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

Rhea-AI Summary

Bank of Commerce Holdings (NASDAQ: BOCH) reported Q3 2020 net income of $4.3 million, a decline from $4.6 million in Q3 2019. Year-to-date net income also decreased to $9.1 million from $10.6 million. The bank recorded a $1.1 million provision for loan losses and significant COVID-19 loan deferrals totaling $38.6 million. While net interest income rose to $14.1 million, the net interest margin declined to 3.51%. Nonperforming assets decreased to $8.1 million, representing 0.47% of total assets, showcasing improved asset quality despite challenging market conditions.

Positive

• Average loans increased by $180 million (17%) year-over-year.
• Book value per common share rose to $10.32 from $9.42 year-over-year.
• Average deposits increased by $231 million (18%) year-over-year.
• Nonperforming assets decreased by $4.7 million (37%) since September 2019.

Negative

• Net income decreased by $313 thousand (7%) compared to Q3 2019.
• Net income for nine months decreased by $1.5 million (14%) year-over-year.
• Net interest margin declined to 3.51% from 4.00% year-over-year.
• Return on average assets decreased to 1.01% from 1.26% year-over-year.

SACRAMENTO, Calif., Oct. 16, 2020 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.740 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter and nine months ended September 30, 2020. Net income for the quarter ended September 30, 2020 was $4.3 million or $0.26 per share – diluted, compared with net income of $4.6 million or $0.26 per share – diluted for the same period of 2019. Net income for the nine months ended September 30, 2020 was $9.1 million or $0.53 per share – diluted, compared with net income of $10.6 million or $0.59 per share – diluted for the same period of 2019.

Significant Items for the third quarter of 2020:

• $1.1 million provision for loan and lease losses.
• COVID-19 loan deferrals totaled $38.6 million at September 30, 2020. Loans with payment deferrals at June 30, 2020 totaling $82.5 million have resumed making payments.

Randall S. Eslick, President and CEO commented: “Throughout this unusual year we have not forgotten that we are responsible to many constituents. The pandemic has prompted us to physically modify our banking offices and many of our employees continue to work remotely. But these changes have not hindered our ability to diligently meet the needs of our depositors, borrowers and communities. We remain committed to protecting the health of our employees and customers and also to protecting the investment our owners have made in us.”

Financial highlights for the third quarter of 2020:

• Net income of $4.3 million was a decrease of $313 thousand (7%) from $4.6 million earned during the same period in the prior year. Earnings of $0.26 per share – diluted was the same compared to 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.
  • $1.1 million provision for loan and lease losses for the current quarter.
• Net interest income increased $408 thousand (3%) to $14.1 million compared to $13.7 million for the same period in the prior year.
• Net interest margin declined to 3.51% compared to 4.00% for the same period in the prior year.
• Return on average assets decreased to 1.01% compared to 1.26% for the same period in the prior year.
• Return on average equity decreased to 10.05% compared to 10.86% for the same period in the prior year.
• Average loans totaled $1.209 billion, an increase of $180 million (17%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.601 billion, an increase of $241 million (18%) compared to average earning assets for the same period in the prior year.
• Average deposits totaled $1.485 billion, an increase of $231 million (18%) compared to average deposits for the same period in the prior year.
  • Average non-maturing deposits totaled $1.345 billion, an increase of $248 million (23%) compared to the same period in the prior year.
  • Average certificates of deposit totaled $139.8 million, a decrease of $17.9 million (11%) compared to same period in the prior year.
• The Company’s efficiency ratio was 54.8% compared to 56.4% during the same period in the prior year.
  
• Nonperforming assets at September 30, 2020 totaled $8.1 million or 0.47% of total assets, a decrease of $4.7 million (37%) since September 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 $10.32 at September 30, 2020 compared to $9.42 at September 30, 2019.
• Tangible book value per common share was $9.38 at September 30, 2020 compared to $8.51 at September 30, 2019.
  

Financial highlights for the nine months ended September 30, 2020:

• Net income of $9.1 million was a decrease of $1.5 million (14%) from $10.6 million earned during the same period in the prior year. Earnings of $0.53 per share – diluted was a decrease of $0.06 (10%) per share from $0.59 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.
    
  • $5.3 million provision for loan and lease losses for the nine months ended September 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.
  • $2.7 million in non-recurring costs recorded during the nine months ended September 30, 2019 associated with our January 31, 2019 acquisition of Merchants National Bank of Sacramento and the name change of our subsidiary bank.
• Net interest income increased $678 thousand (2%) to $40.9 million compared to $40.2 million for the same period in the prior year.
• Net interest margin declined to 3.66% compared to 3.98% for the same period in the prior year.
• Return on average assets decreased to 0.76% compared to 0.98% for the same period in the prior year.
• Return on average equity decreased to 7.14% compared to 8.74% for the same period in the prior year.
• Average loans totaled $1.142 billion, an increase of $124 million (12%) compared to average loans for the same period in the prior year.
• Average earning assets totaled $1.493 billion, an increase of $143 million (11%) compared to the same period in the prior year.
• Average deposits totaled $1.379 billion, an increase of $147 million (12%) compared to the same period in the prior year.
  • Average non-maturing deposits totaled $1.236 billion, an increase of $167 million (16%) compared to the same period in the prior year.
  • Average certificates of deposit totaled $143.3 million, a decrease of $19.7 million (12%) compared to the same period in the prior year.
• The Company’s efficiency ratio was 60.2% compared to 66.5% for the same period in the prior year.
  • The Company’s efficiency ratio of 60.2% for the first nine months of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 57.7%.
  • The Company’s efficiency ratio of 66.5% for the first nine months of 2019 includes $2.7 million in non-recurring costs. The efficiency ratio excluding these non-recurring costs was 60.3%.
• Nonperforming assets at September 30, 2020 totaled $8.1 million or 0.47% of total assets, an increase of $2.5 million (36% annualized) since December 31, 2019.
• Book value per common share was $10.32 at September 30, 2020 compared to $9.62 at December 31, 2019.
• Tangible book value per common share was $9.38 at September 30, 2020 compared to $8.71 at December 31, 2019.

Impact of COVID-19:

• We have funded 606 loans totaling $163.5 million for the Small Business Administration’s Paycheck Protection Program (“PPP”) through September 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 continues to be slow as we maintain credit underwriting discipline in light of the current economic environment.
  
• For the six month period from April through September SBA has made principal and interest payments on all our SBA 7(a) loans. The borrowers will resume responsibility for making their payments in October.
  
• After considering qualitative factors, management determined that the Company’s goodwill was not impaired at September 30, 2020.
  
• At September 30, 2020, our workforce totaled 211 employees of which 107 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.

