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

Rhea-AI Summary

Bank of Commerce Holdings (NASDAQ: BOCH) reported Q2 2020 net income of $3.8 million ($0.23 per share), up from $3.6 million ($0.20 per share) in Q2 2019. However, net income for the first six months decreased to $4.8 million ($0.28 per share), down from $6.0 million ($0.33 per share) in 2019. Key highlights include $162.2 million in Paycheck Protection Program loans and a 51% reduction in nonperforming assets. The efficiency ratio improved to 56.1%. Average loans and deposits rose by 15% and 15%, respectively, compared to the prior year.

Positive

• Net income for Q2 2020 increased by 6% year-over-year to $3.8 million.
• Earnings per share rose 15% year-over-year to $0.23.
• Average loans grew by $153 million (15%) year-over-year to $1.181 billion.
• Average deposits increased by $189 million (15%) year-over-year to $1.406 billion.
• Nonperforming assets decreased by 51% year-over-year to $6.7 million.

Negative

• Net income for the first half of 2020 decreased by 20% year-over-year to $4.8 million.
• Return on average assets fell to 0.62% from 0.83% in the prior year.
• Net interest margin declined to 3.74% from 3.97% in the prior year.
• Provision for loan and lease losses for the first half totaled $4.2 million.

SACRAMENTO, Calif., July 17, 2020 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.712 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter and six months ended June 30, 2020. Net income for the quarter ended June 30, 2020 was $3.8 million or $0.23 per share – diluted, compared with net income of $3.6 million or $0.20 per share – diluted for the same period of 2019.  Net income for the six months ended June 30, 2020 was $4.8 million or $0.28 per share – diluted, compared with net income of $6.0 million or $0.33 per share – diluted for the same period of 2019.

Significant Items for the second quarter of 2020:

• $1.3 million provision for loan and lease losses.
• $162.2 million in loans funded through June 30, 2020 under the federal Paycheck Protection Program (“PPP”) (594 loans).
  
• Through June 30, 2020 approved 244 loan modifications for loans totaling $123.3 million.
  
• Ongoing impact of COVID-19.
  

Randall S. Eslick, President and CEO commented: “We are proud of our company’s response to recent economic and medical challenges. During the second quarter we installed physical protections for employees and customers, assigned 50% of our employees to work remotely, extended 594 PPP loans totaling $162.2 million and deferred loan payments for 10% of our loan portfolio. Until these challenges abate, we remain committed to ongoing protection and support for our employees, customers and communities.”

Financial highlights for the second quarter of 2020:

• Net income of $3.8 million was an increase of $203 thousand (6%) from $3.6 million earned during the same period in the prior year. Earnings of $0.23 per share – diluted was an increase of $0.03 (15%) from $0.20 per share – diluted earned during the same period in the prior year and reflects the impact of the following:
  • 1.5 million shares of common stock repurchased between October of 2019 and April of 2020.
    
  • $1.3 million provision for loan and lease losses for the current quarter.
    
  • $840 thousand 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”) and the name change of our subsidiary bank.
    

• Net interest income increased $288 thousand (2%) to $13.8 million compared to $13.5 million for the same period in the prior year.
• Net interest margin declined to 3.64% compared to 4.00% for the same period in the prior year.
  
• Return on average assets decreased to 0.95% compared to 1.01% for the same period in the prior year.
• Return on average equity increased to 9.26% compared to 8.93% for the same period in the prior year.
• Average loans totaled $1.181 billion, an increase of $153 million (15%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.523 billion, an increase of $170 million (13%) compared to average earning assets for the same period in the prior year.
• Average deposits totaled $1.406 billion, an increase of $189 million (15%) compared to average deposits for the same period in the prior year.
  • Average non-maturing deposits totaled $1.263 billion, an increase of $210 million (20%) compared to the same period in the prior year.
    
  • Average certificates of deposit totaled $143.0 million, a decrease of $21.1 million (13%) compared to same period in the prior year.
    

• The Company’s efficiency ratio was 56.1% compared to 65.9% during the same period in the prior year.
  • The Company’s efficiency ratio of 65.9% for the second quarter of 2019 included $840 thousand in non-recurring acquisition and the name change costs. The efficiency ratio excluding these non-recurring costs was 60.1%.
    

• Nonperforming assets at June 30, 2020 totaled $6.7 million or 0.39% of total assets, a decrease of $6.8 million (51%) since June 30, 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 of 2019 and sold in the fourth quarter of 2019.
• Book value per common share was $10.13 at June 30, 2020 compared to $9.22 at June 30, 2019.
  
• Tangible book value per common share was $9.17 at June 30, 2020 compared to $8.29 at June 30, 2019.
  

Financial highlights for the six months ended June 30, 2020:

• Net income of $4.8 million was a decrease of $1.2 million (20%) from $6.0 million earned during the same period in the prior year. Earnings of $0.28 per share – diluted was a decrease of $0.05 (15%) per share – diluted earned during the same period in prior year and reflects the impact of the following:
  • 1.5 million shares of common stock repurchased between October of 2019 and April of 2020.
  • $4.2 million provision for loan and lease losses for the six months ended June 30, 2020.
  • $1.1 million in non-recurring costs for the first quarter of 2020 associated with the termination of a technology management services contract and a previously announced severance agreement.
  • $2.8 million in non-recurring costs recorded during six months ended June 30, 2019 associated with our January 31, 2019 acquisition of Merchants and the name change of our subsidiary bank.

• Net interest income increased $270 thousand (1%) to $26.8 million compared to $26.5 million for the same period in the prior year.
• Net interest margin declined to 3.74% compared to 3.97% for same period in the prior year.
• Return on average assets decreased to 0.62% compared to 0.83% for the same period in the prior year.
• Return on average equity decreased to 5.65% compared to 7.59% for the same period in the prior year.
• Average loans totaled $1.107 billion, an increase of $96 million (10%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.438 billion, an increase of $93 million (7%) compared the same period in the prior year.
• Average deposits totaled $1.325 billion, an increase of $105 million (9%) compared the same period in the prior year.
  • Average non-maturing deposits totaled $1.180 billion, an increase of $125 million (12%) compared to the same period in the prior year.
    
  • Average certificates of deposit totaled $145.1 million, a decrease of $20.7 million (12%) compared to the same period in the prior year.
    

• The Company’s efficiency ratio was 63.1% compared to 71.7% for the same period in the prior year.
  • The Company’s efficiency ratio of 63.1% for the first six months of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 59.2%.
    
  • The Company’s efficiency ratio of 71.7% for the first six months of 2019 includes $2.8 million in non-recurring costs. The efficiency ratio excluding these non-recurring costs was 62.0%.
    

• Nonperforming assets at June 30, 2020 totaled $6.7 million or 0.39% of total assets, an increase of $1.0 million (37% annualized) since December 31, 2019.
• Book value per common share was $10.13 at June 30, 2020 compared to $9.62 at December 31, 2019.
  
• Tangible book value per common share was $9.17 at June 30, 2020 compared to $8.71 at December 31, 2019.
  

Impact of COVID-19:

• We have funded 594 loans totaling $162.2 million for the PPP through June 30, 2020. The growth in our assets resulting from the PPP has impacted our Tier 1 Leverage capital ratio as we have not utilized the liquidity available to us from the Federal Reserve’s PPP Liquidity Facility and its associated beneficial capital treatment. Substantially all of the loans were made to existing customers and were funded under the two year PPP loan program.
• We have experienced significant increased deposit balances as all of the PPP loan funds were deposited into customer accounts at our bank and as a result of customer behavior that is focused on maintaining greater non-maturing deposit balances.
• Organic loan growth has been slowed as we maintain credit underwriting discipline in light of the current economic environment.
• At June 30, 2020 the Company’s goodwill was not impaired as supported by a review by an independent third party consultant.
• At June 30, 2020, our workforce totaled 214 employees of which 114 are working remotely.
• All of our branch offices remain open, although they are operating under a reduced schedule. Our pandemic response team is continuing to modify and enhance our workforce and customer protection as additional information or requirements are promulgated by the state of California.

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.

