Bank of Commerce Holdings Announces Results for the Third Quarter of 2020 Nasdaq:BOCH

Bank of Commerce Holdings Announces Results for the Third Quarter of 2020 Nasdaq:BOCH

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