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.

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.

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.

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.

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.

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

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.

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.

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.

The following table presents nonperforming assets at the dates indicated.

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

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.