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TABLE 1
SELECTED FINANCIAL INFORMATION - UNAUDITED
(dollars in thousands except per share data)
		For The Three Months Ended		For The Six Months Ended
Net income, average assets and		June 30,			March 31,		June 30,
average shareholders' equity		2020			2019			2020		2020			2019
Net income		$	3,847			$	3,644			$	916			$	4,763			$	5,950
Average total assets		$	1,626,827			$	1,450,725			$	1,454,019			$	1,540,423			$	1,438,361
Average total earning assets		$	1,523,157			$	1,353,200			$	1,353,098			$	1,438,127			$	1,345,177
Average shareholders' equity		$	167,036			$	163,598			$	172,120			$	169,578			$	158,182
Selected performance ratios
Return on average assets			0.95	%			1.01	%			0.25	%			0.62	%			0.83	%
Return on average equity			9.26	%			8.93	%			2.14	%			5.65	%			7.59	%
Efficiency ratio			56.1	%			65.9	%			70.5	%			63.1	%			71.7	%
Share and per share amounts
Weighted average shares - basic (1)			16,660				18,134				17,695				17,178				17,816
Weighted average shares - diluted (1)			16,689				18,194				17,747				17,217				17,878
Earnings per share - basic		$	0.23			$	0.20			$	0.05			$	0.28			$	0.33
Earnings per share - diluted		$	0.23			$	0.20			$	0.05			$	0.28			$	0.33
		At June 30,			At March 31,
Share and per share amounts		2020			2019			2020
Common shares outstanding (2)			16,739				18,214				16,796
Book value per common share (2)		$	10.13			$	9.22			$	9.86
Tangible book value per common share (2)(3)		$	9.17			$	8.29			$	8.89
Capital ratios (4)
Bank of Commerce Holdings
Common equity tier 1 capital ratio			12.34	%			12.56	%			12.02	%
Tier 1 capital ratio			13.18	%			13.41	%			12.85	%
Total capital ratio			15.27	%			15.35	%			14.93	%
Tier 1 leverage ratio			9.82	%			11.08	%			10.78	%
Tangible common equity ratio (5)			9.05	%			10.59	%			10.38	%
Merchants Bank of Commerce
Common equity tier 1 capital ratio			13.72	%			14.06	%			13.66	%
Tier 1 capital ratio			13.72	%			14.06	%			13.66	%
Total capital ratio			14.97	%			15.16	%			14.91	%
Tier 1 leverage ratio			10.21	%			11.61	%			11.45	%
(1) Excludes unvested restricted shares issued in accordance with the Company's equity incentive plan, as they are non-participative in dividends or voting rights.
(2) Includes unvested restricted shares issued in accordance with the Company's equity incentive plan.
(3) Book value per share is computed by dividing total shareholders’ equity by shares outstanding. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.
(4) The Company and the Bank continue to meet all capital adequacy requirements to which they are subject.
(5) Management believes the tangible common equity ratio is a useful measure of capital adequacy because it provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in assessing the capital of the Company and the ability of the Company to absorb potential losses. The tangible common equity ratio is calculated as total shareholders' equity less goodwill and core deposit intangible, net divided by total assets less goodwill and core deposit intangible, net.

BALANCE SHEET OVERVIEW

As of June 30, 2020, the Company had total consolidated assets of $1.712 billion, gross loans of $1.206 billion, allowance for loan and lease losses (“ALLL”) of $16 million, total deposits of $1.494 billion, and shareholders’ equity of $170 million.

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TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(dollars in thousands)
	At June 30,							At March 31,
			% of				% of		Change				% of
	2020			Total		2019			Total		Amount		%		2020			Total
Commercial	$	126,024			10	%		$	152,303			15	%		$	(26,279	)		(17	)	%		$	138,870			13	%
PPP		162,189			13				—			0				162,189			100		%			—			0
Real estate - construction and land development		41,371			3				37,685			4				3,686			10		%			34,394			3
Real estate - commercial non-owner occupied		521,004			44				468,706			45				52,298			11		%			514,052			49
Real estate - commercial owner occupied		215,799			18				210,711			21				5,088			2		%			217,319			21
Real estate - residential - ITIN		31,083			3				35,162			3				(4,079	)		(12	)	%			31,998			3
Real estate - residential - 1-4 family mortgage		60,756			5				67,092			6				(6,336	)		(9	)	%			62,533			6
Real estate - residential - equity lines		20,938			2				23,656			2				(2,718	)		(11	)	%			23,158			2
Consumer and other		27,176			2				41,409			4				(14,233	)		(34	)	%			29,921			3
Gross loans		1,206,340			100	%			1,036,724			100	%			169,616			16		%			1,052,245			100	%
Deferred fees and costs		(1,603	)						2,005							(3,608	)						2,129
Loans, net of deferred fees and costs		1,204,737							1,038,729							166,008							1,054,374
Allowance for loan and lease losses		(16,089	)						(12,445	)						(3,644	)						(15,067	)
Net loans	$	1,188,648						$	1,026,284						$	162,364						$	1,039,307
Average loans during the quarter	$	1,180,915						$	1,028,187						$	152,728			15		%		$	1,033,689
Average loans during the quarter (excluding PPP)	$	1,048,139						$	1,028,187						$	19,952			2		%		$	1,033,689
Average yield on loans during the quarter		4.50		%					5.01		%					(0.51	)		(10	)	%			4.80		%
Average yield on all loans during the quarter (excluding PPP)		4.76		%					5.01		%					(0.25	)		(5	)	%			4.80		%
Average yield on all loans during the year to date		4.64		%					4.96		%					(0.32	)		(6	)	%			4.80		%
Average yield on all loans during the year to date (excluding PPP)		4.78		%					4.96		%					(0.18	)		(4	)	%			4.80		%

The Company recorded gross loan balances of $1.206 billion at June 30, 2020, compared with $1.037 billion and $1.052 billion at June 30, 2019 and March 31, 2020, respectively, an increase of $170 million and $154 million, respectively.

The average yield on loans during the quarter was 4.50% compared to 5.01% and 4.80% for the quarters ended June 30, 2019 and March 31, 2020, respectively. Yields in the current quarter were negatively impacted by PPP loans which averaged $132.8 million and yielded 2.46%.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants of $1.3 million, $1.5 million and $2.0 million at June 30, 2020, March 31, 2020 and June 30, 2019, respectively. We recorded $216 thousand, $163 thousand and $190 thousand in accretion of the discount for these loans during the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

We have funded 594 PPP loans totaling $162.2 million through June 30, 2020. Substantially all of the loans were made to existing customers and the loan proceeds were initially deposited with our institution. At origination, loan fee income net of loan origination costs totaled $4.3 million and is being earned over the 24 month duration of the loans as a part of the loan yield. At June 30, 2020 $3.8 million remains to be earned in future quarters. The following tables provide additional information on the PPP loans by industry and by loan balance at June 30, 2020.

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TABLE 3
PPP LOANS BY INDUSTRY - UNAUDITED
(dollars in thousands)
	At June 30, 2020
	Balance
Construction	$	64,242
Healthcare and Social Assistance		17,530
Professional, Scientific and Tech Services		12,155
Accommodation and Food Services		10,328
Admin, Support, Waste Management and Remediation Services		7,372
Primary Metal Manufacturing		6,581
Retail Trade		8,033
Other		35,948
Total	$	162,189

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TABLE 4
PPP LOANS BY LOAN SIZE - UNAUDITED
(dollars in thousands)
	At June 30, 2020
	Balance		Number		Average Loan Size
$150,000 or less	$	20,256		381		$	53
$150,001 to $350,000		25,234		109			232
$350,001 to $1,999,999		73,143		92			795
$2,000,000 or greater		43,556		12			3,630
Total	$	162,189		594		$	273