TABLE 1
SELECTED FINANCIAL INFORMATION - UNAUDITED
(dollars in thousands except per share data)
		For The Three Months Ended												For The Nine Months Ended
Net income, average assets and		September 30,								June 30,				September 30,
average shareholders' equity		2020				2019				2020				2020				2019
Net income		$	4,329			$	4,642			$	3,847			$	9,092			$	10,592
Average total assets		$	1,704,116			$	1,462,444			$	1,626,827			$	1,595,386			$	1,446,476
Average total earning assets		$	1,601,436			$	1,360,006			$	1,523,157			$	1,492,961			$	1,350,173
Average shareholders' equity		$	171,433			$	169,608			$	167,036			$	170,201			$	162,032
Selected performance ratios
Return on average assets			1.01	%			1.26	%			0.95	%			0.76	%			0.98	%
Return on average equity			10.05	%			10.86	%			9.26	%			7.14	%			8.74	%
Efficiency ratio			54.8	%			56.4	%			56.1	%			60.2	%			66.5	%
Share and per share amounts
Weighted average shares - basic (1)			16,660				18,130				16,660				17,004				17,918
Weighted average shares - diluted (1)			16,696				18,196				16,689				17,044				17,981
Earnings per share - basic		$	0.26			$	0.26			$	0.23			$	0.53			$	0.59
Earnings per share - diluted		$	0.26			$	0.26			$	0.23			$	0.53			$	0.59
		At September 30,								At June 30,
Share and per share amounts		2020				2019				2020
Common shares outstanding (2)			16,792				18,212				16,739
Book value per common share (2)		$	10.32			$	9.42			$	10.13
Tangible book value per common share (2)(3)		$	9.38			$	8.51			$	9.17
Capital ratios (4)
Bank of Commerce Holdings
Common equity tier 1 capital ratio			12.61	%			12.85	%			12.34	%
Tier 1 capital ratio			13.44	%			13.69	%			13.18	%
Total capital ratio			15.53	%			15.62	%			15.27	%
Tier 1 leverage ratio			9.60	%			11.28	%			9.82	%
Tangible common equity ratio (5)			9.13	%			10.64	%			9.05	%
Merchants Bank of Commerce
Common equity tier 1 capital ratio			14.01	%			14.25	%			13.72	%
Tier 1 capital ratio			14.01	%			14.25	%			13.72	%
Total capital ratio			15.26	%			15.34	%			14.97	%
Tier 1 leverage ratio			9.99	%			11.74	%			10.21	%
(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 September 30, 2020, the Company had total consolidated assets of $1.740 billion, gross loans of $1.206 billion, allowance for loan and lease losses (“ALLL”) of $17 million, total deposits of $1.518 billion, and shareholders’ equity of $173 million.

TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(dollars in thousands)
	At September 30,																					At June 30,
					% of							% of			Change												% of
	2020				Total			2019				Total			Amount				%				2020				Total
Commercial	$	121,025			10	%		$	152,195			15	%		$	(31,170	)		(20	)	%		$	126,024			10	%
Paycheck protection program		163,493			14				—			—				163,493			100		%			162,189			13
Real estate - construction and land development		40,289			3				35,606			3				4,683			13		%			41,371			3
Real estate - commercial non-owner occupied		538,079			45				475,678			47				62,401			13		%			521,004			44
Real estate - commercial owner occupied		210,455			17				210,767			20				(312	)		—		%			215,799			18
Real estate - residential - ITIN		30,071			2				34,036			3				(3,965	)		(12	)	%			31,083			3
Real estate - residential - 1-4 family mortgage		57,867			5				64,747			6				(6,880	)		(11	)	%			60,756			5
Real estate - residential - equity lines		20,296			2				22,729			2				(2,433	)		(11	)	%			20,938			2
Consumer and other		24,490			2				37,324			4				(12,834	)		(34	)	%			27,176			2
Gross loans		1,206,065			100	%			1,033,082			100	%			172,983			17		%			1,206,340			100	%
Deferred fees and costs		(1,037	)						1,980							(3,017	)							(1,603	)
Loans, net of deferred fees and costs		1,205,028							1,035,062							169,966								1,204,737
Allowance for loan and lease losses		(16,873	)						(12,285	)						(4,588	)							(16,089	)
Net loans	$	1,188,155						$	1,022,777						$	165,378							$	1,188,648
Average loans during the quarter	$	1,209,277						$	1,029,534						$	179,743			17		%		$	1,180,915
Average loans during the quarter (excluding PPP)	$	1,046,187						$	1,029,534						$	16,653			2		%		$	1,048,139
Average yield on loans during the quarter		4.42		%					5.01		%					(0.59	)		(12	)	%			4.50		%
Average yield on all loans during the quarter (excluding PPP)		4.75		%					5.01		%					(0.26	)		(5	)	%			4.76		%
Average yield on all loans year to date		4.56		%					4.98		%					(0.42	)		(8	)	%			4.64		%
Average yield on all loans year to date (excluding PPP)		4.77		%					4.98		%					(0.21	)		(4	)	%			4.78		%

The Company recorded gross loan balances of $1.206 billion at September 30, 2020, compared with $1.033 billion and $1.206 billion at September 30, 2019 and June 30, 2020, respectively, an increase of $173 million and a decrease of $275 thousand, respectively.

The average yield on loans during the quarter was 4.42% compared to 5.01% and 4.50% for the quarters ended September 30, 2019 and June 30, 2020, respectively. Yields in the current quarter were negatively impacted by PPP loans, which averaged $163.1 million and yielded 2.31%.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants of $1.1 million, $1.3 million and $1.9 million at September 30, 2020, June 30, 2020 and September 30, 2019, respectively. We recorded $233 thousand, $216 thousand and $193 thousand in accretion of the discount for these loans during the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

We have funded 606 PPP loans totaling $163.5 million through September 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 life of the loans as a part of the loan yield. At September 30, 2020, $3.3 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 September 30, 2020.

TABLE 3
PPP LOANS BY INDUSTRY - UNAUDITED
(dollars in thousands)
		At September 30, 2020
		Number		Balance
Construction		98		$	64,750
Healthcare and Social Assistance		96			17,701
Professional, Scientific and Tech Services		78			12,155
Accommodation and Food Services		51			10,328
Admin, Support, Waste Management and Remediation Services		20			7,383
Primary Metal Manufacturing		16			6,641
Retail Trade		59			8,050
Other		188			36,485
Total		606		$	163,493

TABLE 4
PPP LOANS BY LOAN SIZE - UNAUDITED
(dollars in thousands)
	At September 30, 2020
	Balance			Number		Average Loan Size
$150,000 or less	$	20,604		390		$	53
$150,001 to $350,000		25,406		110			231
$350,001 to $1,999,999		73,927		94			786
$2,000,000 or greater		43,556		12			3,630
Total	$	163,493		606		$	270

During the third quarter of 2020, the SBA began accepting applications for PPP loan forgiveness. The bank has 60 days to review and approve an application before submitting it to SBA, and then the SBA has 90 days to process it for forgiveness. The following table presents the progress of our loans in the forgiveness process.

TABLE 5
PPP LOANS FORGIVENESS APPLICATION STATUS - UNAUDITED
(dollars in thousands)
	At September 30, 2020
	Balance			Number		Average Loan Size
Borrower has not started application	$	78,930		390		$	202
Borrower is working on application		38,624		123			314
Borrower has completed application and the bank is reviewing it		32,400		73			444
Bank has approved application and submitted it to the SBA		13,539		20			677
SBA has approved the application and the loan has been repaid		—		—			—
Total	$	163,493		606		$	270

As of October 13, 2020, two of our PPP loans totaling $95 thousand that were outstanding on September 30, 2020 have been forgiven by the SBA.

