Press Release BANK OF COMMERCE HOLDINGS (NASDAQ - BOCH)

Bank of Commerce Holdings Announces Results for the Third Quarter of 2019

Company Release - 10/18/2019 9:00 AM ET

SACRAMENTO, Calif., Oct. 18, 2019 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.472 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter ended September 30, 2019. Net income for the quarter ended September 30, 2019 was $4.6 million or $0.26 per share – diluted, compared with net income of $4.0 million or $0.25 per share – diluted for the same period of 2018. Net income for the nine months ended September 30, 2019 was $10.6 million or $0.59 per share – diluted, compared with net income of $10.9 million or $0.67 per share – diluted for the same period of 2018.

The current year includes the benefits of our January 31, 2019 acquisition of Merchants National Bank of Sacramento (“Merchants”). In May, we successfully converted all of Merchant’s computer records onto our core system. As previously announced, the Company’s subsidiary bank, which had been operating under multiple names, simultaneously changed the name for all locations to Merchants Bank of Commerce. To date, acquisition related costs have totaled $2.2 million and costs related to the name change have totaled $501 thousand. All significant costs for these two projects have now been absorbed.

Randall S. Eslick, President and CEO commented: “The Company performed solidly during the third quarter which reflects the benefits derived from our acquisition of Merchants National Bank earlier in the year. With the successful integration of Merchants now complete, we are again wholly focused on leveraging our talented business relationship teams to meet customer needs and achieve our organic growth goals.”

Financial highlights for the third quarter of 2019:

  • Net income of $4.6 million was an increase of $610 thousand (15%) from $4.0 million earned during the same period in the prior year. Earnings of $0.26 per share – diluted was an increase of $0.01 (4%) from $0.25 per share – diluted earned during the same period in the prior year and reflects the impact of 1,834,142 shares of common stock issued during the first quarter of 2019 as part of our acquisition of Merchants.
  • Net interest income increased $1.6 million (13%) to $13.7 million compared to $12.1 million for the same period in the prior year.
  • Net interest margin improved to 4.00% compared to 3.91% for the same period in the prior year
  • Return on average assets increased to 1.26% compared to 1.23% for the same period in the prior year.
  • Return on average equity decreased to 10.86% compared to 12.16% for the same period in the prior year.
  • Average loans totaled $1.030 billion, an increase of $99 million (11%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.360 billion, an increase of $130 million (11%) compared to average earning assets for the same period in the prior year.
  • Average deposits totaled $1.255 billion, an increase of $145 million (13%) compared to average deposits for the same period in the prior year.
    º  Average non-maturing deposits totaled $1.097 billion, an increase of $151 million (16%) compared to the same period in the prior year.
    º  Average certificates of deposit totaled $157.6 million, a decrease of $5.7 million (3%) compared to same period in the prior year.
  • The Company’s efficiency ratio was 56.4% compared to 58.4% during the same period in the prior year.
  • Nonperforming assets at September 30, 2019 totaled $12.8 million or 0.87% of total assets, an increase of $9.0 million since September 30, 2018. The increase in nonperforming assets results from one $10.1 million commercial real estate loan.
  • Book value per common share was $9.42 at September 30, 2019 compared to $8.14 at September 30, 2018.
  • Tangible book value per common share was $8.51 at September 30, 2019 compared to $8.03 at September 30, 2018.

Financial highlights for the nine months ended September 30, 2019:

  • Net income of $10.6 million ($0.59 per share – diluted) was a decrease of $299 thousand (3%) from $10.9 million ($0.67 per share – diluted) earned during the same period in the prior year and reflects the impact of 1,834,142 shares of common stock issued during the first quarter of 2019 as part of our acquisition of Merchants.
  • Acquisition costs associated with our acquisition of Merchants totaled $2.2 million. Costs related to the name change of our subsidiary bank totaled $501 thousand.
  • Net interest income increased $5.2 million (15%) to $40.2 million compared to $35.1 million for the same period in the prior year.
  • Net interest margin improved to 3.98% compared to 3.88% for the same period in the prior year.
  • Return on average assets decreased to 0.98% compared to 1.14% for the same period in the prior year.
  • Return on average equity decreased to 8.74% compared to 11.29% for the same period in the prior year.
  • Average loans totaled $1.017 billion, an increase of $104 million (11%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.350 billion, an increase of $143 million (12%) compared the same period in the prior year.
  • Average deposits totaled $1.232 billion, an increase of $154 million (14%) compared the same period in the prior year.
    º  Average non-maturing deposits totaled $1.069 billion, an increase of $163 million (18%) compared to the same period in the prior year.
    º  Average certificates of deposit totaled $163.0 million, a decrease of $8.9 million (5%) compared to the same period in the prior year.
  • The Company’s efficiency ratio was 66.5% compared to 61.5% for the same period in the prior year.
    º  The Company’s efficiency ratio of 66.5% for the first nine months of 2019 includes $2.2 million in acquisition costs and $501 thousand in name change costs. The efficiency ratio excluding these non-recurring costs was 60.3%.
  • Nonperforming assets at September 30, 2019 totaled $12.8 million or 0.87% of total assets, an increase of $8.7 million since December 31, 2018. The increase in nonperforming assets results from one $10.1 million commercial real estate loan.
  • Book value per common share was $9.42 at September 30, 2019 compared to $8.47 at December 31, 2018.
  • Tangible book value per common share was $8.51 at September 30, 2019 compared to $8.36 at December 31, 2018.

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 
(amounts 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 2019
 2018
 2019 2019 2018 
Net income $4,642  $4,032  $3,644  $10,592 $10,891 
Average total assets $1,462,444  $1,300,278  $1,450,725  $1,446,476 $1,275,369 
Average total earning assets $1,360,006  $1,229,704  $1,353,200  $1,350,173 $1,206,798 
Average shareholders' equity $169,608  $131,499  $163,598  $162,032 $128,933 
                    
Selected performance ratios                   
Return on average assets  1.26%  1.23%  1.01%  0.98% 1.14%
Return on average equity  10.86%  12.16%  8.93%  8.74% 11.29%
Efficiency ratio  56.4%  58.4%  65.9%  66.5% 61.5%
                    
Share and per share amounts                   
Weighted average shares - basic (1)  18,130   16,252   18,134   17,918  16,242 
Weighted average shares - diluted (1)  18,196   16,342   18,194   17,981  16,327 
Earnings per share - basic $0.26  $0.25  $0.20  $0.59 $0.67 
Earnings per share - diluted $0.26  $0.25  $0.20  $0.59 $0.67 
                    
  At September 30,   At June 30,   
Share and per share amounts 2019
 2018
 2019     
Common shares outstanding (2)  18,212   16,330   18,214        
Book value per common share (2) $9.42  $8.14  $9.22        
Tangible book value per common share (2)(3) $8.51  $8.03  $8.29        
                    
Capital ratios (4)                  
Bank of Commerce Holdings                  
Common equity tier 1 capital ratio  12.85%  12.65%  12.56%       
Tier 1 capital ratio  13.69%  13.59%  13.41%       
Total capital ratio  15.62%  15.75%  15.35%       
Tier 1 leverage ratio  11.28%  11.14%  11.08%       
Tangible common equity ratio (5)  10.64%  9.98%  10.59%       
                    
Merchants Bank of Commerce                   
Common equity tier 1 capital ratio  14.25%  13.14%  14.06%       
Tier 1 capital ratio  14.25%  13.14%  14.06%       
Total capital ratio  15.34%  14.36%  15.16%       
Tier 1 leverage ratio  11.74%  10.78%  11.61%       
                    
(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, 2019, the Company had total consolidated assets of $1.472 billion, gross loans of $1.033 billion, allowance for loan and lease losses (“ALLL”) of $12 million, total deposits of $1.262 billion, and shareholders’ equity of $172 million.