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TABLE 5
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(dollars in thousands)
		At June 30,								At March 31,
				% of				% of		Change				% of
		2020		Total		2019		Total		Amount		%		2020		Total
Cash and due from banks		$	29,630		7	%		$	21,306		7	%		$	8,324			39		%		$	21,127		6	%
Interest-bearing deposits in other banks			126,132		29				19,319		6				106,813			553		%			22,813		7
Total cash and cash equivalents			155,762		36				40,625		13				115,137			283		%			43,940		13
Investment securities:
U.S. government and agencies			33,195		8				44,837		14				(11,642	)		(26	)	%			36,043		11
Obligations of state and political subdivisions			76,888		18				45,003		14				31,885			71		%			63,263		19
Residential mortgage backed securities and collateralized mortgage obligations			137,120		30				168,085		50				(30,965	)		(18	)	%			160,439		50
Corporate securities			1,000		0				2,978		1				(1,978	)		(66	)	%			2,983		1
Commercial mortgage backed securities			16,329		4				24,868		8				(8,539	)		(34	)	%			17,428		5
Other asset backed securities			15,668		4				48		—				15,620			32,542		%			4,921		1
Total investment securities - AFS			280,200		64				285,819		87				(5,619	)		(2	)	%			285,077		87
Total cash, cash equivalents and investment securities		$	435,962		100	%		$	326,444		100	%		$	109,518			34		%		$	329,017		100	%
Average yield on interest-bearing due from banks during the quarter			0.12	%					2.47	%					(2.35	)						1.31	%
Average yield on investment securities during the quarter - nominal			2.61	%					2.86	%					(0.25	)						2.74	%
Average yield on investment securities during the quarter - tax equivalent			2.78	%					2.98	%					(0.20	)						2.84	%

As of June 30, 2020, we maintained noninterest-bearing cash positions of $29.6 million and interest-bearing deposits of $126.1 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $280.2 million at June 30, 2020, compared with $285.8 million and $285.1 million at June 30, 2019 and March 31, 2020, respectively. During the second quarter of 2020, we continued to reposition a portion of the Bank’s investment securities portfolio to take advantage of longer durations and widening credit spreads on municipal securities. During the second quarter of 2020, we purchased securities with a par value of $32.4 million and weighted average yield of 2.13% (2.53% tax equivalent) and sold securities with a par value of $19.8 million and weighted average yield of 2.03%. The sales resulted in net realized gains of $140 thousand and $224 thousand for the quarter and six months ended June 30, 2020, respectively.

Average securities balances for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019 were $269.7 million, $272.3 million and $289.4 million, respectively. Weighted average yields on securities balances for those same periods were 2.61%, 2.74% and 2.86%, respectively.

At June 30, 2020, our net unrealized gains on available-for-sale investment securities were $10.1 million compared with net unrealized gains of $3.4 million and $8.4 million at June 30, 2019 and March 31, 2020, respectively. The changes in net unrealized gains on the investment securities portfolio were due to changes in market interest rates and do not reflect changes in credit quality.

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TABLE 6
DEPOSITS BY TYPE - UNAUDITED
(dollars in thousands)
	At June 30,								At March 31,
			% of				% of			Change				% of
	2020		Total		2019		Total		Amount		%		2020		Total
Demand - noninterest-bearing	$	521,751		35	%		$	397,349		32	%		$	124,402			31		%		$	419,315		34	%
Demand - interest-bearing		287,198		19				238,175		19				49,023			21		%			231,276		19
Money market		405,322		27				300,847		24				104,475			35		%			314,687		25
Total demand		1,214,271		81				936,371		75				277,900			30		%			965,278		78
Savings		142,389		10				138,591		11				3,798			3		%			133,552		11
Total non-maturing deposits		1,356,660		91				1,074,962		86				281,698			26		%			1,098,830		89
Certificates of deposit		137,647		9				160,556		14				(22,909	)		(14	)	%			143,557		11
Total deposits	$	1,494,307		100	%		$	1,235,518		100	%		$	258,789			21		%		$	1,242,387		100	%

Total deposits at June 30, 2020, increased $259 million or 21% to $1.494 billion compared to June 30, 2019 and increased $252 million or 82% annualized compared to March 31, 2020. Total non-maturing deposits increased $281.7 million or 26% compared to the same date a year ago and increased $257.8 million or 94% annualized compared to March 31, 2020. The increase in non-maturing deposits from March 31, 2020 to June 30, 2020 was due to PPP loan program disbursements and changes in customer behavior which is placing greater emphasis on increasing non-maturing deposit balances. Certificates of deposit decreased $22.9 million or 14% compared to the same date a year ago and decreased $5.9 million or 16% annualized compared to March 31, 2020. The decrease in certificates of deposits from March 31, 2020 to June 30, 2020 reflects our decision to reduce reliance on public deposits.

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

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TABLE 7
AVERAGE COST OF FUNDS - UNAUDITED
For The Three Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,		March 31,		December 31,		September 30,
	2020		2020		2019		2019		2019		2019		2018		2018
Interest-bearing deposits		0.43	%			0.53	%			0.56	%			0.56	%			0.54	%			0.49	%			0.45	%			0.42	%
Interest-bearing deposits and noninterest-bearing demand		0.28	%			0.35	%			0.38	%			0.38	%			0.37	%			0.34	%			0.31	%			0.29	%
All interest-bearing liabilities		0.52	%			0.65	%			0.68	%			0.68	%			0.74	%			0.67	%			0.61	%			0.64	%
All interest-bearing liabilities and noninterest-bearing demand		0.34	%			0.43	%			0.46	%			0.46	%			0.52	%			0.46	%			0.42	%			0.45	%

Stock Repurchase Program

We previously announced a program to repurchase 1.5 million common shares. Between October of 2019 and April of 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

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TABLE 8
SUMMARY INCOME STATEMENT - UNAUDITED
(dollars in thousands, except per share data)
	For The Three Months Ended
	June 30,		Change		March 31,		Change
	2020		2019		Amount		%		2020		Amount		%
Interest income	$	14,997		$	15,127		$	(130	)		(1	)	%		$	14,345		$	652			5		%
Interest expense		1,214			1,632			(418	)		(26	)	%			1,359			(145	)		(11	)	%
Net interest income		13,783			13,495			288			2		%			12,986			797			6		%
Provision for loan and lease losses		1,300			—			1,300			100		%			2,850			(1,550	)		(54	)	%
Noninterest income		955			1,100			(145	)		(13	)	%			892			63			7		%
Noninterest expense		8,270			9,611			(1,341	)		(14	)	%			9,783			(1,513	)		(15	)	%
Income before provision for income taxes		5,168			4,984			184			4		%			1,245			3,923			315		%
Provision for income taxes		1,321			1,340			(19	)		(1	)	%			329			992			302		%
Net income	$	3,847		$	3,644		$	203			6		%		$	916		$	2,931			320		%
Earnings per share - basic	$	0.23		$	0.20		$	0.03			15		%		$	0.05		$	0.18			360		%
Weighted average shares - basic		16,660			18,134			(1,474	)		(8	)	%			17,695			(1,035	)		(6	)	%
Earnings per share - diluted	$	0.23		$	0.20		$	0.03			15		%		$	0.05		$	0.18			360		%
Weighted average shares - diluted		16,689			18,194			(1,505	)		(8	)	%			17,747			(1,058	)		(6	)	%
Dividends declared per common share	$	0.05		$	0.05		$	—			—		%		$	0.05		$	—			—		%

Second Quarter of 2020 Compared With The Second Quarter of 2019

Net income for the second quarter of 2020 increased $203 thousand compared to the second quarter of 2019. In the current quarter, net interest income was $288 thousand higher, noninterest expense was $1.3 million lower and income taxes were $19 thousand lower. These changes were partially offset by a provision for loan and lease losses that was $1.3 million higher and noninterest income that was $145 thousand lower.

Net Interest Income

Net interest income increased $288 thousand compared to the same period a year ago.

Interest income for the second quarter of 2020 decreased $130 thousand or 1% to $15.0 million.

• Interest and fees on loans increased $377 thousand due to a $152.7 million increase in average loan balances partially offset by a 51 basis point decrease in the average yield on the loan portfolio. Much of the 51 basis point decrease was caused by PPP loans which yielded only 2.46%. The yield on loans exclusive of PPP loans declined 25 basis points.
• Interest on investment securities decreased $309 thousand due to a $19.7 million decrease in average securities balances and a 24 basis point decrease in average yield on the securities portfolio.
• Interest on interest-bearing deposits due from banks decreased $198 thousand due to a 235 basis point decrease in average yield that was partially offset by a $36.9 million increase in average interest-bearing deposit balances.