TABLE 6
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(dollars in thousands)
		At September 30,																				At June 30,
					% of						% of			Change											% of
		2020			Total			2019			Total			Amount				%				2020			Total
Cash and due from banks		$	22,884		5	%		$	32,505		9	%		$	(9,621	)		(30	)	%		$	29,630		7	%
Interest-bearing deposits in other banks			104,999		23				56,099		16				48,900			87		%			126,132		29
Total cash and cash equivalents			127,883		28				88,604		25				39,279			44		%			155,762		36
Investment securities:
U.S. government and agencies			31,811		7				40,467		11				(8,656	)		(21	)	%			33,195		8
Obligations of state and political subdivisions			91,863		20				39,004		11				52,859			136		%			76,888		18
Residential mortgage backed securities and collateralized mortgage obligations			165,693		35				165,994		46				(301	)		—		%			137,120		30
Corporate securities			—		—				2,992		1				(2,992	)		(100	)	%			1,000		—
Commercial mortgage backed securities			19,576		4				22,822		6				(3,246	)		(14	)	%			16,329		4
Other asset backed securities			28,089		6				1,062		—				27,027			2,545		%			15,668		4
Total investment securities - AFS			337,032		72				272,341		75				64,691			24		%			280,200		64
Total cash, cash equivalents and investment securities		$	464,915		100	%		$	360,945		100	%		$	103,970			29		%		$	435,962		100	%
Average yield on interest-bearing due from banks during the quarter			0.12	%					2.07	%					(1.95	)							0.12	%
Average yield on investment securities during the quarter - nominal			2.33	%					2.75	%					(0.42	)							2.61	%
Average yield on investment securities during the quarter - tax equivalent			2.50	%					2.85	%					(0.35	)							2.78	%

As of September 30, 2020, we maintained noninterest-bearing cash positions of $22.9 million and interest-bearing deposits of $105.0 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $337.0 million at September 30, 2020, compared with $272.3 million and $280.2 million at September 30, 2019 and June 30, 2020, respectively. During the third quarter of 2020, we continued the deployment of excess cash into investment securities as deposits continued to grow. Investment purchases were comprised primarily of longer duration municipal bonds and lower coupon mortgage backed securities. During the third quarter of 2020, we purchased securities with a par value of $84.1 million and weighted average yield of 1.75% (2.09% tax equivalent) and sold securities with a par value of $5.8 million and weighted average yield of 2.67% (3.16% tax equivalent). The sales resulted in net realized gains of $258 thousand and $482 thousand for the quarter and nine months ended September 30, 2020, respectively.

Average securities balances for the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019 were $296.8 million, $269.7 million and $271.6 million, respectively. Weighted average yields on securities balances for those same periods were 2.33%, 2.61% and 2.75%, respectively.

At September 30, 2020, our net unrealized gains on available-for-sale investment securities were $10.4 million compared with net unrealized gains of $3.3 million and $10.1 million at September 30, 2019 and June 30, 2020, respectively. The changes in net unrealized gains on the investment securities portfolio were due to changes in market interest rates.

TABLE 7
DEPOSITS BY TYPE - UNAUDITED
(dollars in thousands)
	At September 30,																				At June 30,
				% of						% of				Change										% of
	2020			Total			2019			Total			Amount				%				2020			Total
Demand - noninterest-bearing	$	542,060		36	%		$	412,410		33	%		$	129,650			31		%		$	521,751		35	%
Demand - interest-bearing		280,370		18				239,547		19				40,823			17		%			287,198		19
Money market		403,785		27				317,120		25				86,665			27		%			405,322		27
Total demand		1,226,215		81				969,077		77				257,138			27		%			1,214,271		81
Savings		151,016		10				137,441		11				13,575			10		%			142,389		10
Total non-maturing deposits		1,377,231		91				1,106,518		88				270,713			24		%			1,356,660		91
Certificates of deposit		140,900		9				155,621		12				(14,721	)		(9	)	%			137,647		9
Total deposits	$	1,518,131		100	%		$	1,262,139		100	%		$	255,992			20		%		$	1,494,307		100	%

Total deposits at September 30, 2020, increased $256 million or 20% to $1.518 billion compared to September 30, 2019 and increased $23.8 million or 6% annualized compared to June 30, 2020. Total non-maturing deposits increased $270.7 million or 24% compared to the same date a year ago and increased $20.6 million or 6% annualized compared to June 30, 2020. The increase in non-maturing deposits compared to the same period one year ago 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 $14.7 million or 9% compared to the same date a year ago and increased $3.3 million or 9% annualized compared to June 30, 2020. The decrease in certificates of deposits compared to the same period one year ago 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.

TABLE 8
AVERAGE COST OF FUNDS - UNAUDITED
For The Three Months Ended
	September 30,				June 30,				March 31,				December 31,				September 30,				June 30,				March 31,				December 31,
	2020				2020				2020				2019				2019				2019				2019				2018
Interest-bearing deposits		0.36	%			0.43	%			0.53	%			0.56	%			0.56	%			0.54	%			0.49	%			0.45	%
Interest-bearing deposits and noninterest-bearing demand		0.23	%			0.28	%			0.35	%			0.38	%			0.38	%			0.37	%			0.34	%			0.31	%
All interest-bearing liabilities		0.44	%			0.52	%			0.65	%			0.68	%			0.68	%			0.74	%			0.67	%			0.61	%
All interest-bearing liabilities and noninterest-bearing demand		0.29	%			0.34	%			0.43	%			0.46	%			0.46	%			0.52	%			0.46	%			0.42	%

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

TABLE 9
SUMMARY INCOME STATEMENT - UNAUDITED
(dollars in thousands, except per share data)
	For The Three Months Ended
	September 30,						Change								June 30,			Change
	2020			2019			Amount				%				2020			Amount				%
Interest income	$	15,218		$	15,201		$	17			0		%		$	14,997		$	221			1		%
Interest expense		1,088			1,479			(391	)		(26	)	%			1,214			(126	)		(10	)	%
Net interest income		14,130			13,722			408			3		%			13,783			347			3		%
Provision for loan and lease losses		1,100			—			1,100			100		%			1,300			(200	)		(15	)	%
Noninterest income		1,189			1,006			183			18		%			955			234			25		%
Noninterest expense		8,390			8,300			90			1		%			8,270			120			1		%
Income before provision for income taxes		5,829			6,428			(599	)		(9	)	%			5,168			661			13		%
Provision for income taxes		1,500			1,786			(286	)		(16	)	%			1,321			179			14		%
Net income	$	4,329		$	4,642		$	(313	)		(7	)	%		$	3,847		$	482			13		%
Earnings per share - basic	$	0.26		$	0.26		$	—			—		%		$	0.23		$	0.03			13		%
Weighted average shares - basic		16,660			18,130			(1,470	)		(8	)	%			16,660			—			—		%
Earnings per share - diluted	$	0.26		$	0.26		$	—			—		%		$	0.23		$	0.03			13		%
Weighted average shares - diluted		16,696			18,196			(1,500	)		(8	)	%			16,689			7			—		%
Dividends declared per common share	$	0.05		$	0.05		$	—			—		%		$	0.05		$	—			—		%

Third Quarter of 2020 Compared With The Third Quarter of 2019

Net income for the third quarter of 2020 decreased $313 thousand compared to the third quarter of 2019. In the current quarter, net interest income was $408 thousand higher, noninterest income was $183 thousand higher and income taxes were $286 thousand lower. These changes were partially offset by a provision for loan and lease losses that was $1.1 million higher and noninterest expense that was $90 thousand higher.

Net Interest Income

Net interest income increased $408 thousand compared to the same period a year ago.

Interest income for the third quarter of 2020 increased $17 thousand or less than 1% to $15.2 million.

• Interest and fees on loans increased $435 thousand due to a $179.7 million increase in average loan balances partially offset by a 59 basis point decrease in the average yield. Much of the 59 basis point decrease was caused by PPP loans which yielded only 2.31%. The yield on loans exclusive of PPP loans declined 26 basis points.
• Interest on investment securities decreased $139 thousand due to a 41 basis point decrease in average yield partially offset by a $25.2 million increase in average securities balances.
• Interest on interest-bearing deposits due from banks decreased $279 thousand due to a 195 basis point decrease in average yield that was partially offset by a $36.4 million increase in average interest-bearing deposit balances. During 2020, in response to the economic effects of the COVID-19 pandemic, the Federal Reserve cut its interest rates by 150 to 175 basis points which has resulted in a decrease in our interest income.