                        
TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(amounts in thousands)
                        
 At September 30,       At June 30,
   % of    % of  Change   % of
 2019
 Total 2018
 Total Amount % 2019
 Total
Commercial$152,195  15% $132,091  14% $20,104  15 % $152,303  15%
Real estate - construction and land development 35,606  3   20,496  2   15,110  74 %  37,685  4 
Real estate - commercial non-owner occupied 475,678  47   431,246  47   44,432  10 %  468,706  45 
Real estate - commercial owner occupied 210,767  20   195,608  21   15,159  8 %  210,711  21 
Real estate - residential - ITIN 34,036  3   38,353  4   (4,317) (11)%  35,162  3 
Real estate - residential - 1-4 family mortgage 64,747  6   33,473  4   31,274  93 %  67,092  6 
Real estate - residential - equity lines 22,729  2   28,713  3   (5,984) (21)%  23,656  2 
Consumer and other 37,324  4   47,500  5   (10,176) (21)%  41,409  4 
Gross loans 1,033,082  100%  927,480  100%  105,602  11 %  1,036,724  100%
Deferred fees and costs 1,980      1,757      223      2,005    
Loans, net of deferred fees and costs 1,035,062      929,237      105,825      1,038,729    
Allowance for loan and lease losses (12,285)     (12,392)     107      (12,445)   
Net loans$1,022,777     $916,845     $105,932     $1,026,284    
                        
Average loans during the quarter$1,029,534     $930,863     $98,671  11 % $1,028,187    
Average yield on loans during the quarter 5.01 %    4.93 %    0.08      5.01 %  
Average yield on loans during the year 4.98 %    4.90 %    0.08      4.96 %  
                            

The Company recorded gross loan balances of $1.033 billion at September 30, 2019, compared with $927 million and $1.037 billion at September 30, 2018 and June 30, 2019, respectively, an increase of $106 million and a decrease of $4 million, respectively. During the first quarter of 2019,     the Merchants acquisition provided an additional $85.3 million of loans.

The average yield on loans during the quarter was 5.01% compared to 4.93% and 5.01% for the quarters ended September 30, 2018 and June 30, 2019, respectively.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants during the first quarter of 2019 of $1.9 million and $2.1 million at September 30, 2019 and June 30, 2019, respectively. We recorded $190 thousand and $193 thousand in accretion of the discount for these loans during the second and third quarters of 2019, respectively.

                         
TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(amounts in thousands)
                         
  At September 30,        At June 30,
    % of    % of  Change   % of
  2019 Total 2018 Total Amount % 2019 Total
Cash and due from banks $32,505 9% $21,316 6% $11,189  52 % $21,306 7%
Interest-bearing deposits in other banks  56,099 16   69,920 21   (13,821) (20)%  19,319 6 
Total cash and cash equivalents  88,604 25   91,236 27   (2,632) (3)%  40,625 13 
                         
Investment securities:                        
U.S. government and agencies  40,467 11   35,656 11   4,811  13 %  44,837 14 
Obligations of state and political subdivisions  39,004 11   51,562 16   (12,558) (24)%  45,003 14 
Residential mortgage backed securities and
collateralized mortgage obligations
  165,994 46   124,109 38   41,885  34 %  168,085 50 
Corporate securities  2,992 1   3,974 1   (982) (25)%  2,978 1 
Commercial mortgage backed securities  22,822 6   24,167 7   (1,345) (6)%  24,868 8 
Other asset backed securities  1,062    165    897  544 %  48  
Total investment securities - AFS  272,341 75   239,633 73   32,708  14 %  285,819 87 
                         
Total cash, cash equivalents and
investment securities
 $360,945 100% $330,869 100% $30,076  9 % $326,444 100%
Average yield on interest-bearing due
from banks and investment securities
during the quarter - nominal
  2.63%    2.47%    0.16      2.81%  
Average yield on interest-bearing due
from banks and investment securities
during the quarter - tax equivalent
  2.71%    2.61%    0.10      2.92%  
                          