Interest expense for the second quarter of 2020 decreased $418 thousand or 26% to $1.2 million.

• Interest expense on interest-bearing deposits decreased $165 thousand. Average interest-bearing demand and savings deposit balances increased $91.3 million, while average certificate of deposit balances decreased $21.1 million. The average rate paid on interest-bearing deposits decreased 11 basis points.
• Interest expense on FHLB borrowings decreased $187 thousand. Average FHLB borrowings were $16.0 million in the current quarter compared to $30.0 million for the same period a year ago. The average rate paid on FHLB borrowings decreased 244 basis points.
  
• Interest expense on other term debt decreased $17 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 $49 thousand. The average rate paid on junior subordinated debentures decreased 190 basis points.
  

Provision for Loan and Lease Losses

Net loan loss charge-offs were $278 thousand for the current quarter compared to net loan recoveries of $203 thousand for the same period a year ago. As illustrated in Table 10 asset quality metrics are improved for the three months ended June 30, 2020 when compared to the same period a year ago. We recognize the deteriorating credit environment due to the economic effects of COVID-19 and have made changes to our qualitative factors (Q-Factors) in calculating our ALLL. As a result we recorded a provision for loan and lease losses of $1.3 million for the second quarter of 2020. There was no provision for loan and lease losses in the second quarter of 2019. A discussion of our provision is provided following Table 10.

Noninterest Income

Noninterest income for the three months ended June 30, 2020 decreased $145 thousand including an $88 thousand decrease in Federal Home Loan Bank of San Francisco dividends.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2020 decreased $1.3 million compared to the same period a year previous. Decreases in noninterest expense included the following items:

• $697 thousand deferred loan origination cost benefit in the second quarter of 2020 as a result of loans originated under the PPP.
• $840 thousand in non-recurring costs recorded during the second quarter of 2019 associated acquisition of Merchants and the name change of our subsidiary bank.

The Company’s efficiency ratio was 56.1% for the second quarter of 2020. The ratio during the same period in 2019 was 65.9% (60.1% excluding $840 thousand of non-recurring costs).

Income Tax Provision

For the three months ended June 30, 2020, our income tax provision of $1.3 million on pre-tax income of $5.2 million was an effective tax rate of 25.6%. The tax provision for the second quarter of the prior year was $1.3 million on pre-tax income of $5.0 million for an effective rate of 26.9%. The 2019 tax rate reflects the non-deductibility of certain acquisition-related expenses.

Second Quarter of 2020 Compared With The First Quarter of 2020

Net income for the second quarter of 2020 increased $2.9 million compared to the first quarter of 2020. In the current quarter, net interest income was $797 thousand higher, provision for loan and lease losses was $1.6 million lower, noninterest income was $63 thousand higher and noninterest expense was $1.5 million lower. These changes were partially offset by a provision for income taxes that was $ 992 thousand higher.

Net Interest Income

Net interest income increased $797 thousand over the prior quarter.

Interest income for the three months ended June 30, 2020 increased $652 thousand or 5% to $15.0 million.

• Interest and fees on loans increased $886 thousand due to a $147.2 million increase in average loan balances partially offset by a 30 basis point decrease in the average yield on the loan portfolio. Much of the 30 basis point decrease was caused by PPP loans which yielded only 2.46%. The yield on loans exclusive of PPP loans declined only 4 basis points.
• Interest on investment securities decreased $101 thousand due to a 12 basis point decrease in average yield on the investment portfolio and a $2.5 million decrease in average securities balances.
  
• Interest on interest-bearing deposits due from banks decreased $133 thousand due to a 120 basis point decrease in the average yield on interest-bearing deposits due from banks partially offset by a $25.4 million increase in average balances.
  

Interest expense for the three months ended June 30, 2020 decreased $145 thousand or 11% to $1.2 million.

• Interest expense on interest-bearing deposits decreased $121 thousand. Average interest-bearing demand and savings deposit balances increased $89.3 million, while average certificates of deposit decreased $4.3 million. The average rate paid on interest-bearing deposits decreased by ten basis points.
• Interest expense on FHLB borrowings increased to $5 thousand. Average FHLB borrowings were $16.0 million in the current quarter compared to $220 thousand in the prior quarter. During the second quarter, we took an advance under our FHLB line of credit for $10.0 million at 0% interest with $5.0 million due in 6 months and $5.0 million due in one year. The average rate paid on FHLB borrowings was 0.13% during the second quarter of 2020.
  
• Interest expense on other term debt was unchanged at $184 thousand for both quarters.
  
• Interest expense on other junior subordinated debentures decreased $29 thousand due to a 113 basis point decrease in the average rate paid.
  

Provision for Loan and Lease Losses

Net loan charge-offs were $278 thousand in the current quarter compared to $14 thousand in the prior quarter. As illustrated in Table 10 total nonaccrual loans increased by $1.4 million during the three months ended June 30, 2020 when compared to the previous quarter. The increase was primarily due to one commercial real estate loan that was moved to nonaccrual status during the quarter. We recorded a provision for loan and lease losses of $2.9 million and $1.3 million for the first and second quarters of 2020, respectively. A discussion of our provision is provided following Table 10.

Noninterest Income

Noninterest income for the three months ended June 30, 2020 increased $63 thousand and was not concentrated in any one item.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2020 decreased $1.5 million compared to the prior quarter. Decreases in noninterest expense included:

• $748 thousand deferred loan origination cost benefit as a result of loans originated under the PPP during the current quarter.
• $700 thousand in non-recurring costs related to the termination of a technology management services contract in the prior quarter.
  
• $414 thousand non-recurring costs related to a previously disclosed severance agreement in the prior quarter.
  

The Company’s efficiency ratio was 56.1% for the second quarter of 2020 compared with 70.5% for the prior quarter (62.5% excluding $1.1 million in non-recurring costs.).

Income Tax Provision

For the three months ended June 30, 2020, our income tax provision of $1.3 million on pre-tax income of $5.2 million was an effective tax rate of 25.6%. The income tax provision for the prior quarter of $329 thousand on pre-tax income of $1.2 million was an effective tax rate of 26.4%.

Earnings Per Share

Diluted earnings per share were $0.23 for the three months ended June 30, 2020 compared with diluted earnings per share of $0.20 for the same period a year ago and diluted earnings per share of $0.05 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.