Interest expense for the third quarter of 2020 decreased $391 thousand or 26% to $1.1 million.

• Interest expense on interest-bearing deposits decreased $336 thousand. Average interest-bearing demand and savings deposit balances increased $122.8 million, while average certificate of deposit balances decreased $17.9 million. The average rate paid on interest-bearing deposits decreased 20 basis points.
• Average FHLB borrowings were $10.0 million in the current quarter. The borrowings bear no interest under a program offered by the FHLB during the second quarter of 2020 in response to COVID-19 liquidity concerns. There were no borrowings during the same period a year ago.
• Interest expense on other term debt increased $1 thousand. The average rate paid on other term debt increased three basis points.
• Interest expense on junior subordinated debentures decreased $56 thousand. The average rate paid on junior subordinated debentures decreased 215 basis points.

Provision for Loan and Lease Losses

Net loan loss charge-offs were $316 thousand for the current quarter compared to net loan loss charge-offs of $160 thousand for the same period a year ago. Net loan charge-offs during the current quarter were primarily related to the unguaranteed portion of two commercial loans that are partially guaranteed under the California Capital Access Program for Small Business.

We recognized deterioration in the 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 $1.1 million for the third quarter of 2020. There was no provision for loan and lease losses in the third quarter of 2019. A discussion of our provision is provided following Table 11.

Noninterest Income

Noninterest income for the three months ended September 30, 2020 increased $183 thousand compared to the same period a year previous. The increase was due $246 thousand in net gains on sale of investment securities during the third quarter of 2020.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2020 increased $90 thousand compared to the same period a year previous. Increases in noninterest expense included the following items:

• $121 thousand increase in salaries and related benefits.
• $205 thousand increase in FDIC insurance premiums.

These increases were partially offset by decreases in travel, sponsorship and other noninterest expenses as a result of the pandemic.

The Company’s efficiency ratio was 54.8% for the third quarter of 2020. The ratio during the same period in 2019 was 56.4%.

Income Tax Provision

For the three months ended September 30, 2020, our income tax provision of $1.5 million on pre-tax income of $5.8 million was an effective tax rate of 25.7%. The tax provision for the third quarter of the prior year was $1.8 million on pre-tax income of $6.4 million for an effective rate of 27.8%. The effective tax rate has declined in the current period as a result of increased income from tax-exempt securities.

Third Quarter of 2020 Compared With The Second Quarter of 2020

Net income for the third quarter of 2020 increased $482 thousand compared to the second quarter of 2020. In the current quarter, net interest income was $347 thousand higher, provision for loan and lease losses was $200 thousand lower, noninterest income was $234 thousand higher. These changes were partially offset by noninterest expense that was $120 thousand higher and a provision for income taxes that was $179 thousand higher.

Net Interest Income

Net interest income increased $347 thousand over the prior quarter.

Interest income for the three months ended September 30, 2020 increased $221 thousand or 1% to $15.2 million.

• Interest and fees on loans increased $224 thousand due to a $28.4 million increase in average loan balances partially offset by an eight basis point decrease in the average yield. Much of the eight basis point decrease was caused by PPP loans.
• Interest on investment securities decreased $11 thousand due to a 28 basis point decrease in average yield partially offset by a $27.1 million increase in average securities balances.
• Interest on interest-bearing deposits due from banks increased $8 thousand due to a $22.8 million increase in average balances.

Interest expense for the three months ended September 30, 2020 decreased $126 thousand or 10% to $1.1 million.

• Interest expense on interest-bearing deposits decreased $110 thousand. Average interest-bearing demand and savings deposit balances increased $48.0 million, while average certificates of deposit decreased $3.2 million. The average rate paid on interest-bearing deposits decreased by seven basis points.
• Interest expense on FHLB borrowings decreased $5 thousand. Average FHLB borrowings were $10.0 million in the current quarter compared to $16.0 million in the prior quarter. During the second quarter of 2020, we took an advance under our FHLB line of credit for $10.0 million, which bears no interest under a program offered by the FHLB during the second quarter of 2020 in response to COVID-19 liquidity concerns.
• Interest expense on other term debt was unchanged at $184 thousand for both quarters.
• Interest expense on other junior subordinated debentures decreased $11 thousand due to a 45 basis point decrease in the average rate paid.

Provision for Loan and Lease Losses

Net loan charge-offs were $316 thousand in the current quarter compared to $278 thousand in the prior quarter. As illustrated in Table 11 total nonaccrual loans increased by $1.4 million during the three months ended September 30, 2020 when compared to the previous quarter. Net loan charge-offs during the current quarter were primarily related to the unguaranteed portion of two commercial loans that are partially guaranteed under the California Capital Access Program for Small Business. Both loans were also placed in nonaccrual status during the quarter. We recorded a provision for loan and lease losses of $1.3 million and $1.1 million for the second and third quarters of 2020, respectively. A discussion of our provision is provided following Table 11.

Noninterest Income

Noninterest income for the three months ended September 30, 2020 increased $234 thousand including a $118 thousand increase in gain on sale of investment securities and $73 thousand increase in FHLB dividends.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2020 increased $120 thousand compared to the prior quarter. The increase was primarily due to a deferred PPP loan origination cost benefit of approximately $600 recorded in the prior quarter which did not recur in the current quarter. This was offset during the current quarter by accruals for incentives and unused vacation which were $408 thousand lower.

The Company’s efficiency ratio was 54.8% for the third quarter of 2020 compared with 56.1% for the prior quarter.

Income Tax Provision

For the three months ended September 30, 2020, our income tax provision of $1.5 million on pre-tax income of $5.8 million was an effective tax rate of 25.7%. The income tax provision for the prior quarter of $1.3 thousand on pre-tax income of $5.2 million was an effective tax rate of 25.6%.

Earnings Per Share

Diluted earnings per share were $0.26 for the three months ended September 30, 2020 compared with diluted earnings per share of $0.26 for the same period a year ago and diluted earnings per share of $0.23 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in Table 9 presented earlier in this press release.