As of September 30, 2019, we maintained noninterest-bearing cash positions of $32.5 million and interest-bearing deposits of $56.1 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $272.3 million at September 30, 2019, compared with $239.6 million and $285.8 million at September 30, 2018 and June 30, 2019, respectively. During the first quarter of 2019, the Merchants acquisition included securities with a par value of $107.4 million. Management elected to sell securities with a par value of $13.8 million and $100.1 million during the three and nine months ended September 30, 2019, respectively. The sales resulted in net realized gains of $12 thousand and $137 thousand for the three and nine months ended September 30, 2019, respectively.

Average securities balances and weighted average tax equivalent yields for the quarters ended September 30, 2019 and 2018 were $271.6 million and 2.85% compared to $248.4 million and 2.74%, respectively.

At September 30, 2019, our net unrealized gains on available-for-sale investment securities were $3.3 million compared with net unrealized losses of $5.8 million and unrealized gains of $3.4 million at September 30, 2018 and June 30, 2019, respectively. The changes in net unrealized losses on the investment securities portfolio were due to changes in market interest rates.

                        
TABLE 4
DEPOSITS BY TYPE - UNAUDITED
(amounts in thousands)
                        
 At September 30,        At June 30,
   % of    % of   Change   % of
 2019 Total 2018 Total Amount % 2019 Total
Demand - noninterest-bearing$412,410 33% $361,516 32% $50,894  14 % $397,349 32%
Demand - interest-bearing 239,547 19   251,323 22   (11,776) (5)%  238,175 19 
Money market 317,120 25   259,230 23   57,890  22 %  300,847 24 
Total demand 969,077 77   872,069 77   97,008  11 %  936,371 75 
                        
Savings 137,441 11   111,388 10   26,053  23 %  138,591 11 
Total non-maturing deposits 1,106,518 88   983,457 87   123,061  13 %  1,074,962 86 
                        
Certificates of deposit 155,621 12   161,304 13   (5,683) (4)%  160,556 14 
Total deposits$1,262,139 100% $1,144,761 100% $117,378  10 % $1,235,518 100%
                        

Total deposits at September 30, 2019, increased $117 million or 10% to $1.262 billion compared to September 30, 2018 and increased $27 million or 9% annualized compared to June 30, 2019. Total non-maturing deposits increased $123.1 million or 13% compared to the same date a year ago and increased $31.6 million or 12% annualized compared to June 30, 2019. Certificates of deposit decreased $5.7 million or 4% compared to the same date a year ago and decreased $4.9 million or 12% annualized compared to June 30, 2019.

During the first quarter of 2019, the Merchants acquisition provided an additional $190.2 million of deposits. The decrease in the acquired deposits of $23.2 million at September 30, 2019 is not attributable to the loss of any significant relationships. As illustrated in the following table, legacy deposits have experienced their seasonal decline, while wholesale time deposits have matured and were not renewed.

               
TABLE 5
YEAR TO DATE CHANGES IN DEPOSITS
(amounts in thousands)
 Legacy Deposits Acquired
Merchants Deposits
 Change In Acquired
Deposits For The Eight
Months Ended
 Change In Legacy
Deposits For The Nine
Months Ended
 Deposits At
 At December 31, At January 31, September 30,  September 30,  At September 30,
 2018 2019 2019
 2019 2019
Demand - noninterest-bearing$347,199 $51,880 $(5,233) $18,564  $412,410
Demand - interest-bearing 252,202  28,231  (5,031)  (35,855)  239,547
Money market 265,093  43,316  (2,314)  11,025   317,120
Total demand 864,494  123,427  (12,578)  (6,266)  969,077
               
Savings 114,840  28,786  (3,530)  (2,655)  137,441
Total non-maturing deposits 979,334  152,213  (16,108)  (8,921)  1,106,518
               
Certificates of deposit 152,382  38,003  (7,047)  (27,717)  155,621
Total deposits$1,131,716 $190,216 $(23,155) $(36,638) $1,262,139
                 


         
TABLE 6
WHOLESALE AND RECIPROCAL DEPOSITS - UNAUDITED
(amounts in thousands)
         
 At September 30,  At June 30,
 2019 2018 2019
CDARS / ICS reciprocal deposits$57,897 $78,772 $60,492
Online listing service wholesale time deposits 248  24,397  248
Total wholesale and reciprocal deposits$58,145 $103,169 $60,740
         

For calendar quarters prior to April 1, 2018, CDARS/ ICS reciprocal deposits were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, this is no longer so.

