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

Significant Items for the second quarter of 2020:

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

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

Financial highlights for the second quarter of 2020:

  • Net income of $3.8 million was an increase of $203 thousand (6%) from $3.6 million earned during the same period in the prior year. Earnings of $0.23 per share – diluted was an increase of $0.03 (15%) from $0.20 per share – diluted earned during the same period in the prior year and reflects the impact of the following:
    • 1.5 million shares of common stock repurchased between October of 2019 and April of 2020.
    • $1.3 million provision for loan and lease losses for the current quarter.
    • $840 thousand in non-recurring costs recorded during the same period a year ago associated with our January 31, 2019 acquisition of Merchants Holding Company in Sacramento (“Merchants”) and the name change of our subsidiary bank.
  • Net interest income increased $288 thousand (2%) to $13.8 million compared to $13.5 million for the same period in the prior year.
  • Net interest margin declined to 3.64% compared to 4.00% for the same period in the prior year.
  • Return on average assets decreased to 0.95% compared to 1.01% for the same period in the prior year.
  • Return on average equity increased to 9.26% compared to 8.93% for the same period in the prior year.
  • Average loans totaled $1.181 billion, an increase of $153 million (15%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.523 billion, an increase of $170 million (13%) compared to average earning assets for the same period in the prior year.
  • Average deposits totaled $1.406 billion, an increase of $189 million (15%) compared to average deposits for the same period in the prior year.
    • Average non-maturing deposits totaled $1.263 billion, an increase of $210 million (20%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $143.0 million, a decrease of $21.1 million (13%) compared to same period in the prior year.
  • The Company’s efficiency ratio was 56.1% compared to 65.9% during the same period in the prior year.
    • The Company’s efficiency ratio of 65.9% for the second quarter of 2019 included $840 thousand in non-recurring acquisition and the name change costs. The efficiency ratio excluding these non-recurring costs was 60.1%.
  • Nonperforming assets at June 30, 2020 totaled $6.7 million or 0.39% of total assets, a decrease of $6.8 million (51%) since June 30, 2019. The decrease in nonperforming assets results from one $10.9 million commercial real estate loan which was placed in nonaccrual status in the first quarter of 2019 and sold in the fourth quarter of 2019.
  • Book value per common share was $10.13 at June 30, 2020 compared to $9.22 at June 30, 2019.
  • Tangible book value per common share was $9.17 at June 30, 2020 compared to $8.29 at June 30, 2019.

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

  • Net income of $4.8 million was a decrease of $1.2 million (20%) from $6.0 million earned during the same period in the prior year. Earnings of $0.28 per share – diluted was a decrease of $0.05 (15%) per share – diluted earned during the same period in prior year and reflects the impact of the following:
    • 1.5 million shares of common stock repurchased between October of 2019 and April of 2020.
    • $4.2 million provision for loan and lease losses for the six months ended June 30, 2020.
    • $1.1 million in non-recurring costs for the first quarter of 2020 associated with the termination of a technology management services contract and a previously announced severance agreement.
    • $2.8 million in non-recurring costs recorded during six months ended June 30, 2019 associated with our January 31, 2019 acquisition of Merchants and the name change of our subsidiary bank.
  • Net interest income increased $270 thousand (1%) to $26.8 million compared to $26.5 million for the same period in the prior year.
  • Net interest margin declined to 3.74% compared to 3.97% for same period in the prior year.
  • Return on average assets decreased to 0.62% compared to 0.83% for the same period in the prior year.
  • Return on average equity decreased to 5.65% compared to 7.59% for the same period in the prior year.
  • Average loans totaled $1.107 billion, an increase of $96 million (10%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.438 billion, an increase of $93 million (7%) compared the same period in the prior year.
  • Average deposits totaled $1.325 billion, an increase of $105 million (9%) compared the same period in the prior year.
    • Average non-maturing deposits totaled $1.180 billion, an increase of $125 million (12%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $145.1 million, a decrease of $20.7 million (12%) compared to the same period in the prior year.
  • The Company’s efficiency ratio was 63.1% compared to 71.7% for the same period in the prior year.
    • The Company’s efficiency ratio of 63.1% for the first six months of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 59.2%.
    • The Company’s efficiency ratio of 71.7% for the first six months of 2019 includes $2.8 million in non-recurring costs. The efficiency ratio excluding these non-recurring costs was 62.0%.
  • Nonperforming assets at June 30, 2020 totaled $6.7 million or 0.39% of total assets, an increase of $1.0 million (37% annualized) since December 31, 2019.
  • Book value per common share was $10.13 at June 30, 2020 compared to $9.62 at December 31, 2019.
  • Tangible book value per common share was $9.17 at June 30, 2020 compared to $8.71 at December 31, 2019.