TABLE 10a
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
		For The Three Months Ended
		September 30, 2020									September 30, 2019									June 30, 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)		$	1,046,187		$	12,499		4.75	%		$	1,029,534		$	13,013		5.01	%		$	1,048,139		$	12,411		4.76	%
PPP loans			163,090			949		2.31	%			—			—		—	%			132,776			813		2.46	%
Taxable securities			228,045			1,284		2.24	%			238,601			1,609		2.68	%			211,195			1,329		2.53	%
Tax-exempt securities (3)			68,766			457		2.64	%			32,974			271		3.26	%			58,540			423		2.91	%
Interest-bearing deposits in other banks			95,348			29		0.12	%			58,897			308		2.07	%			72,507			21		0.12	%
Average interest- earning assets			1,601,436			15,218		3.78	%			1,360,006			15,201		4.43	%			1,523,157			14,997		3.96	%
Cash and due from banks			23,381									23,822									21,564
Premises and equipment, net			15,365									15,922									15,428
Goodwill			11,671									11,686									11,671
Other intangible assets, net			4,318									5,083									4,508
Other assets			47,945									45,925									50,499
Average total assets		$	1,704,116								$	1,462,444								$	1,626,827
Interest-bearing liabilities:
Interest-bearing demand		$	279,744			71		0.10	%		$	243,553			117		0.19	%		$	261,907			85		0.13	%
Money market			387,995			289		0.30	%			309,188			451		0.58	%			365,368			317		0.35	%
Savings			146,074			74		0.20	%			138,296			131		0.38	%			138,500			95		0.28	%
Certificates of deposit			139,757			420		1.20	%			157,620			491		1.24	%			142,955			467		1.31	%
Federal Home Loan Bank of San Francisco borrowings			10,000			—		—	%			—			—		—	%			16,044			5		0.13	%
Other borrowings net of unamortized debt issuance costs			9,988			184		7.33	%			9,942			183		7.30	%			9,976			184		7.42	%
Junior subordinated debentures			10,310			50		1.93	%			10,310			106		4.08	%			10,310			61		2.38	%
Average interest- bearing liabilities			983,868			1,088		0.44	%			868,909			1,479		0.68	%			945,060			1,214		0.52	%
Noninterest-bearing demand			531,459									405,853									497,636
Other liabilities			17,356									18,074									17,095
Shareholders’ equity			171,433									169,608									167,036
Average liabilities and shareholders’ equity		$	1,704,116								$	1,462,444								$	1,626,827
Net interest income and net interest margin (4)					$	14,130		3.51	%					$	13,722		4.00	%					$	13,783		3.64	%
(1) Interest income on loans includes deferred fees and costs of approximately $240 thousand, $161 thousand, and $138 thousand for the three months ended September 30, 2020 and 2019 and June 30, 2020, respectively. Interest income on PPP loans includes $538 thousand and $476 thousand of fee income for the three months ended September 30, 2020 and June 30, 2020, respectively.
(2) Loans net of PPP includes average nonaccrual loans of $6.6 million, $13.2 million and $5.6 million for the three months ended September 30, 2020 and 2019 and June 30, 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 September 30, 2020 and 2019 and June 30, 2020 included $233 thousand, $193 thousand and $216 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 basis points. Net interest income for the three months ended September 30, 2020 included $949 thousand in interest and fee income from PPP loans with an average balance of $163.1 million for the quarter, which decreased the net interest margin by 14 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.

TABLE 10b
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
		For The Nine Months Ended
		September 30, 2020									September 30, 2019
		Average						Yield /			Average						Yield /
		Balance			Interest(1)			Rate (5)			Balance			Interest(1)			Rate (5)
Interest-earning assets:
Loans net of PPP (2)		$	1,042,685		$	37,248		4.77	%		$	1,017,127		$	37,891		4.98	%
PPP loans			98,857			1,762		2.38	%			—			—		—	%
Taxable securities			225,558			4,195		2.48	%			247,139			5,106		2.76	%
Tax-exempt securities (3)			54,112			1,151		2.84	%			40,912			986		3.22	%
Interest-bearing deposits in other banks			71,749			204		0.38	%			44,995			772		2.29	%
Average interest- earning assets			1,492,961			44,560		3.99	%			1,350,173			44,755		4.43	%
Cash and due from banks			22,314									22,375
Premises and equipment, net			15,514									15,445
Goodwill			11,671									10,450
Other intangible assets, net			4,508									4,780
Other assets			48,418									43,253
Average total assets		$	1,595,386								$	1,446,476
Interest-bearing liabilities:
Interest-bearing demand		$	258,420			256		0.13	%		$	241,924			372		0.21	%
Money market			353,775			1,009		0.38	%			299,694			1,120		0.50	%
Savings			140,048			287		0.27	%			136,254			365		0.36	%
Certificates of deposit			143,305			1,351		1.26	%			163,020			1,478		1.21	%
Federal Home Loan Bank of San Francisco borrowings			8,759			5		0.08	%			12,894			247		2.56	%
Other borrowings net of unamortized debt issuance costs			9,976			552		7.39	%			11,213			623		7.43	%
Junior subordinated debentures			10,310			201		2.60	%			10,310			329		4.27	%
Average interest- bearing liabilities			924,593			3,661		0.53	%			875,309			4,534		0.69	%
Noninterest-bearing demand			483,490									391,208
Other liabilities			17,102									17,927
Shareholders’ equity			170,201									162,032
Average liabilities and shareholders’ equity		$	1,595,386								$	1,446,476
Net interest income and net interest margin (4)					$	40,899		3.66	%					$	40,221		3.98	%
(1) Interest income on loans includes deferred fees and costs of approximately $636 thousand and $433 thousand for the nine months ended September 30, 2020 and 2019, respectively. Interest income on PPP loans includes $1.0 million of fee income for the nine months ended September 30, 2020.
(2) Loans net of PPP includes average nonaccrual loans of $5.8 million and $11.8 million for the nine months ended September 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 nine months ended September 30, 2020 and 2019 included $612 thousand and $431 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 and 6 basis points, respectively. Net interest income for the nine months ended September 30, 2020 included $1.8 million in interest and fee income from PPP loans with an average balance of $98.9 million for the nine months ended September 30, 2020, which decreased the net interest margin by 9 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.

TABLE 11
ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS - UNAUDITED
(dollars in thousands)
	For The Three Months Ended
	September 30,					June 30,					March 31,					December 31,					September 30,
	2020					2020					2020					2019					2019
Beginning balance ALLL	$	16,089				$	15,067				$	12,231				$	12,285				$	12,445
Provision for loan and lease losses		1,100					1,300					2,850					—					—
Loans charged-off		(502	)				(356	)				(169	)				(174	)				(319	)
Loan loss recoveries		186					78					155					120					159
Ending balance ALLL	$	16,873				$	16,089				$	15,067				$	12,231				$	12,285
	At September 30,					At June 30,					At March 31,					At December 31,					At September 30,
	2020					2020					2020					2019					2019
Nonaccrual loans:
Commercial	$	1,549				$	7				$	39				$	61				$	139
Real estate - commercial non-owner occupied		1,062					1,062					—					—					10,099
Real estate - commercial owner occupied		3,750					3,647					3,103					3,103					—
Real estate - residential - ITIN		1,574					1,738					1,878					2,221					2,339
Real estate - residential - 1-4 family mortgage		145					180					184					191					198
Consumer and other		18					37					39					40					21
Total nonaccrual loans		8,098					6,671					5,243					5,616					12,796
Accruing troubled debt restructured loans:
Commercial		531					592					592					595					629
Real estate - residential - ITIN		3,597					3,642					3,891					3,957					4,072
Real estate - residential - equity lines		131					221					226					231					236
Total accruing troubled debt restructured loans		4,259					4,455					4,709					4,783					4,937
All other accruing impaired loans		—					—					—					—					—
Total impaired loans	$	12,357				$	11,126				$	9,952				$	10,399				$	17,733
Gross loans outstanding at period end	$	1,206,065				$	1,206,340				$	1,052,245				$	1,032,903				$	1,033,082
Impaired loans to gross loans		1.02		%			0.92		%			0.95		%			1.01		%			1.72		%
Nonaccrual loans to gross loans		0.67		%			0.55		%			0.50		%			0.54		%			1.24		%
Allowance for loan and lease losses as a percent of:
Gross loans		1.40		%			1.33		%			1.43		%			1.18		%			1.19		%
Nonaccrual loans		208.36		%			241.18		%			287.37		%			217.79		%			96.01		%
Impaired loans		136.55		%			144.61		%			151.40		%			117.62		%			69.28		%

TABLE 12
ALLOWANCE, RESERVE AND DISCOUNT - UNAUDITED
(dollars in thousands)
	At September 30,				At June 30,				At March 31,				At December 31,				At September 30,
	2020				2020				2020				2019				2019
ALLL	$	16,873			$	16,089			$	15,067			$	12,231			$	12,285
Reserve for unfunded commitments		800				800				695				695				695
Discount on acquired loans (1)		1,060				1,293				1,509				1,672				1,860
Total allowance, reserve and discount	$	18,733			$	18,182			$	17,271			$	14,598			$	14,840
Gross loans	$	1,206,065			$	1,206,340			$	1,052,245			$	1,032,903			$	1,033,082
PPP loans		163,493				162,189				—				—				—
Total gross loans net of PPP loans	$	1,042,572			$	1,044,151			$	1,052,245			$	1,032,903			$	1,033,082
Total allowance, reserve and discount as a percentage of total gross loans net of PPP loans		1.80	%			1.74	%			1.64	%			1.41	%			1.44	%
(1) Discount on acquired loans includes fair value discount for loans acquired from Merchants in January of 2019.