AVERAGE COST OF FUNDS

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
                        
 September 30,  June 30, March 31, December 31, September 30,  June 30, March 31, December 31,
 2019 2019 2019 2018 2018 2018 2018 2017
Interest-bearing deposits0.56% 0.54% 0.49% 0.45% 0.42% 0.41% 0.41% 0.42%
Interest-bearing deposits and noninterest-bearing demand0.38% 0.37% 0.34% 0.31% 0.29% 0.29% 0.29% 0.30%
All interest-bearing liabilities0.68% 0.74% 0.67% 0.61% 0.64% 0.68% 0.60% 0.59%
All interest-bearing liabilities and noninterest-bearing demand0.46% 0.52% 0.46% 0.42% 0.45% 0.50% 0.43% 0.42%
                        

INCOME STATEMENT OVERVIEW

                     
TABLE 8
SUMMARY INCOME STATEMENT - UNAUDITED
(amounts in thousands, except per share data)
                     
 
For The Three Months Ended
           
 September 30,  Change June 30, Change
 2019 2018 Amount % 2019 Amount %
Interest income$15,201 $13,431 $1,770 13% $15,127 $74  0 %
Interest expense 1,479  1,304  175 13%  1,632  (153) (9)%
Net interest income 13,722  12,127  1,595 13%  13,495  227  2 %
Provision for loan
and lease losses
      %       %
Noninterest income 1,006  943  63 7%  1,100  (94) (9)%
Noninterest expense 8,300  7,634  666 9%  9,611  (1,311) (14)%
Income before provision
for income taxes
 6,428  5,436  992 18%  4,984  1,444  29 %
Provision for income taxes 1,786  1,404  382 27%  1,340  446  33 %
Net income$4,642 $4,032 $610 15% $3,644 $998  27 %
                     
Basic earnings per share$0.26 $0.25 $0.01 4% $0.20 $0.06  30 %
Average basic shares 18,130  16,252  1,878 12%  18,134  (4)  %
Diluted earnings per share$0.26 $0.25 $0.01 4% $0.20 $0.06  30 %
Average diluted shares 18,196  16,342  1,854 11%  18,194  2   %
Dividends declared per
common share
$0.05 $0.04 $0.01 25% $0.05 $   %
                       

Third Quarter of 2019 Compared With Third Quarter of 2018

Net income for the third quarter of 2019 increased $610 thousand compared to the third quarter of 2018. In the current quarter, net interest income was $1.6 million higher and noninterest income was $63 thousand higher. These positive changes were offset by noninterest expenses that were $666 thousand higher and the provision for income taxes was $382 thousand higher.

Net Interest Income

Net interest income increased $1.6 million compared to the same period a year ago.

Interest income for the third quarter of 2019 increased $1.8 million or 13% to $15.2 million.

  • Interest and fees on loans increased $1.4 million due to an $11.6 million increase in average loan balances and an 8 basis point increase in the average yield on the loan portfolio.
  • Interest on investment securities increased $271 thousand due to a $23.1 million increase in average securities balances and an 18 basis point increase in average yield on the securities portfolio.
  • Interest on interest-bearing deposits due from banks increased $54 thousand due to an $8.5 million increase in average interest-bearing deposit balances, and an 8 basis point increase in average yield.

Interest expense for the third quarter of 2019 increased $175 thousand or 13% to $1.5 million.