Impact of COVID-19:

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

Forward-Looking Statements

Bank of Commerce Holdings wishes to take advantage of the Safe Harbor provisions included in the Private Securities Litigation Reform Act of 1995. This news release includes statements by the Company, which describe management’s expectations and developments, which may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21B of the Securities Act of 1934, as amended. Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in the Company's public filings, factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) local, national and international economic conditions are less favorable than expected or have a more direct and pronounced effect on the Company than expected and adversely affect the Company's ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new banks and/or branches are lower than expected; (4) our concentration in lending tied to real estate exposes us to the adverse effects of material increases in interest rates, declines in the general economy, tightening credit markets or declines in real estate values; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which the Company is engaged; and (7) technological changes could expose us to new risks.

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

BALANCE SHEET OVERVIEW

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

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

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

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

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

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

     
TABLE 3
PPP LOANS BY INDUSTRY - UNAUDITED
(dollars in thousands)
     
  At June 30, 2020
  Balance
Construction $  64,242 
Healthcare and Social Assistance    17,530 
Professional, Scientific and Tech Services    12,155 
Accommodation and Food Services    10,328 
Admin, Support, Waste Management and Remediation Services    7,372 
Primary Metal Manufacturing    6,581 
Retail Trade    8,033 
Other    35,948 
Total $  162,189 
               
               
TABLE 4
PPP LOANS BY LOAN SIZE - UNAUDITED
(dollars in thousands)
               
  At June 30, 2020
  Balance   Number   Average Loan Size
$150,000 or less $  20,256     381    $  53 
$150,001 to $350,000    25,234     109       232 
$350,001 to $1,999,999    73,143     92       795 
$2,000,000 or greater    43,556     12       3,630 
Total $  162,189     594    $  273 
                                                 
                                                 
TABLE 5
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(dollars in thousands)
                                                 
    At June 30,               At March 31,
        % of       % of   Change       % of
    2020   Total   2019   Total   Amount   %   2020   Total
Cash and due from banks   $ 29,630   7 %   $ 21,306   7 %   $ 8,324     39   %   $ 21,127   6 %
Interest-bearing deposits in other banks     126,132   29       19,319   6       106,813     553   %     22,813   7  
Total cash and cash equivalents     155,762   36       40,625   13       115,137     283   %     43,940   13  
                                                 
Investment securities:                                                
U.S. government and agencies     33,195   8       44,837   14       (11,642 )   (26 ) %     36,043   11  
Obligations of state and political subdivisions     76,888   18       45,003   14       31,885     71   %     63,263   19  
Residential mortgage backed securities and collateralized mortgage obligations     137,120   30       168,085   50       (30,965 )   (18 ) %     160,439   50  
Corporate securities     1,000   0       2,978   1       (1,978 )   (66 ) %     2,983   1  
Commercial mortgage backed securities     16,329   4       24,868   8       (8,539 )   (34 ) %     17,428   5  
Other asset backed securities     15,668   4       48         15,620     32,542   %     4,921   1  
Total investment securities - AFS     280,200   64       285,819   87       (5,619 )   (2 ) %     285,077   87  
                                                 
Total cash, cash equivalents and investment securities   $ 435,962   100 %   $ 326,444   100 %   $ 109,518     34   %   $ 329,017   100 %
Average yield on interest-bearing due from banks during the quarter     0.12 %         2.47 %         (2.35 )           1.31 %    
Average yield on investment securities during the quarter - nominal     2.61 %         2.86 %         (0.25 )           2.74 %    
Average yield on investment securities during the quarter - tax equivalent     2.78 %         2.98 %         (0.20 )           2.84 %    

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

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

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

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

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

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

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

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

Stock Repurchase Program

We previously announced a program to repurchase 1.5 million common shares. Between October of 2019 and April of 2020 all 1.5 million shares were repurchased at a total cost of $13.6 million including commissions, or an average of $9.11 per share.

INCOME STATEMENT OVERVIEW

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

Second Quarter of 2020 Compared With The Second Quarter of 2019

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

Net Interest Income

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

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

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

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

  • Interest expense on interest-bearing deposits decreased $165 thousand. Average interest-bearing demand and savings deposit balances increased $91.3 million, while average certificate of deposit balances decreased $21.1 million. The average rate paid on interest-bearing deposits decreased 11 basis points.
  • Interest expense on FHLB borrowings decreased $187 thousand. Average FHLB borrowings were $16.0 million in the current quarter compared to $30.0 million for the same period a year ago. The average rate paid on FHLB borrowings decreased 244 basis points.
  • Interest expense on other term debt decreased $17 thousand. During the second quarter of 2019, we completed the early repayment of our variable rate senior debt.
  • Interest expense on junior subordinated debentures decreased $49 thousand. The average rate paid on junior subordinated debentures decreased 190 basis points.

