 2019, we adopted a share repurchase program that authorizes the Company to purchase up to one million shares of its common stock over a period ending March 31, 2020. As of October 18, 2019 no shares have been repurchased under the program.

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 $10.1 million commercial real estate loan has resulted in a deterioration in our asset quality metrics for the first three quarters of 2019 however, the loan is current and management believes it is adequately collateralized. Net loan loss charge-offs totaled only $160 thousand for the quarter ended September 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 1.19% as of September 30, 2019 compared to 1.34% as of September 30, 2018 and decreased compared to 1.20% as of June 30, 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 September 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 September 30, 2019, the recorded investment in loans classified as impaired totaled $17.7 million, with a corresponding specific reserve of $335 thousand compared to impaired loans of $10.7 million with a corresponding specific reserve of $1.1 million at September 30, 2018 and impaired loans of $19.9 million, with a corresponding specific reserve of $727 thousand at June 30, 2019. The increase in loans classified as impaired compared to the same period a year ago results from one $10.1 million commercial real estate loan.