COVID‐19 Loan Analysis

During the third quarter of 2020, we continued to proactively monitor our loan portfolio by maintaining close contact with our borrowers to update our understanding of the impact of the pandemic on them, their businesses and the underlying collateral for our loans. For borrowers who continue to have been granted a loan payment deferral, we have evaluated their credit quality position and the potential for loss of principal.

We have segmented 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 $10.0 million and $21.3 million of SBA 7(a) (generally 75% guaranteed) loans in the high risk and low to moderate risk categories, respectively.

TABLE 13
COVID-19 LOAN ANALYSIS - UNAUDITED
(dollars in thousands)
	At September 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	12		$	15,896			$	24,641			$	8,050			$	48,587		—		$	—			—		$	—
Health care and social assistance	46			14,148				12,847				17,701				44,696		6			3,608			1			954
Hotels, motels and bed-and-breakfast inns	17			34,635				—				1,402				36,037		3			9,986			—			—
Other services	7			6,014				18,318				2,967				27,299		1			2,032			1			231
Restaurants, bars and caterers	20			11,103				—				6,370				17,473		2			1,606			—			—
Educational services	3			7,348				303				2,693				10,344		—			—			—			—
Arts, entertainment and recreation	20			4,200				60				4,579				8,839		5			1,698			—			—
Other industries	22			17,255				739,069				119,731				876,055		3			4,032			10			10,757
Residential, Consumer and All Other not individually analyzed	—			—				136,735				—				136,735		—			—			116			3,714
Total	147		$	110,599			$	931,973			$	163,493			$	1,206,065		20		$	22,962			128		$	15,656
% to gross loans				9.17	%			77.27	%			13.56	%								1.90	%					1.30	%

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 September 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 updating this work, during the third quarter 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 $16.9 million at September 30, 2020, an increase of 38% compared to our ALLL of $12.2 million at December 31, 2019. A provision for loan and lease losses of $1.1 million was recorded during the current quarter compared to $1.3 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 1.40% as of September 30, 2020 compared to 1.19% as of September 30, 2019 and 1.33% as of June 30, 2020. Excluding SBA guaranteed PPP loans our ALLL as a percentage of gross loans was 1.62% as of September 30, 2020 compared to 1.54% as of June 30, 2020.

Management believes the Company’s ALLL is adequate at September 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 September 30, 2020, the recorded investment in loans classified as impaired totaled $12.4 million, with a corresponding specific reserve of $204 thousand compared to impaired loans of $17.7 million with a corresponding specific reserve of $335 thousand at September 30, 2019 and impaired loans of $11.1 million, with a corresponding specific reserve of $270 thousand at June 30, 2020. The increase in impaired loans during the current quarter was due to two commercial loans totaling $1.4 million that were placed on nonaccrual status during the third quarter of 2020.

TABLE 14
TROUBLED DEBT RESTRUCTURINGS - UNAUDITED
(dollars in thousands)
		At September 30,				At June 30,				At March 31,				At December 31,				At September 30,
		2020				2020				2020				2019				2019
Nonaccrual		$	2,063			$	2,194			$	1,611			$	1,680			$	1,746
Accruing			4,259				4,455				4,709				4,783				4,937
Total troubled debt restructurings		$	6,322			$	6,649			$	6,320			$	6,463			$	6,683
Troubled debt restructurings as a percentage of total gross loans			0.52	%			0.55	%			0.60	%			0.63	%			0.65	%

There were no new troubled debt restructurings during the three months ended September 30, 2020. As of September 30, 2020, we had 92 restructured loans that qualified as troubled debt restructurings, of which 91 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. These modified loans are not troubled debt restructurings and are not considered to be past due or non-performing. We have granted deferrals ranging from one to six months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19. For some borrowers that where initially granted a deferral of less than 6 months, we have granted an additional deferral period on a case-by-case basis. Since March of 2020, we have granted 261 payment deferrals totaling $125.3 million. As of September 30, 2020 loans totaling $82.5 million have resumed making payments.

The following tables present approved loan deferrals that are still in effect at September 30, 2020. For the loans with payment deferrals at September 30, 2020, nine borrowers also received a PPP loan through our U.S. Small Business Administration (“SBA”) department.

TABLE 15a
COVID-19 LOAN DEFERRALS - UNAUDITED
(dollars in thousands)
		Payments Scheduled to Resume In The Three Months Ended
		December 31, 2020					March 31, 2021
		#		Amount			#		Amount			#		Total
Length of 1st deferral granted:
3 months		2		$	1,748		—		$	—		2		$	1,748
5 months		2			935		—			—		2			935
6 months		18			19,986		3			484		21			20,470
Length of 2nd deferral granted:
2 months		1			2,873		—			—		1			2,873
3 months		7			6,865		1			2,033		8			8,898
Total loan deferrals		30			32,407		4			2,517		34			34,924
Loans serviced by others (1)		—			—		—			—		114			3,694
Total		60		$	64,814		8		$	5,034		182		$	73,542
(1) Loans serviced by others are small residential mortgages and consumer home improvement loans, which are deferred on a short-term basis up to a maximum of six months.

TABLE 15b
COVID-19 LOAN DEFERRALS BY INDUSTRY - UNAUDITED
(dollars in thousands)
		Payments Scheduled to Resume In The Three Months Ended
		December 31, 2020					March 31, 2021
Industry:		#		Amount			#		Amount			#		Total
Health care and social assistance		6		$	4,550		1		$	12		7		$	4,562
Hotels, motels and bed-and-breakfast inns		3			9,986		—			—		3			9,986
Other services		1			231		1			2,033		2			2,264
Restaurants, bars and caterers		2			1,605		—			—		2			1,605
Arts, entertainment and recreation		5			1,698		—			—		5			1,698
Other industries		13			14,337		2			472		15			14,809
Total loan deferrals		30			32,407		4			2,517		34			34,924
Loans serviced by others (1)		—			—		—			—		114			3,694
Total		60		$	64,814		8		$	5,034		182		$	73,542
(1) Loans serviced by others are small residential mortgages and consumer home improvement loans, which are deferred on a short-term basis up to a maximum of six months.

The following table presents nonperforming assets at the dates indicated.