Provision for Loan and Lease Losses

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

Noninterest Income

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

Noninterest Expense

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

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

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

Income Tax Provision

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

Second Quarter of 2020 Compared With The First Quarter of 2020

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

Net Interest Income

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

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

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

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

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

Provision for Loan and Lease Losses

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

Noninterest Income

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

Noninterest Expense

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

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

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

Income Tax Provision

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

Earnings Per Share

Diluted earnings per share were $0.23 for the three months ended June 30, 2020 compared with diluted earnings per share of $0.20 for the same period a year ago and diluted earnings per share of $0.05 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in Table 8 presented earlier in this press release.

                                                       
                                                       
TABLE 9a
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
                                                       
    For The Three Months Ended
    June 30, 2020   June 30, 2019   March 31, 2020
    Average         Yield /   Average         Yield /   Average         Yield /
    Balance   Interest(1)   Rate (5)   Balance   Interest(1)   Rate (5)   Balance   Interest(1)   Rate (5)
Interest-earning assets:                                                      
Loans net of PPP (2)   $  1,048,139    $  12,411     4.76  %   $  1,028,187    $  12,847     5.01  %   $  1,033,689    $  12,338     4.80  %
PPP loans      132,776       813     2.46  %      —      —    — %      —      —    — %
Taxable securities      211,195       1,329     2.53  %      249,907       1,733     2.78  %      237,405       1,582     2.68  %
Tax-exempt securities (3)      58,540       423     2.91  %      39,501       328     3.33  %      34,869       271     3.13  %
Interest-bearing deposits in other banks      72,507       21     0.12  %      35,605       219     2.47  %      47,135       154     1.31  %
Average interest- earning assets      1,523,157       14,997     3.96  %      1,353,200       15,127     4.48  %      1,353,098       14,345     4.26  %
Cash and due from banks      21,564                   21,942                   21,987             
Premises and equipment, net      15,428                   15,819                   15,753             
Goodwill      11,671                   11,720                   11,671             
Other intangible assets, net      4,508                   5,275                   4,701             
Other assets      50,499                   42,769                   46,809             
Average total assets   $  1,626,827                $  1,450,725                $  1,454,019             
                                                       
Interest-bearing liabilities:                                                      
Interest-bearing demand   $  261,907       85     0.13  %   $  238,840       129     0.22  %   $  233,375       100     0.17  %
Money market      365,368       317     0.35  %      296,326       380     0.51  %      307,587       403     0.53  %
Savings      138,500       95     0.28  %      139,307       123     0.35  %      135,504       118     0.35  %
Certificates of deposit      142,955       467     1.31  %      164,084       497     1.21  %      147,241       464     1.27  %
Federal Home Loan Bank of San Francisco borrowings      16,044       5     0.13  %      30,000       192     2.57  %      220       —    0.21  %
Other borrowings net of unamortized debt issuance costs      9,976       184     7.42  %      10,841       201     7.44  %      9,963       184     7.43  %
Junior subordinated debentures      10,310       61     2.38  %      10,310       110     4.28  %      10,310       90     3.51  %
Average interest- bearing liabilities      945,060       1,214     0.52  %      889,708       1,632     0.74  %      844,200       1,359     0.65  %
Noninterest-bearing demand      497,636                   379,173                   420,847             
Other liabilities      17,095                   18,246                   16,852             
Shareholders’ equity      167,036                   163,598                   172,120             
Average liabilities and shareholders’ equity   $  1,626,827                $  1,450,725                $  1,454,019             
Net interest income and net interest margin (4)         $  13,783     3.64  %         $  13,495     4.00  %         $  12,986     3.86  %
                                                       
(1) Interest income on loans includes deferred fees and costs of approximately $138 thousand, $91 thousand, and $257 thousand for the three months ended June 30, 2020 and 2019 and March 31, 2020, respectively. Interest income on PPP loans includes $476 thousand of fee income for the three months ended June 30, 2020.
(2) Loans net of PPP includes average nonaccrual loans of $5.6 million, $13.7 million and $5.5 million for the three months ended June 30, 2020 and 2019 and March 31, 2020, respectively.
(3) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
(4) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the three months ended June 30, 2020 and 2019 and March 31, 2020 included $216 thousand, $190 thousand and $163 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7, 7 and 6 basis points, respectively. Net interest income for the three months ended June 30, 2020 included $813 thousand in interest and fee income from PPP loans with an average balance of $132.8 million for the quarter which decreased the net interest margin by11 basis points.
(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
                                     