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TABLE 9a
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
		For The Three Months Ended
		June 30, 2020		June 30, 2019		March 31, 2020
		Average					Yield /		Average					Yield /		Average					Yield /
		Balance		Interest(1)		Rate (5)		Balance		Interest(1)		Rate (5)		Balance		Interest(1)		Rate (5)
Interest-earning assets:
Loans net of PPP (2)		$	1,048,139		$	12,411		4.76	%		$	1,028,187		$	12,847		5.01	%		$	1,033,689		$	12,338		4.80	%
PPP loans			132,776			813		2.46	%			—			—		—	%			—			—		—	%
Taxable securities			211,195			1,329		2.53	%			249,907			1,733		2.78	%			237,405			1,582		2.68	%
Tax-exempt securities (3)			58,540			423		2.91	%			39,501			328		3.33	%			34,869			271		3.13	%
Interest-bearing deposits in other banks			72,507			21		0.12	%			35,605			219		2.47	%			47,135			154		1.31	%
Average interest- earning assets			1,523,157			14,997		3.96	%			1,353,200			15,127		4.48	%			1,353,098			14,345		4.26	%
Cash and due from banks			21,564									21,942									21,987
Premises and equipment, net			15,428									15,819									15,753
Goodwill			11,671									11,720									11,671
Other intangible assets, net			4,508									5,275									4,701
Other assets			50,499									42,769									46,809
Average total assets		$	1,626,827								$	1,450,725								$	1,454,019
Interest-bearing liabilities:
Interest-bearing demand		$	261,907			85		0.13	%		$	238,840			129		0.22	%		$	233,375			100		0.17	%
Money market			365,368			317		0.35	%			296,326			380		0.51	%			307,587			403		0.53	%
Savings			138,500			95		0.28	%			139,307			123		0.35	%			135,504			118		0.35	%
Certificates of deposit			142,955			467		1.31	%			164,084			497		1.21	%			147,241			464		1.27	%
Federal Home Loan Bank of San Francisco borrowings			16,044			5		0.13	%			30,000			192		2.57	%			220			—		0.21	%
Other borrowings net of unamortized debt issuance costs			9,976			184		7.42	%			10,841			201		7.44	%			9,963			184		7.43	%
Junior subordinated debentures			10,310			61		2.38	%			10,310			110		4.28	%			10,310			90		3.51	%
Average interest- bearing liabilities			945,060			1,214		0.52	%			889,708			1,632		0.74	%			844,200			1,359		0.65	%
Noninterest-bearing demand			497,636									379,173									420,847
Other liabilities			17,095									18,246									16,852
Shareholders’ equity			167,036									163,598									172,120
Average liabilities and shareholders’ equity		$	1,626,827								$	1,450,725								$	1,454,019
Net interest income and net interest margin (4)					$	13,783		3.64	%					$	13,495		4.00	%					$	12,986		3.86	%
(1) Interest income on loans includes deferred fees and costs of approximately $138 thousand, $91 thousand, and $257 thousand for the three months ended June 30, 2020 and 2019 and March 31, 2020, respectively. Interest income on PPP loans includes $476 thousand of fee income for the three months ended June 30, 2020.
(2) Loans net of PPP includes average nonaccrual loans of $5.6 million, $13.7 million and $5.5 million for the three months ended June 30, 2020 and 2019 and March 31, 2020, 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 June 30, 2020 and 2019 and March 31, 2020 included $216 thousand, $190 thousand and $163 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7, 7 and 6 basis points, respectively. Net interest income for the three months ended June 30, 2020 included $813 thousand in interest and fee income from PPP loans with an average balance of $132.8 million for the quarter which decreased the net interest margin by11 basis points.
(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.

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TABLE 9b
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
		For The Six Months Ended
		June 30, 2020		June 30, 2019
		Average					Yield /		Average					Yield /
		Balance		Interest(1)		Rate (5)		Balance		Interest(1)		Rate (5)
Interest-earning assets:
Loans net of PPP (2)		$	1,040,914		$	24,749		4.78	%		$	1,010,821		$	24,878		4.96	%
PPP loans			66,388			813		2.46	%			—			—		—	%
Taxable securities			224,300			2,911		2.61	%			251,479			3,497		2.80	%
Tax-exempt securities (3)			46,705			694		2.99	%			44,947			715		3.21	%
Interest-bearing deposits in other banks			59,820			175		0.59	%			37,930			464		2.47	%
Average interest- earning assets			1,438,127			29,342		4.10	%			1,345,177			29,554		4.43	%
Cash and due from banks			21,775									21,640
Premises and equipment, net			15,591									15,203
Goodwill			11,671									9,822
Other intangible assets, net			4,604									4,625
Other assets			48,655									41,894
Average total assets		$	1,540,423								$	1,438,361
Interest-bearing liabilities:
Interest-bearing demand		$	247,641			185		0.15	%		$	241,095			255		0.21	%
Money market			336,477			720		0.43	%			294,869			669		0.46	%
Savings			137,002			213		0.31	%			135,217			234		0.35	%
Certificates of deposit			145,098			931		1.29	%			165,764			987		1.20	%
Federal Home Loan Bank of San Francisco borrowings			8,132			5		0.12	%			19,448			247		2.56	%
Other borrowings net of unamortized debt issuance costs			9,970			368		7.42	%			11,859			440		7.48	%
Junior subordinated debentures			10,310			151		2.95	%			10,310			223		4.36	%
Average interest- bearing liabilities			894,630			2,573		0.58	%			878,562			3,055		0.70	%
Noninterest-bearing demand			459,241									383,766
Other liabilities			16,974									17,851
Shareholders’ equity			169,578									158,182
Average liabilities and shareholders’ equity		$	1,540,423								$	1,438,361
Net interest income and net interest margin (4)					$	26,769		3.74	%					$	26,499		3.97	%
(1) Interest income on loans includes deferred fees and costs of approximately $395 thousand and $272 thousand for the six months ended June 30, 2020 and 2019, respectively. Interest income on PPP loans includes $476 thousand of fee income for the three months ended June 30, 2020.
(2) Loans net of PPP includes average nonaccrual loans of $5.5 million and $11.1 million for the six months ended June 30, 2020 and 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 six months ended June 30, 2020 and 2019 included $379 thousand and $238 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 and 4 basis points, respectively. Net interest income for the six months ended June 30, 2020 included $813 thousand in interest and fee income from PPP loans with an average balance of $66.4 million for the six months ended June 30, 2020 which decreased the net interest margin by 6 basis points.
(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.

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TABLE 10
ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS - UNAUDITED
(dollars in thousands)
	For The Three Months Ended
	June 30,		March 31,		December 31,		September 30,		June 30,
	2020		2020		2019		2019		2019
Beginning balance ALLL	$	15,067				$	12,231				$	12,285				$	12,445				$	12,242
Provision for loan and lease losses		1,300					2,850					—					—					—
Loans charged-off		(356	)				(169	)				(174	)				(319	)				(659	)
Loan loss recoveries		78					155					120					159					862
Ending balance ALLL	$	16,089				$	15,067				$	12,231				$	12,285				$	12,445
	At June 30,		At March 31,		At December 31,		At September 30,		At June 30,
	2020		2020		2019		2019		2019
Nonaccrual loans:
Commercial	$	7				$	39				$	61				$	139				$	194
Real estate - commercial non-owner occupied		1,062					—					—					10,099					10,690
Real estate - commercial owner occupied		3,647					3,103					3,103					—					—
Real estate - residential - ITIN		1,738					1,878					2,221					2,339					2,389
Real estate - residential - 1-4 family mortgage		180					184					191					198					217
Consumer and other		37					39					40					21					22
Total nonaccrual loans		6,671					5,243					5,616					12,796					13,512
Accruing troubled debt restructured loans:
Commercial		592					592					595					629					1,092
Real estate - commercial non-owner occupied		—					—					—					—					791
Real estate - residential - ITIN		3,642					3,891					3,957					4,072					4,300
Real estate - residential - equity lines		221					226					231					236					242
Total accruing troubled debt restructured loans		4,455					4,709					4,783					4,937					6,425
All other accruing impaired loans		—					—					—					—					—
Total impaired loans	$	11,126				$	9,952				$	10,399				$	17,733				$	19,937
Gross loans outstanding at period end	$	1,206,340				$	1,052,245				$	1,032,903				$	1,033,082				$	1,036,724
Impaired loans to gross loans		0.92		%			0.95		%			1.01		%			1.72		%			1.92		%
Nonaccrual loans to gross loans		0.55		%			0.50		%			0.54		%			1.24		%			1.30		%
Allowance for loan and lease losses as a percent of:
Gross loans		1.33		%			1.43		%			1.18		%			1.19		%			1.20		%
Nonaccrual loans		241.18		%			287.37		%			217.79		%			96.01		%			92.10		%
Impaired loans		144.61		%			151.40		%			117.62		%			69.28		%			62.42		%

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TABLE 11
ALLOWANCE, RESERVE AND DISCOUNT - UNAUDITED
(dollars in thousands)
	At June 30,		At March 31,		At December 31,		At September 30,		At June 30,
	2020		2020		2019		2019		2019
ALLL	$	16,089			$	15,067			$	12,231			$	12,285			$	12,445
Reserve for unfunded commitments		800				695				695				695				695
Discount on acquired loans (1)		1,293				1,509				1,672				1,860				2,053
Total allowance, reserve and discount	$	18,182			$	17,271			$	14,598			$	14,840			$	15,193
Gross loans	$	1,206,340			$	1,052,245			$	1,032,903			$	1,033,082			$	1,036,724
PPP loans		162,189				—				—				—				—
Total gross loans net of PPP loans	$	1,044,151			$	1,052,245			$	1,032,903			$	1,033,082			$	1,036,724
Total allowance, reserve and discount as a percentage of total gross loans net of PPP loans		1.74	%			1.64	%			1.41	%			1.44	%			1.47	%
(1) Discount on acquired loans includes fair value discount for loans acquired from Merchants in January of 2019.