TABLE 16
NONPERFORMING ASSETS - UNAUDITED
(dollars in thousands)
		At September 30,				At June 30,				At March 31,				At December 31,				At September 30,
		2020				2020				2020				2019				2019
Total nonaccrual loans		$	8,098			$	6,671			$	5,243			$	5,616			$	12,796
90 days past due and still accruing			—				—				2				—				—
Total nonperforming loans			8,098				6,671				5,245				5,616				12,796
Other real estate owned ("OREO")			8				8				8				35				58
Total nonperforming assets		$	8,106			$	6,679			$	5,253			$	5,651			$	12,854
Nonperforming loans to gross loans			0.67	%			0.55	%			0.50	%			0.54	%			1.24	%
Nonperforming assets to total assets			0.47	%			0.39	%			0.36	%			0.38	%			0.87	%

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

TABLE 17
LOANS BY RATE INDEX AND PROJECTED REPRICING - UNAUDITED
(dollars in thousands)
	At September 30, 2020
																	Years 6
																	Through			Beyond
Rate Index:		Year 1			Year 2			Year 3			Year 4			Year 5			Year 10			Year 10			Total
Fixed		$	151,140		$	112,246		$	80,366		$	31,253		$	28,809		$	163,536		$	22,862		$	590,212
Variable:
Prime			84,620			4,712			7,187			6,788			7,724			1,412			—			112,443
5 Year Treasury			46,749			60,366			87,327			66,646			105,976			48,013			—			415,077
7 Year Treasury			3,252			609			4,764			5,631			368			13,560			—			28,184
1 Year LIBOR			21,748			—			—			—			—			—			—			21,748
Other Indexes			5,627			1,668			2,030			1,443			7,314			10,278			906			29,266
Total variable			161,996			67,355			101,308			80,508			121,382			73,263			906			606,718
Nonaccrual			2,109			1,026			994			695			498			2,015			761			8,098
Total		$	315,245		$	180,627		$	182,668		$	112,456		$	150,689		$	238,814		$	24,529		$	1,205,028

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

TABLE 18
LOAN FLOORS - UNAUDITED
(dollars in thousands)
		At September 30, 2020
		Loans At			Loans Above
		Floor Rate			Floor Rate			Total
Variable rate loans with floors:
Prime		$	58,674		$	4,977		$	63,651
5 year Treasury			339,407			47,132			386,539
7 Year Treasury			28,184			—			28,184
1 Year LIBOR			—			726			726
Other Indexes			15,141			1,260			16,401
		$	441,406		$	54,095			495,501
Variable rate loans without floors:
Prime									48,792
5 year Treasury									28,538
1 Year LIBOR									21,022
Other Indexes									12,865
									111,217
Total accruing variable rate loans								$	606,718
Nonaccrual									8,098
Total variable rate loans								$	614,816

TABLE 19
UNAUDITED CONSOLIDATED
BALANCE SHEET
(dollars in thousands, except per share data)
	At September 30,									Change								At June 30,
		2020				2019				$				%				2020
Assets:
Cash and due from banks		$	22,884			$	32,505			$	(9,621	)		(30	)	%		$	29,630
Interest-bearing deposits in other banks			104,999				56,099				48,900			87		%			126,132
Total cash and cash equivalents			127,883				88,604				39,279			44		%			155,762
Securities available-for-sale, at fair value			337,032				272,341				64,691			24		%			280,200
Loans, net of deferred fees and costs			1,205,028				1,035,062				169,966			16		%			1,204,737
Allowance for loan and lease losses			(16,873	)			(12,285	)			(4,588	)		(37	)	%			(16,089	)
Net loans			1,188,155				1,022,777				165,378			16		%			1,188,648
Premises and equipment, net			15,210				16,084				(874	)		(5	)	%			15,466
Other real estate owned			8				58				(50	)		(86	)	%			8
Life insurance			24,086				23,576				510			2		%			23,968
Deferred tax asset, net			2,571				4,818				(2,247	)		(47	)	%			2,645
Goodwill			11,671				11,671				—			—		%			11,671
Other intangible assets, net			4,235				5,001				(766	)		(15	)	%			4,426
Other assets			29,037				27,497				1,540			6		%			29,102
Total assets		$	1,739,888			$	1,472,427			$	267,461			18		%		$	1,711,896
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	542,060			$	412,410			$	129,650			31		%		$	521,751
Demand - interest-bearing			280,370				239,547				40,823			17		%			287,198
Money market			403,785				317,120				86,665			27		%			405,322
Savings			151,016				137,441				13,575			10		%			142,389
Certificates of deposit			140,900				155,621				(14,721	)		(9	)	%			137,647
Total deposits			1,518,131				1,262,139				255,992			20		%			1,494,307
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			(7	)			(55	)			48			87		%			(19	)
Net term debt			19,993				9,945				10,048			101		%			19,981
Junior subordinated debentures			10,310				10,310				—			—		%			10,310
Other liabilities			18,104				18,396				(292	)		(2	)	%			17,743
Total liabilities			1,566,538				1,300,790				265,748			20		%			1,542,341
Shareholders' equity:
Common stock			58,872				72,200				(13,328	)		(18	)	%			58,749
Retained earnings			107,154				97,100				10,054			10		%			103,658
Accumulated other comprehensive income, net of tax			7,324				2,337				4,987			213		%			7,148
Total shareholders' equity			173,350				171,637				1,713			1		%			169,555
Total liabilities and shareholders' equity		$	1,739,888			$	1,472,427			$	267,461			18		%		$	1,711,896
Total interest-earning assets		$	1,636,661			$	1,360,184			$	276,477			20		%		$	1,600,922
Shares outstanding			16,792				18,212				(1,420	)		(8	)	%			16,739
Book value per share (1)		$	10.32			$	9.42			$	0.90			10		%		$	10.13
Tangible book value per share (1)		$	9.38			$	8.51			$	0.87			10		%		$	9.17
(1) Book value per share is computed by dividing total shareholders’ equity by shares outstanding. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

TABLE 20
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
		For The Three Months Ended																	For The Nine Months Ended
		September 30,						Change								June 30,			September 30,
		2020			2019			$				%				2020			2020				2019
Interest income:
Interest and fees on loans		$	13,448		$	13,013		$	435			3		%		$	13,224		$	39,010			$	37,891
Interest on taxable securities			1,284			1,609			(325	)		(20	)	%			1,329			4,195				5,106
Interest on tax-exempt securities			457			271			186			69		%			423			1,151				986
Interest on interest-bearing deposits in other banks			29			308			(279	)		(91	)	%			21			204				772
Total interest income			15,218			15,201			17			—		%			14,997			44,560				44,755
Interest expense:
Interest on demand deposits			71			117			(46	)		(39	)	%			85			256				372
Interest on money market			289			451			(162	)		(36	)	%			317			1,009				1,120
Interest on savings			74			131			(57	)		(44	)	%			95			287				365
Interest on certificates of deposit			420			491			(71	)		(14	)	%			467			1,351				1,478
Interest on Federal Home Loan Bank of San Francisco borrowings			—			—			—			—		%			5			5				247
Interest on other borrowings			184			183			1			1		%			184			552				623
Interest on junior subordinated debentures			50			106			(56	)		(53	)	%			61			201				329
Total interest expense			1,088			1,479			(391	)		(26	)	%			1,214			3,661				4,534
Net interest income			14,130			13,722			408			3		%			13,783			40,899				40,221
Provision for loan and lease losses			1,100			—			1,100			100		%			1,300			5,250				—
Net interest income after provision for loan and lease losses			13,030			13,722			(692	)		(5	)	%			12,483			35,649				40,221
Noninterest income:
Service charges on deposit accounts			142			177			(35	)		(20	)	%			152			463				532
ATM and point of sale fees			297			293			4			1		%			263			828				876
Payroll and benefit processing fees			152			158			(6	)		(4	)	%			143			465				486
Life insurance			125			126			(1	)		(1	)	%			148			396				410
Gain on investment securities, net			258			12			246			2,050		%			140			482				137
Federal Home Loan Bank of San Francisco dividends			109			131			(22	)		(17	)	%			36			275				376
(Loss) gain on sale of OREO			—			—			—			—		%			—			(23	)			41
Other income			106			109			(3	)		(3	)	%			73			150				305
Total noninterest income			1,189			1,006			183			18		%			955			3,036				3,163