                                     
TABLE 9b
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
                                     
    For The Six Months Ended
    June 30, 2020   June 30, 2019
    Average         Yield /   Average         Yield /
    Balance   Interest(1)   Rate (5)   Balance   Interest(1)   Rate (5)
Interest-earning assets:                                    
Loans net of PPP (2)   $  1,040,914    $  24,749     4.78  %   $  1,010,821    $  24,878     4.96  %
PPP loans      66,388       813     2.46  %      —      —    — %
Taxable securities      224,300       2,911     2.61  %      251,479       3,497     2.80  %
Tax-exempt securities (3)      46,705       694     2.99  %      44,947       715     3.21  %
Interest-bearing deposits in other banks      59,820       175     0.59  %      37,930       464     2.47  %
Average interest- earning assets      1,438,127       29,342     4.10  %      1,345,177       29,554     4.43  %
Cash and due from banks      21,775                   21,640             
Premises and equipment, net      15,591                   15,203             
Goodwill      11,671                   9,822             
Other intangible assets, net      4,604                   4,625             
Other assets      48,655                   41,894             
Average total assets   $  1,540,423                $  1,438,361             
                                     
Interest-bearing liabilities:                                    
Interest-bearing demand   $  247,641       185     0.15  %   $  241,095       255     0.21  %
Money market      336,477       720     0.43  %      294,869       669     0.46  %
Savings      137,002       213     0.31  %      135,217       234     0.35  %
Certificates of deposit      145,098       931     1.29  %      165,764       987     1.20  %
Federal Home Loan Bank of San Francisco borrowings      8,132       5     0.12  %      19,448       247     2.56  %
Other borrowings net of unamortized debt issuance costs      9,970       368     7.42  %      11,859       440     7.48  %
Junior subordinated debentures      10,310       151     2.95  %      10,310       223     4.36  %
Average interest- bearing liabilities      894,630       2,573     0.58  %      878,562       3,055     0.70  %
Noninterest-bearing demand      459,241                   383,766             
Other liabilities      16,974                   17,851             
Shareholders’ equity      169,578                   158,182             
Average liabilities and shareholders’ equity   $  1,540,423                $  1,438,361             
Net interest income and net interest margin (4)         $  26,769     3.74  %         $  26,499     3.97  %
                                     
(1) Interest income on loans includes deferred fees and costs of approximately $395 thousand and $272 thousand for the six months ended June 30, 2020 and 2019, respectively. Interest income on PPP loans includes $476 thousand of fee income for the three months ended June 30, 2020.
(2) Loans net of PPP includes average nonaccrual loans of $5.5 million and $11.1 million for the six months ended June 30, 2020 and 2019, respectively.
(3) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
(4) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the six months ended June 30, 2020 and 2019 included $379 thousand and $238 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 and 4 basis points, respectively. Net interest income for the six months ended June 30, 2020 included $813 thousand in interest and fee income from PPP loans with an average balance of $66.4 million for the six months ended June 30, 2020 which decreased the net interest margin by 6 basis points.
(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
                                       
                                       
TABLE 10  
ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS - UNAUDITED  
(dollars in thousands)  
                                       
  For The Three Months Ended
  June 30,   March 31,   December 31,   September 30,   June 30,
  2020   2020   2019   2019   2019
Beginning balance ALLL $ 15,067       $ 12,231       $ 12,285       $ 12,445       $ 12,242    
Provision for loan and lease losses   1,300         2,850                            
Loans charged-off   (356 )       (169 )       (174 )       (319 )       (659 )  
Loan loss recoveries   78         155         120         159         862    
Ending balance ALLL $ 16,089       $ 15,067       $ 12,231       $ 12,285       $ 12,445    
                                       
  At June 30,   At March 31,   At December 31,   At September 30,   At June 30,
  2020   2020   2019   2019   2019
Nonaccrual loans:                                      
Commercial $ 7       $ 39       $ 61       $ 139       $ 194    
Real estate - commercial non-owner occupied   1,062                         10,099         10,690    
Real estate - commercial owner occupied   3,647         3,103         3,103                    
Real estate - residential - ITIN   1,738         1,878         2,221         2,339         2,389    
Real estate - residential - 1-4 family mortgage   180         184         191         198         217    
Consumer and other   37         39         40         21         22    
Total nonaccrual loans   6,671         5,243         5,616         12,796         13,512    
Accruing troubled debt restructured loans:                                      
Commercial   592         592         595         629         1,092    
Real estate - commercial non-owner occupied                                   791    
Real estate - residential - ITIN   3,642         3,891         3,957         4,072         4,300    
Real estate - residential - equity lines   221         226         231         236         242    
Total accruing troubled debt restructured loans   4,455         4,709         4,783         4,937         6,425    
                                       