COVID‐19 Loan Analysis

During the second quarter of 2020, we worked to proactively monitor our loan portfolio by contacting many of our borrowers to evaluate the impact of the pandemic on them, their businesses and the underlying collateral for our loans. For borrowers who received a loan payment deferral we are working with the borrowers to evaluate the potential for further deterioration of credit quality at the end of the deferral period.

We evaluated our commercial loan and commercial real estate loan portfolios (86% of gross loans excluding PPP loans) to identify those loans in industries that are most at risk or where other information indicates the borrower may be significantly impacted by the effects of COVID-19. The following table presents loans by industry that are most at risk or where other information indicates the loan or borrower may be highly impacted by COVID-19 and the related loan modifications. The table below includes $10.1 million and $22.4 million of SBA 7(a) (generally 75% guaranteed) loans in the high risk and low to moderate risk categories, respectively.

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TABLE 12
COVID-19 LOAN ANALYSIS - UNAUDITED
(dollars in thousands)
	At June 30, 2020
	Individually Analyzed Loans With a COVID-19 Risk Of								Loan Modifications
						Low and													Low and
	High		Moderate		PPP		Total		High		Moderate
	#		Amount		Amount		Amount		Amount		#		Amount		#		Amount
CRE and C&I
Industries highly impacted by COVID-19:
Retail trade	13		$	13,716		$	25,555		$	8,033		$	47,304		4		$	3,838		6		$	4,156
Health care and social assistance	47			14,650			12,305			17,530			44,485		14			7,281		8			4,741
Hotels, motels and bed-and-breakfast inns	17			34,790			—			1,402			36,192		12			29,466		—			—
Other services	7			6,438			18,492			2,874			27,804		3			4,972		5			2,737
Restaurants, bars and caterers	20			10,951			—			6,370			17,321		10			7,587		—			—
Educational services	3			6,796			—			2,693			9,489		—			—		—			—
Arts, entertainment and recreation	21			4,362			—			4,573			8,935		11			2,989		—			—
Other industries	23			18,853			733,732			118,714			871,299		11			12,698		43			37,801
Residential, Consumer and All Other not individually analyzed	—			—			143,511			—			143,511		—			—		117			5,007
Total	151		$	110,556		$	933,595		$	162,189		$	1,206,340		65		$	68,831		179		$	54,442

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 June 30, 2020, our review of the adequacy of our allowance for loan and lease losses (ALLL) focused on our Q-Factor for “changes in the volume and severity of past due loans and other similar 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 and businesses in higher risk industries or for loans with higher LTVs. We also completed analyses on individual borrowers who may be higher risk. After completing this work, we significantly increased our Q-Factor for “changes in the volume and severity of past due loans and other similar conditions”. Our ALLL methodology, adjusted for the revised Q-Factor discussed above necessitated an ALLL of $16.1 million at June 30, 2020, an increase of 32% compared to our ALLL of $12.2 million at December 31, 2019. A provision for loan and lease losses of $1.3 million was recorded during the current quarter compared to $2.9 million in the prior quarter. There was no provision for loan and lease loss during the same quarter a year ago. Our ALLL as a percentage of gross loans was 1.33% as of June 30, 2020 compared to 1.20% as of June 30, 2019 and 1.43% as of March 31, 2020. Excluding PPP loans our ALLL as a percentage of gross loans was 1.54% as of June 30, 2020.

Management believes the Company’s ALLL is adequate at June 30, 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 June 30, 2020, the recorded investment in loans classified as impaired totaled $11.1 million, with a corresponding specific reserve of $270 thousand compared to impaired loans of $19.9 million with a corresponding specific reserve of $727 thousand at June 30, 2019 and impaired loans of $10.0 million, with a corresponding specific reserve of $318 thousand at March 31, 2020. The increase in impaired loans during the current quarter was due to one commercial real estate loan for $1.1 million which was placed on nonaccrual status during the second quarter of 2020.

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45%; width:45%; min-width:45%;">	2%; width:2%; min-width:2%;">	1%; width:1%; min-width:1%;">	7%; width:7%; min-width:7%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	2%; width:2%; min-width:2%;">	7%; width:7%; min-width:7%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	2%; width:2%; min-width:2%;">	7%; width:7%; min-width:7%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	2%; width:2%; min-width:2%;">	7%; width:7%; min-width:7%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	2%; width:2%; min-width:2%;">	7%; width:7%; min-width:7%;">	1%; width:1%; min-width:1%;">
TABLE 13
TROUBLED DEBT RESTRUCTURINGS - UNAUDITED
(dollars in thousands)
		At June 30,		At March 31,		At December 31,		At September 30,		At June 30,
		2020		2020		2019		2019		2019
Nonaccrual		$	2,194			$	1,611			$	1,680			$	1,746			$	1,828
Accruing			4,455				4,709				4,783				4,937				6,425
Total troubled debt restructurings		$	6,649			$	6,320			$	6,463			$	6,683			$	8,253
Troubled debt restructurings as a percentage of total gross loans			0.55	%			0.60	%			0.63	%			0.65	%			0.80	%

There was one new troubled debt restructuring of a $654 thousand commercial real estate loan during the three months ended June 30, 2020. The borrower was impacted by COVID-19 but the loan did not qualify under the new troubled debt restructuring guidance issued by the financial institution regulators or under the CARES act.  As of June 30, 2020, we had 97 restructured loans that qualified as troubled debt restructurings, of which 95 were performing according to their restructured terms.

Troubled Debt Restructuring Guidance

Financial institution regulators and the CARES Act have changed the treatment of short term loan modifications for borrowers impacted by COVID-19. The change provides that modifications made in response to COVID-19, to borrowers under certain circumstances, should not be considered a troubled debt restructuring.

We have responded to the needs of our borrowers in accordance with the CARES Act and 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 requests at June 30, 2020, only one of which meet the definition of a troubled debt restructuring. For the loans that were modified, 26 borrowers also received a PPP loan through our SBA department. The table also includes 59 consumer loan modifications on loans totaling $525 thousand and 51 residential real estate loan modifications totaling $3.5 million which are serviced by third parties as part of our purchased loan portfolios.

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TABLE 14
COVID-19 LOAN MODIFICATIONS - UNAUDITED
(dollars in thousands)
	At June 30, 2020
			Commercial		Residential
	Commercial		Real Estate		Real Estate		Consumer		Total
Approved	$	14,033		$	102,061		$	6,623		$	556		$	123,273
Total	$	14,033		$	102,061		$	6,623		$	556		$	123,273
Number of contracts approved		44			81			58			61			244
Total		44			81			58			61			244

The following table presents nonperforming assets at the dates indicated.

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TABLE 15
NONPERFORMING ASSETS - UNAUDITED
(dollars in thousands)
		At June 30,		At March 31,		At December 31,		At September 30,		At June 30,
		2020		2020		2019		2019		2019
Total nonaccrual loans		$	6,671			$	5,243			$	5,616			$	12,796			$	13,512
90 days past due and still accruing			—				2				—				—				—
Total nonperforming loans			6,671				5,245				5,616				12,796				13,512
Other real estate owned ("OREO")			8				8				35				58				—
Total nonperforming assets		$	6,679			$	5,253			$	5,651			$	12,854			$	13,512
Nonperforming loans to gross loans			0.55	%			0.50	%			0.54	%			1.24	%			1.30	%
Nonperforming assets to total assets			0.39	%			0.36	%			0.38	%			0.87	%			0.94	%

The following table summarizes when loans are projected to reprice by year and rate index as of June 30, 2020.