TABLE 20 - CONTINUED
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
		For The Three Months Ended																		For The Nine Months Ended
		September 30,							Change								June 30,			September 30,
		2020			2019				$				%				2020			2020			2019
Noninterest expense:
Salaries and related benefits			5,126			5,005				121			2		%			4,965			15,978			15,880
Premises and equipment			951			933				18			2		%			826			2,631			2,836
Federal Deposit Insurance Corporation insurance premium			101			(104	)			205			197		%			90			227			91
Data processing			581			582				(1	)		—		%			585			1,697			1,796
Professional services			342			392				(50	)		(13	)	%			469			1,145			1,230
Telecommunications			157			194				(37	)		(19	)	%			156			484			547
Acquisition and merger			—			(113	)			113			100		%			—			—			2,193
Other expenses			1,132			1,411				(279	)		(20	)	%			1,179			4,281			4,261
Total noninterest expense			8,390			8,300				90			1		%			8,270			26,443			28,834
Income before provision for income taxes			5,829			6,428				(599	)		(9	)	%			5,168			12,242			14,550
Provision for income taxes			1,500			1,786				(286	)		(16	)	%			1,321			3,150			3,958
Net income		$	4,329		$	4,642			$	(313	)		(7	)	%		$	3,847		$	9,092		$	10,592
Earnings per share - basic		$	0.26		$	0.26			$	—			—		%		$	0.23		$	0.53		$	0.59
Weighted average shares - basic			16,660			18,130				(1,470	)		(8	)	%			16,660			17,004			17,918
Earnings per share - diluted		$	0.26		$	0.26			$	—			—		%		$	0.23		$	0.53		$	0.59
Weighted average shares - diluted			16,696			18,196				(1,500	)		(8	)	%			16,689			17,044			17,981

TABLE 21
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(dollars in thousands)
		For The Three Months Ended
		September 30,			June 30,			March 31,			December 31,			September 30,
		2020			2020			2020			2019			2019
Earning assets:
Loans		$	1,209,277		$	1,180,915		$	1,033,689		$	1,031,702		$	1,029,534
Taxable securities			228,045			211,195			237,405			245,487			238,601
Tax-exempt securities			68,766			58,540			34,869			32,158			32,974
Interest-bearing deposits in other banks			95,348			72,507			47,135			81,099			58,897
Total earning assets			1,601,436			1,523,157			1,353,098			1,390,446			1,360,006
Cash and due from banks			23,381			21,564			21,987			24,083			23,822
Premises and equipment, net			15,365			15,428			15,753			16,049			15,922
Goodwill			11,671			11,671			11,671			11,671			11,686
Other intangible assets, net			4,318			4,508			4,701			4,890			5,083
Other assets			47,945			50,499			46,809			45,504			45,925
Total assets		$	1,704,116		$	1,626,827		$	1,454,019		$	1,492,643		$	1,462,444
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	531,459		$	497,636		$	420,847		$	428,420		$	405,853
Demand - interest-bearing			279,744			261,907			233,375			244,276			243,553
Money market			387,995			365,368			307,587			318,127			309,188
Savings			146,074			138,500			135,504			138,155			138,296
Certificates of deposit			139,757			142,955			147,241			153,223			157,620
Total deposits			1,485,029			1,406,366			1,244,554			1,282,201			1,254,510
Federal Home Loan Bank of San Francisco borrowings			10,000			16,044			220			—			—
Other borrowings net of unamortized debt issuance costs			9,988			9,976			9,963			9,952			9,942
Junior subordinated debentures			10,310			10,310			10,310			10,310			10,310
Other liabilities			17,356			17,095			16,852			17,795			18,074
Total liabilities			1,532,683			1,459,791			1,281,899			1,320,258			1,292,836
Shareholders' equity			171,433			167,036			172,120			172,385			169,608
Liabilities & shareholders' equity		$	1,704,116		$	1,626,827		$	1,454,019		$	1,492,643		$	1,462,444

TABLE 22
UNAUDITED CONDENSED CONSOLIDATED
YEAR TO DATE AVERAGE BALANCE SHEETS
(dollars in thousands)
	For the Nine Months Ended							For the Twelve Months Ended
		September 30,			September 30,			December 31,			December 31,			December 31,
		2020			2019			2019			2018			2017
Earning assets:
Loans		$	1,141,542		$	1,017,127		$	1,020,801		$	915,360		$	818,119
Taxable securities			225,558			247,139			246,723			207,407			165,333
Tax-exempt securities			54,112			40,912			38,706			50,330			74,231
Interest-bearing deposits in other banks			71,749			44,995			54,095			47,038			66,872
Total earning assets			1,492,961			1,350,173			1,360,325			1,220,135			1,124,555
Cash and due from banks			22,314			22,375			22,806			20,468			18,301
Premises and equipment, net			15,514			15,445			15,598			13,952			15,567
Goodwill			11,671			10,450			10,758			665			665
Other intangible assets, net			4,508			4,780			4,807			1,252			1,471
Other assets			48,418			43,253			43,818			32,369			37,692
Total assets		$	1,595,386		$	1,446,476		$	1,458,112		$	1,288,841		$	1,198,251
Liabilities and shareholders' equity:
Demand - noninterest-bearing		$	483,490		$	391,208		$	400,588		$	332,197		$	289,735
Demand - interest-bearing			258,420			241,924			242,516			238,328			209,792
Money market			353,775			299,694			304,340			250,685			224,913
Savings			140,048			136,254			136,733			109,025			111,376
Certificates of deposit			143,305			163,020			160,550			168,183			205,648
Total deposits			1,379,038			1,232,100			1,244,727			1,098,418			1,041,464
Federal Home Loan Bank of San Francisco borrowings			8,759			12,894			9,644			22,466			302
Other borrowings net of unamortized debt issuance costs			9,976			11,213			10,895			15,143			17,981
Junior subordinated debentures			10,310			10,310			10,310			10,310			10,310
Other liabilities			17,102			17,927			17,894			12,286			12,293
Total liabilities			1,425,185			1,284,444			1,293,470			1,158,623			1,082,350
Shareholders' equity			170,201			162,032			164,642			130,218			115,901
Liabilities & shareholders' equity		$	1,595,386		$	1,446,476		$	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) 722-395

 

FAQ

What were Bank of Commerce Holdings' Q3 2020 earnings per share?

Earnings per share for Q3 2020 were $0.26, unchanged from Q3 2019.

What is the net income for Bank of Commerce Holdings for Q3 2020?

The net income for Q3 2020 was $4.3 million.

How did COVID-19 impact Bank of Commerce Holdings' loan deferrals?

COVID-19 loan deferrals totaled $38.6 million as of September 30, 2020.

What changes occurred in the nonperforming assets for Bank of Commerce Holdings?

Nonperforming assets decreased to $8.1 million, or 0.47% of total assets, a 37% drop since September 2019.

What was the return on average equity for Bank of Commerce Holdings as of Q3 2020?

Return on average equity decreased to 10.05% for Q3 2020 compared to 10.86% in Q3 2019.