All other accruing impaired loans                                      
                                       
Total impaired loans $ 11,126       $ 9,952       $ 10,399       $ 17,733       $ 19,937    
                                       
Gross loans outstanding at period end $ 1,206,340       $ 1,052,245       $ 1,032,903       $ 1,033,082       $ 1,036,724    
                                       
Impaired loans to gross loans   0.92   %     0.95   %     1.01   %     1.72   %     1.92   %
Nonaccrual loans to gross loans   0.55   %     0.50   %     0.54   %     1.24   %     1.30   %
                                       
Allowance for loan and lease losses as a percent of:                          
Gross loans   1.33   %     1.43   %     1.18   %     1.19   %     1.20   %
Nonaccrual loans   241.18   %     287.37   %     217.79   %     96.01   %     92.10   %
Impaired loans   144.61   %     151.40   %     117.62   %     69.28   %     62.42   %
                                       
                                       
TABLE 11  
ALLOWANCE, RESERVE AND DISCOUNT - UNAUDITED  
(dollars in thousands)  
                                       
  At June 30,   At March 31,   At December 31,   At September 30,   At June 30,
  2020   2020   2019   2019   2019
ALLL $  16,089      $  15,067      $  12,231      $  12,285      $  12,445   
Reserve for unfunded commitments    800         695         695         695         695   
Discount on acquired loans (1)    1,293         1,509         1,672         1,860         2,053   
Total allowance, reserve and discount $  18,182      $  17,271      $  14,598      $  14,840      $  15,193   
                                       
Gross loans $  1,206,340      $  1,052,245      $  1,032,903      $  1,033,082      $  1,036,724   
PPP loans    162,189         —        —        —        —  
Total gross loans net of PPP loans $  1,044,151      $  1,052,245      $  1,032,903      $  1,033,082      $  1,036,724   
                                       
Total allowance, reserve and discount as a percentage of total gross loans net of PPP loans   1.74 %     1.64 %     1.41 %     1.44 %     1.47 %
(1) Discount on acquired loans includes fair value discount for loans acquired from Merchants in January of 2019.

COVID‐19 Loan Analysis

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

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

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

Provision for Loan and Lease Losses

We monitor credit quality and the general economic environment to ensure that the ALLL is maintained at a level that is adequate to cover estimated credit losses in the loan and lease portfolio. Our review of ALLL adequacy utilizes both quantitative and qualitative factors. The quantitative analysis relies on historical loss rates which, unfortunately, are not indicative of potential losses related to a pandemic such as we are currently experiencing with COVID-19. In response to quantitative data deficiencies, we have placed greater reliance on qualitative factors (Q-Factors).

At June 30, 2020, our review of the adequacy of our allowance for loan and lease losses (ALLL) focused on our Q-Factor for “changes in the volume and severity of past due loans and other similar conditions”. We considered concentrations of credit in industries that are more likely to be significantly impacted by the effects of COVID-19. We evaluated our C&I portfolio by NAICS code and our CRE portfolio for concentrations of tenants and businesses in higher risk industries or for loans with higher LTVs. We also completed analyses on individual borrowers who may be higher risk. After completing this work, we significantly increased our Q-Factor for “changes in the volume and severity of past due loans and other similar conditions”. Our ALLL methodology, adjusted for the revised Q-Factor discussed above necessitated an ALLL of $16.1 million at June 30, 2020, an increase of 32% compared to our ALLL of $12.2 million at December 31, 2019. A provision for loan and lease losses of $1.3 million was recorded during the current quarter compared to $2.9 million in the prior quarter. There was no provision for loan and lease loss during the same quarter a year ago. Our ALLL as a percentage of gross loans was 1.33% as of June 30, 2020 compared to 1.20% as of June 30, 2019 and 1.43% as of March 31, 2020. Excluding PPP loans our ALLL as a percentage of gross loans was 1.54% as of June 30, 2020.

Management believes the Company’s ALLL is adequate at June 30, 2020. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in future charges to the provision for loan and lease losses.

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

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

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

Troubled Debt Restructuring Guidance

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

We have responded to the needs of our borrowers in accordance with the CARES Act and regulatory guidance to grant short term COVID-19 related loan modifications. Deferral periods are either 3 or 6 months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19. The following table presents approved loan modification requests at June 30, 2020, only one of which meet the definition of a troubled debt restructuring. For the loans that were modified, 26 borrowers also received a PPP loan through our SBA department. The table also includes 59 consumer loan modifications on loans totaling $525 thousand and 51 residential real estate loan modifications totaling $3.5 million which are serviced by third parties as part of our purchased loan portfolios.