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TABLE 16
LOANS BY RATE INDEX AND PROJECTED REPAYMENT - UNAUDITED
(dollars in thousands)
	At June 30, 2020
																	Years 6
																	Through		Beyond
		Year 1		Year 2		Year 3		Year 4		Year 5		Year 10		Year 10		Total
Rate Index:
Fixed		$	54,472		$	216,930		$	68,744		$	39,618		$	32,010		$	177,452		$	30,599		$	619,825
Variable:
Prime			80,588			6,026			7,379			7,416			8,321			1,264			—			110,994
5 Year Treasury			28,754			68,980			87,110			65,206			86,679			50,943			—			387,672
7 Year Treasury			643			3,221			4,798			5,661			365			13,648			—			28,336
1 Year LIBOR			22,373			—			—			—			—			—			—			22,373
Other Indexes			4,821			1,569			1,156			550			9,682			10,390			698			28,866
Nonaccrual			1,645			557			545			523			499			2,085			817			6,671
Total		$	193,296		$	297,283		$	169,732		$	118,974		$	137,556		$	255,782		$	32,114		$	1,204,737

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.

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TABLE 17
LOAN FLOORS - UNAUDITED
(dollars in thousands)
		At June 30, 2020
		Loans At		Loans Above
		Floor Rate		Floor Rate		Total
Variable rate loans with floors:
Prime		$	58,041		$	5,532		$	63,573
5 year Treasury			309,033			48,569			357,602
7 Year Treasury			28,336			—			28,336
1 Year LIBOR			—			734			734
Other Indexes			15,137			1,274			16,411
		$	410,547		$	56,109			466,656
Variable rate loans without floors:
Prime									47,421
5 year Treasury									30,070
1 Year LIBOR									21,639
Other Indexes									12,455
									111,585
Total variable rate loans								$	578,241

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TABLE 18
UNAUDITED CONSOLIDATED
BALANCE SHEET
(dollars in thousands, except per share data)
	At June 30,		Change		At March 31,
		2020			2019			$		%		2020
Assets:
Cash and due from banks		$	29,630			$	21,306			$	8,324			39		%		$	21,127
Interest-bearing deposits in other banks			126,132				19,319				106,813			553		%			22,813
Total cash and cash equivalents			155,762				40,625				115,137			283		%			43,940
Securities available-for-sale, at fair value			280,200				285,819				(5,619	)		(2	)	%			285,077
Loans, net of deferred fees and costs			1,204,737				1,038,729				166,008			16		%			1,054,374
Allowance for loan and lease losses			(16,089	)			(12,445	)			(3,644	)		(29	)	%			(15,067	)
Net loans			1,188,648				1,026,284				162,364			16		%			1,039,307
Premises and equipment, net			15,466				15,836				(370	)		(2	)	%			15,452
Other real estate owned			8				—				8			—		%			8
Life insurance			23,968				23,449				519			2		%			23,824
Deferred tax asset, net			2,645				4,791				(2,146	)		(45	)	%			3,149
Goodwill			11,671				11,708				(37	)		—		%			11,671
Other intangible assets, net			4,426				5,192				(766	)		(15	)	%			4,618
Other assets			29,102				28,282				820			3		%			28,834
Total assets		$	1,711,896			$	1,441,986			$	269,910			19		%		$	1,455,880
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	521,751			$	397,349			$	124,402			31		%		$	419,315
Demand - interest-bearing			287,198				238,175				49,023			21		%			231,276
Money market			405,322				300,847				104,475			35		%			314,687
Savings			142,389				138,591				3,798			3		%			133,552
Certificates of deposit			137,647				160,556				(22,909	)		(14	)	%			143,557
Total deposits			1,494,307				1,235,518				258,789			21		%			1,242,387
Term debt:
Federal Home Loan Bank of San Francisco borrowings			10,000				—				10,000			100		%			10,000
Other borrowings			10,000				10,000				—			—		%			10,000
Unamortized debt issuance costs			(19	)			(67	)			48			72		%			(31	)
Net term debt			19,981				9,933				10,048			101		%			19,969
Junior subordinated debentures			10,310				10,310				—			—		%			10,310
Other liabilities			17,743				18,372				(629	)		(3	)	%			17,556
Total liabilities			1,542,341				1,274,133				268,208			21		%			1,290,222
Shareholders' equity:
Common stock			58,749				72,087				(13,338	)		(19	)	%			59,067
Retained earnings			103,658				93,363				10,295			11		%			100,644
Accumulated other comprehensive income, net of tax			7,148				2,403				4,745			197		%			5,947
Total shareholders' equity			169,555				167,853				1,702			1		%			165,658
Total liabilities and shareholders' equity		$	1,711,896			$	1,441,986			$	269,910			19		%		$	1,455,880
Total interest-earning assets		$	1,600,922			$	1,340,456			$	260,466			19		%		$	1,353,822
Shares outstanding			16,739				18,214				(1,475	)		(8	)	%			16,796
Book value per share (1)		$	10.13			$	9.22			$	0.91			10		%		$	9.86
Tangible book value per share (1)		$	9.17			$	8.29			$	0.88			11		%		$	8.89
						9
(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.

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TABLE 19
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
		For The Three Months Ended		For The Six Months Ended
		June 30,		Change		March 31,		June 30,
		2020		2019		$		%		2020			2020			2019
Interest income:
33%; width:33%; min-width:33%;">Interest and fees on loans	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">$	7%; width:7%; min-width:7%;">13,224	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">$	7%; width:7%; min-width:7%;">12,847	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">$	7%; width:7%; min-width:7%;">377	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	4%; width:4%; min-width:4%;">3	1%; width:1%; min-width:1%;">	2%; width:2%; min-width:2%;">%	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">$	7%; width:7%; min-width:7%;">12,338	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">$	8%; width:8%; min-width:8%;">25,562	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">$	8%; width:8%; min-width:8%;">24,878
Interest on taxable securities			1,329			1,733			(404	)		(23	)	%			1,582				2,911				3,497
Interest on tax-exempt securities			423			328			95			29		%			271				694				715
Interest on interest-bearing deposits in other banks			21			219			(198	)		(90	)	%			154				175				464
Total interest income			14,997			15,127			(130	)		(1	)	%			14,345				29,342				29,554
Interest expense:
Interest on demand deposits			85			129			(44	)		(34	)	%			100				185				255
Interest on money market			317			380			(63	)		(17	)	%			403				720				669
Interest on savings			95			123			(28	)		(23	)	%			118				213				234
Interest on certificates of deposit			467			497			(30	)		(6	)	%			464				931				987
Interest on Federal Home Loan Bank of San Francisco borrowings			5			192			(187	)		(97	)	%			—				5				247
Interest on other borrowings			184			201			(17	)		(8	)	%			184				368				440
Interest on junior subordinated debentures			61			110			(49	)		(45	)	%			90				151				223
Total interest expense			1,214			1,632			(418	)		(26	)	%			1,359				2,573				3,055
Net interest income			13,783			13,495			288			2		%			12,986				26,769				26,499
Provision for loan and lease losses			1,300			—			1,300			100		%			2,850				4,150				—
Net interest income after provision for loan and lease losses			12,483			13,495			(1,012	)		(7	)	%			10,136				22,619				26,499
Noninterest income:
Service charges on deposit accounts			152			187			(35	)		(19	)	%			169				321				355
ATM and point of sale fees			263			318			(55	)		(17	)	%			268				531				583
Payroll and benefit processing fees			143			157			(14	)		(9	)	%			170				313				328
Life insurance			148			155			(7	)		(5	)	%			123				271				284
Gain on investment securities, net			140			33			107			324		%			84				224				125
Federal Home Loan Bank of San Francisco dividends			36			124			(88	)		(71	)	%			130				166				245
Gain (loss) on sale of OREO			—			18			(18	)		(100	)	%			(23	)			(23	)			41
Other income (loss)			73			108			(35	)		(32	)	%			(29	)			44				196
Total noninterest income			955			1,100			(145	)		(13	)	%			892				1,847				2,157