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

The following table presents nonperforming assets at the dates indicated.

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

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

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

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

                   
                   
TABLE 17
LOAN FLOORS - UNAUDITED
(dollars in thousands)
                   
    At June 30, 2020
    Loans At   Loans Above      
    Floor Rate   Floor Rate   Total
Variable rate loans with floors:                  
Prime   $  58,041    $  5,532    $  63,573 
5 year Treasury      309,033       48,569       357,602 
7 Year Treasury      28,336       —      28,336 
1 Year LIBOR      —      734       734 
Other Indexes      15,137       1,274       16,411 
    $  410,547    $  56,109       466,656 
                   
Variable rate loans without floors:                  
Prime                  47,421 
5 year Treasury                  30,070 
1 Year LIBOR                  21,639 
Other Indexes                  12,455 
                   111,585 
Total variable rate loans               $  578,241 
                   
                               
                               
TABLE 18
UNAUDITED CONSOLIDATED
BALANCE SHEET
(dollars in thousands, except per share data)
                               
  At June 30,   Change   At March 31,
    2020     2019     $   %   2020  
Assets:                              
Cash and due from banks   $ 29,630     $ 21,306     $ 8,324     39   %   $ 21,127  
Interest-bearing deposits in other banks     126,132       19,319       106,813     553   %     22,813  
Total cash and cash equivalents     155,762       40,625       115,137     283   %     43,940  
Securities available-for-sale, at fair value     280,200       285,819       (5,619 )   (2 ) %     285,077  
Loans, net of deferred fees and costs     1,204,737       1,038,729       166,008     16   %     1,054,374  
Allowance for loan and lease losses     (16,089 )     (12,445 )     (3,644 )   (29 ) %     (15,067 )
Net loans     1,188,648       1,026,284       162,364     16   %     1,039,307  
Premises and equipment, net     15,466       15,836       (370 )   (2 ) %     15,452  
Other real estate owned     8             8       %     8  
Life insurance     23,968       23,449       519     2   %     23,824  
Deferred tax asset, net     2,645       4,791       (2,146 )   (45 ) %     3,149  
Goodwill     11,671       11,708       (37 )     %     11,671  
Other intangible assets, net     4,426       5,192       (766 )   (15 ) %     4,618  
Other assets     29,102       28,282       820     3   %     28,834  
Total assets   $ 1,711,896     $ 1,441,986     $ 269,910     19   %   $ 1,455,880  
Liabilities and shareholders' equity:                              
Demand - noninterest-bearing   $ 521,751     $ 397,349     $ 124,402     31   %   $ 419,315  
Demand - interest-bearing     287,198       238,175       49,023     21   %     231,276  
Money market     405,322       300,847       104,475     35   %     314,687  
Savings     142,389       138,591       3,798     3   %     133,552  
Certificates of deposit     137,647       160,556       (22,909 )   (14 ) %     143,557  
Total deposits     1,494,307       1,235,518       258,789     21   %     1,242,387  
Term debt:                              
Federal Home Loan Bank of San Francisco borrowings     10,000             10,000     100   %     10,000  
Other borrowings     10,000       10,000             %     10,000  
Unamortized debt issuance costs     (19 )     (67 )     48     72   %     (31 )
Net term debt     19,981       9,933       10,048     101   %     19,969  
Junior subordinated debentures     10,310       10,310             %     10,310  
Other liabilities     17,743       18,372       (629 )   (3 ) %     17,556  
Total liabilities     1,542,341       1,274,133       268,208     21   %     1,290,222  
Shareholders' equity:                              
Common stock     58,749       72,087       (13,338 )   (19 ) %     59,067  
Retained earnings     103,658       93,363       10,295     11   %     100,644  
Accumulated other comprehensive income, net of tax     7,148       2,403       4,745     197   %     5,947  
Total shareholders' equity     169,555       167,853       1,702     1   %     165,658  
Total liabilities and shareholders' equity   $ 1,711,896     $ 1,441,986     $ 269,910     19   %   $ 1,455,880  
Total interest-earning assets   $ 1,600,922     $ 1,340,456     $ 260,466     19   %   $ 1,353,822  
Shares outstanding     16,739       18,214       (1,475 )   (8 ) %     16,796  
Book value per share (1)   $ 10.13     $ 9.22     $ 0.91     10   %   $ 9.86  
Tangible book value per share (1)   $ 9.17     $ 8.29     $ 0.88     11   %   $ 8.89  
            9                    
(1)  Book value per share is computed by dividing total shareholders’ equity by shares outstanding. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.
                                           
                                           
TABLE 19
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
    For The Three Months Ended   For The Six Months Ended
    June 30,   Change   March 31,   June 30,
    2020   2019   $   %   2020     2020     2019
Interest income:                                          
Interest and fees on loans   $ 13,224   $ 12,847   $ 377     3   %   $ 12,338     $ 25,562     $ 24,878
Interest on taxable securities     1,329     1,733     (404 )   (23 ) %     1,582       2,911       3,497
Interest on tax-exempt securities     423     328     95     29   %     271       694       715
Interest on interest-bearing deposits in other banks     21     219     (198 )   (90 ) %     154       175       464
Total interest income     14,997     15,127     (130 )   (1 ) %     14,345       29,342       29,554
Interest expense:                                          
Interest on demand deposits     85     129     (44 )   (34 ) %     100       185       255
Interest on money market     317     380     (63 )   (17 ) %     403       720       669
Interest on savings     95     123     (28 )   (23 ) %     118       213       234
Interest on certificates of deposit     467     497     (30 )   (6 ) %     464       931       987
Interest on Federal Home Loan Bank of San Francisco borrowings     5     192     (187 )   (97 ) %           5       247
Interest on other borrowings     184     201     (17 )   (8 ) %     184       368       440
Interest on junior subordinated debentures     61     110     (49 )   (45 ) %     90       151       223
Total interest expense     1,214     1,632     (418 )   (26 ) %     1,359       2,573       3,055
Net interest income     13,783     13,495     288     2   %     12,986       26,769       26,499
Provision for loan and lease losses     1,300         1,300     100   %     2,850       4,150      
Net interest income after provision for loan and lease losses     12,483     13,495     (1,012 )   (7 ) %     10,136       22,619       26,499
Noninterest income:                                          
Service charges on deposit accounts     152     187     (35 )   (19 ) %     169       321       355
ATM and point of sale fees     263     318     (55 )   (17 ) %     268       531       583
Payroll and benefit processing fees     143     157     (14 )   (9 ) %     170       313       328
Life insurance     148     155     (7 )   (5 ) %     123       271       284
Gain on investment securities, net     140     33     107     324   %     84       224       125
Federal Home Loan Bank of San Francisco dividends     36     124     (88 )   (71 ) %     130       166       245
Gain (loss) on sale of OREO         18     (18 )   (100 ) %     (23 )     (23 )     41
Other income (loss)     73     108     (35 )   (32 ) %     (29 )     44       196
Total noninterest income     955     1,100     (145 )   (13 ) %     892       1,847       2,157
                                           
                                           
TABLE 19 - CONTINUED
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
                                           
    For The Three Months Ended   For The Six Months Ended
    June 30,   Change   March 31,   June 30,
    2020   2019   $   %   2020   2020   2019
Noninterest expense:                                          
Salaries and related benefits     4,965     5,146     (181 )   (4 ) %     5,887     10,852     10,875
Premises and equipment     826     928     (102 )   (11 ) %     854     1,680     1,903
Federal Deposit Insurance Corporation insurance premium     90     95     (5 )   (5 ) %     36     126     195
Data processing     585     638     (53 )   (8 ) %     531     1,116     1,214
Professional services     469     535     (66 )   (12 ) %     334     803     838
Telecommunications     156     180     (24 )   (13 ) %     171     327     353
Acquisition and merger         376     (376 )   (100 ) %             2,306
Other expenses     1,179     1,713     (534 )   (31 ) %     1,970     3,149     2,850
Total noninterest expense     8,270     9,611     (1,341 )   (14 ) %     9,783     18,053     20,534
Income before provision for income taxes     5,168     4,984     184     4   %     1,245     6,413     8,122
Provision for income taxes     1,321     1,340     (19 )   (1 ) %     329     1,650     2,172
Net income   $ 3,847   $ 3,644   $ 203     6   %   $ 916   $ 4,763   $ 5,950
                                           
Earnings per share - basic   $ 0.23   $ 0.20   $ 0.03     15   %   $ 0.05   $ 0.28   $ 0.33
Weighted average shares - basic     16,660     18,134     (1,474 )   (8 ) %     17,695     17,178     17,816
Earnings per share - diluted   $ 0.23   $ 0.20   $ 0.03     15   %   $ 0.05   $ 0.28   $ 0.33
Weighted average shares - diluted     16,689     18,194     (1,505 )   (8 ) %     17,747     17,217     17,878
                               
                               
TABLE 20
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(dollars in thousands)
                               