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TABLE 19 - CONTINUED
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
		For The Three Months Ended		For The Six Months Ended
		June 30,		Change		March 31,		June 30,
		2020		2019		$		%		2020		2020		2019
Noninterest expense:
33%; width:33%; min-width:33%;">Salaries and related benefits	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	7%; width:7%; min-width:7%;">4,965	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	7%; width:7%; min-width:7%;">5,146	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	7%; width:7%; min-width:7%;">(181	1%; width:1%; min-width:1%;">)	1%; width:1%; min-width:1%;">	4%; width:4%; min-width:4%;">(4	1%; width:1%; min-width:1%;">)	2%; width:2%; min-width:2%;">%	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	7%; width:7%; min-width:7%;">5,887	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	9%; width:9%; min-width:9%;">10,852	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	9%; width:9%; min-width:9%;">10,875
Premises and equipment			826			928			(102	)		(11	)	%			854			1,680			1,903
Federal Deposit Insurance Corporation insurance premium			90			95			(5	)		(5	)	%			36			126			195
Data processing			585			638			(53	)		(8	)	%			531			1,116			1,214
Professional services			469			535			(66	)		(12	)	%			334			803			838
Telecommunications			156			180			(24	)		(13	)	%			171			327			353
Acquisition and merger			—			376			(376	)		(100	)	%			—			—			2,306
Other expenses			1,179			1,713			(534	)		(31	)	%			1,970			3,149			2,850
Total noninterest expense			8,270			9,611			(1,341	)		(14	)	%			9,783			18,053			20,534
Income before provision for income taxes			5,168			4,984			184			4		%			1,245			6,413			8,122
Provision for income taxes			1,321			1,340			(19	)		(1	)	%			329			1,650			2,172
Net income		$	3,847		$	3,644		$	203			6		%		$	916		$	4,763		$	5,950
Earnings per share - basic		$	0.23		$	0.20		$	0.03			15		%		$	0.05		$	0.28		$	0.33
Weighted average shares - basic			16,660			18,134			(1,474	)		(8	)	%			17,695			17,178			17,816
Earnings per share - diluted		$	0.23		$	0.20		$	0.03			15		%		$	0.05		$	0.28		$	0.33
Weighted average shares - diluted			16,689			18,194			(1,505	)		(8	)	%			17,747			17,217			17,878

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40%; width:40%; min-width:40%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	10%; width:10%; min-width:10%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	10%; width:10%; min-width:10%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	10%; width:10%; min-width:10%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	10%; width:10%; min-width:10%;">	1%; width:1%; min-width:1%;">	1%; width:1%; min-width:1%;">	10%; width:10%; min-width:10%;">
TABLE 20
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(dollars in thousands)
		For The Three Months Ended
		June 30,		March 31,		December 31,		September 30,		June 30,
		2020		2020		2019		2019		2019
Earning assets:
Loans		$	1,180,915		$	1,033,689		$	1,031,702		$	1,029,534		$	1,028,187
Taxable securities			211,195			237,405			245,487			238,601			249,907
Tax-exempt securities			58,540			34,869			32,158			32,974			39,501
Interest-bearing deposits in other banks			72,507			47,135			81,099			58,897			35,605
Total earning assets			1,523,157			1,353,098			1,390,446			1,360,006			1,353,200
Cash and due from banks			21,564			21,987			24,083			23,822			21,942
Premises and equipment, net			15,428			15,753			16,049			15,922			15,819
Goodwill			11,671			11,671			11,671			11,686			11,720
Other intangible assets, net			4,508			4,701			4,890			5,083			5,275
Other assets			50,499			46,809			45,504			45,925			42,769
Total assets		$	1,626,827		$	1,454,019		$	1,492,643		$	1,462,444		$	1,450,725
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	497,636		$	420,847		$	428,420		$	405,853		$	379,173
Demand - interest-bearing			261,907			233,375			244,276			243,553			238,840
Money market			365,368			307,587			318,127			309,188			296,326
Savings			138,500			135,504			138,155			138,296			139,307
Certificates of deposit			142,955			147,241			153,223			157,620			164,084
Total deposits			1,406,366			1,244,554			1,282,201			1,254,510			1,217,730
Federal Home Loan Bank of San Francisco borrowings			16,044			220			—			—			30,000
Other borrowings net of unamortized debt issuance costs			9,976			9,963			9,952			9,942			10,841
Junior subordinated debentures			10,310			10,310			10,310			10,310			10,310
Other liabilities			17,095			16,852			17,795			18,074			18,246
Total liabilities			1,459,791			1,281,899			1,320,258			1,292,836			1,287,127
Shareholders' equity			167,036			172,120			172,385			169,608			163,598
Liabilities & shareholders' equity		$	1,626,827		$	1,454,019		$	1,492,643		$	1,462,444		$	1,450,725

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TABLE 21
UNAUDITED CONDENSED CONSOLIDATED
YEAR TO DATE AVERAGE BALANCE SHEETS
(dollars in thousands)
	For the Six Months Ended		For the Twelve Months Ended
		June 30,		June 30,		December 31,		December 31,		December 31,
		2020		2019		2019		2018		2017
Earning assets:
Loans		$	1,107,302		$	1,010,821		$	1,020,801		$	915,360		$	818,119
Taxable securities			224,300			251,479			246,723			207,407			165,333
Tax-exempt securities			46,705			44,947			38,706			50,330			74,231
Interest-bearing deposits in other banks			59,820			37,930			54,095			47,038			66,872
Total earning assets			1,438,127			1,345,177			1,360,325			1,220,135			1,124,555
Cash and due from banks			21,775			21,640			22,806			20,468			18,301
Premises and equipment, net			15,591			15,203			15,598			13,952			15,567
Goodwill			11,671			9,822			10,758			665			665
Other intangible assets, net			4,604			4,625			4,807			1,252			1,471
Other assets			48,655			41,894			43,818			32,369			37,692
Total assets		$	1,540,423		$	1,438,361		$	1,458,112		$	1,288,841		$	1,198,251
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	459,241		$	383,766		$	400,588		$	332,197		$	289,735
Demand - interest-bearing			247,641			241,095			242,516			238,328			209,792
Money market			336,477			294,869			304,340			250,685			224,913
Savings			137,002			135,217			136,733			109,025			111,376
Certificates of deposit			145,098			165,764			160,550			168,183			205,648
Total deposits			1,325,459			1,220,711			1,244,727			1,098,418			1,041,464
Federal Home Loan Bank of San Francisco borrowings			8,132			19,448			9,644			22,466			302
Other borrowings net of unamortized debt issuance costs			9,970			11,859			10,895			15,143			17,981
Junior subordinated debentures			10,310			10,310			10,310			10,310			10,310
Other liabilities			16,974			17,851			17,894			12,286			12,293
Total liabilities			1,370,845			1,280,179			1,293,470			1,158,623			1,082,350
Shareholders' equity			169,578			158,182			164,642			130,218			115,901
Liabilities & shareholders' equity		$	1,540,423		$	1,438,361		$	1,458,112		$	1,288,841		$	1,198,251

About Bank of Commerce Holdings

Bank of Commerce Holdings is a bank holding company headquartered in Sacramento, California and is the parent company for Merchants Bank of Commerce. The Bank is an FDIC-insured California banking corporation providing community banking and financial services in northern California from Sacramento to Yreka along the Interstate 5 corridor. The Bank was incorporated as a California banking corporation on November 25, 1981 and opened for business on October 22, 1982. The Company’s common stock is listed on the NASDAQ Global Market and trades under the symbol “BOCH”.

Contact Information:

Randall S. Eslick, President and Chief Executive Officer
Telephone Direct (916) 677-5800

James A. Sundquist, Executive Vice President and Chief Financial Officer
Telephone Direct (916) 677-5825

Andrea M. Newburn, Vice President and Senior Administrative Officer / Corporate Secretary
Telephone Direct (530) 722-3959

FAQ

What are the financial results of Bank of Commerce Holdings for Q2 2020?

Bank of Commerce Holdings reported a net income of $3.8 million for Q2 2020, compared to $3.6 million in Q2 2019.

How much did Bank of Commerce Holdings fund through the PPP?

The company funded $162.2 million in loans through the Paycheck Protection Program as of June 30, 2020.

What was the efficiency ratio of Bank of Commerce Holdings in Q2 2020?

The efficiency ratio for Q2 2020 was 56.1%, improving from 65.9% in the same quarter of the previous year.

Did Bank of Commerce Holdings experience a decline in net income for the first half of 2020?

Yes, net income for the first half of 2020 decreased by 20% year-over-year to $4.8 million.

What impact did COVID-19 have on Bank of Commerce Holdings?

The company faced challenges due to COVID-19 but also funded 594 loans under the PPP, increasing deposit balances significantly.