    For The Three Months Ended
    June 30,   March 31,   December 31,   September 30,   June 30,
    2020   2020   2019   2019   2019
Earning assets:                              
Loans   $  1,180,915    $  1,033,689    $  1,031,702    $  1,029,534    $  1,028,187 
Taxable securities      211,195       237,405       245,487       238,601       249,907 
Tax-exempt securities      58,540       34,869       32,158       32,974       39,501 
Interest-bearing deposits in other banks      72,507       47,135       81,099       58,897       35,605 
Total earning assets      1,523,157       1,353,098       1,390,446       1,360,006       1,353,200 
                               
Cash and due from banks      21,564       21,987       24,083       23,822       21,942 
Premises and equipment, net      15,428       15,753       16,049       15,922       15,819 
Goodwill      11,671       11,671       11,671       11,686       11,720 
Other intangible assets, net      4,508       4,701       4,890       5,083       5,275 
Other assets      50,499       46,809       45,504       45,925       42,769 
Total assets   $  1,626,827    $  1,454,019    $  1,492,643    $  1,462,444    $  1,450,725 
                               
Liabilities and shareholders' equity:                              
Demand - noninterest-bearing   $  497,636    $  420,847    $  428,420    $  405,853    $  379,173 
Demand - interest-bearing      261,907       233,375       244,276       243,553       238,840 
Money market      365,368       307,587       318,127       309,188       296,326 
Savings      138,500       135,504       138,155       138,296       139,307 
Certificates of deposit      142,955       147,241       153,223       157,620       164,084 
Total deposits      1,406,366       1,244,554       1,282,201       1,254,510       1,217,730 
                               
Federal Home Loan Bank of San Francisco borrowings      16,044       220       —      —      30,000 
Other borrowings net of unamortized debt issuance costs      9,976       9,963       9,952       9,942       10,841 
Junior subordinated debentures      10,310       10,310       10,310       10,310       10,310 
Other liabilities      17,095       16,852       17,795       18,074       18,246 
Total liabilities      1,459,791       1,281,899       1,320,258       1,292,836       1,287,127 
                               
Shareholders' equity      167,036       172,120       172,385       169,608       163,598 
Liabilities & shareholders' equity   $  1,626,827    $  1,454,019    $  1,492,643    $  1,462,444    $  1,450,725 
                               
                               
TABLE 21
UNAUDITED CONDENSED CONSOLIDATED
YEAR TO DATE AVERAGE BALANCE SHEETS
(dollars in thousands)
                               
  For the Six Months Ended   For the Twelve Months Ended
    June 30,   June 30,   December 31,   December 31,   December 31,
    2020   2019   2019   2018   2017
Earning assets:                            
Loans   $  1,107,302    $  1,010,821    $  1,020,801    $  915,360     $  818,119 
Taxable securities      224,300       251,479       246,723       207,407       165,333 
Tax-exempt securities      46,705       44,947       38,706       50,330       74,231 
Interest-bearing deposits in other banks      59,820       37,930       54,095       47,038       66,872 
Total earning assets      1,438,127       1,345,177       1,360,325       1,220,135       1,124,555 
                               
Cash and due from banks      21,775       21,640       22,806       20,468       18,301 
Premises and equipment, net      15,591       15,203       15,598       13,952       15,567 
Goodwill      11,671       9,822       10,758       665       665 
Other intangible assets, net      4,604       4,625       4,807       1,252       1,471 
Other assets      48,655       41,894       43,818       32,369       37,692 
Total assets   $  1,540,423    $  1,438,361    $  1,458,112    $  1,288,841    $  1,198,251 
                               
Liabilities and shareholders' equity:                              
Demand - noninterest-bearing   $  459,241    $  383,766    $  400,588    $  332,197     $  289,735 
Demand - interest-bearing      247,641       241,095       242,516       238,328       209,792 
Money market      336,477       294,869       304,340       250,685       224,913 
Savings      137,002       135,217       136,733       109,025       111,376 
Certificates of deposit      145,098       165,764       160,550       168,183       205,648 
Total deposits      1,325,459       1,220,711       1,244,727       1,098,418       1,041,464 
                               
Federal Home Loan Bank of San Francisco borrowings      8,132       19,448       9,644       22,466       302 
Other borrowings net of unamortized debt issuance costs      9,970       11,859       10,895       15,143       17,981 
Junior subordinated debentures      10,310       10,310       10,310       10,310       10,310 
Other liabilities      16,974       17,851       17,894       12,286       12,293 
Total liabilities      1,370,845       1,280,179       1,293,470       1,158,623       1,082,350 
                               
Shareholders' equity      169,578       158,182       164,642       130,218       115,901 
Liabilities & shareholders' equity   $  1,540,423    $  1,438,361    $  1,458,112    $  1,288,841    $  1,198,251 

About Bank of Commerce Holdings

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

Contact Information:

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

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

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