  • Interest expense on interest-bearing deposits increased $350 thousand. Average interest-bearing demand and savings deposit balances increased $88.8 million, while average certificate of deposit balances decreased $5.7 million. The average rate paid on interest-bearing deposits increased 14 basis points.
  • Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased $121 thousand. There were no Federal Home Loan Bank of San Francisco borrowings in the current quarter compared to average borrowings of $22.3 million in the same quarter a year ago.
  • Interest expense on other term debt and junior subordinated debentures decreased $80 thousand. During the second quarter of 2019, we completed the early repayment of our variable rate senior debt.

Provision for loan and lease losses

As illustrated in Table 10, the nonaccrual status of a $10.1 million commercial real estate loan has resulted in a deterioration in our asset quality metrics. The loan is current and management believes it is adequately collateralized. Net loan loss charge-offs were only $160 thousand for the current quarter and no provision for loan and lease losses was necessary. There was no provision for loan and lease losses in the third quarter of 2018.

Noninterest Income

Noninterest income for the three months ended September 30, 2019 increased $63 thousand compared to the third quarter for 2018. The change was not concentrated in any one item.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2019 increased $666 thousand compared to the same period a year previous. The increase was primarily due to increased operating costs from our Merchants acquisition and $191 thousand in amortization of the core deposit intangible for the deposits acquired from Merchants. The increases were partially offset by $193 thousand in Small Bank Assessment Credits from the FDIC.

The Company’s efficiency ratio was 56.4% for the third quarter of 2019; the ratio during the same period in 2018 was 58.4%.

Income Tax Provision

For the three months ended September 30, 2019, our income tax provision of $1.8 million on pre-tax income of $6.4 million was an effective tax rate of 27.8%. The tax provision for the third quarter of the prior year was $1.4 million on pre-tax income of $5.4 million for an effective tax rate of 25.8%. The Company’s effective tax rate has increased as muni income, tax credits and permanent deductions arising from investments in low income housing partnerships comprise a smaller percentage of pre-tax income. The increase during the current quarter was also due to the write-off of a $41 thousand deferred tax asset resulting from expiration of a capital loss carryforward.

Third Quarter of 2019 Compared With Second Quarter of 2019

Net income for the third quarter of 2019 increased $998 thousand compared to the second quarter of 2019. In the current quarter net interest income was $227 thousand higher and noninterest expense was $1.3 million lower. These positive changes were partially offset by noninterest income that was $94 thousand lower and the provision for income taxes that was $446 thousand higher.

Net Interest Income

Net interest income increased $227 thousand over the prior quarter.

Interest income for the three months ended September 30, 2019 increased $74 thousand or less than one percent to $15.2 million.

  • Interest and fees on loans increased $166 thousand due to a $1.3 million increase in average loan balances and a ten basis point increase in the average yield on the loan portfolio.
  • Interest on investment securities decreased $181 thousand due to a $17.8 million decrease in average securities balances partially offset by an 11 basis point increase in average yield on the investment portfolio.
  • Interest on interest-bearing deposits due from banks increased $89 thousand due to a $23.3 million increase in average balances.
  • The third quarter of 2019 was one day longer than the second quarter of 2019.

Interest expense for the three months ended September 30, 2019 decreased $153 thousand or 9% to $1.5 million.

  • Interest expense on interest-bearing deposits increased $61 thousand. Average interest-bearing demand and savings deposit balances increased $16.6 million, while average certificates of deposit decreased $6.5 million. The average rate paid on interest-bearing deposits increased by two basis points.
  • Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased $192 thousand. There were no Federal Home Loan Bank of San Francisco borrowings outstanding in the current quarter, compared to average borrowings of $30.0 million in the prior quarter
  • Interest expense on other term debt and junior subordinated debentures decreased $22 thousand. During the second quarter of 2019, we completed the early repayment and termination of our senior debt agreement.

Provision for loan and lease losses

As a result of improvements in our asset quality metrics and loan loss charge-offs totaling only $160 thousand for the current quarter, no provision for loan and lease losses was necessary during current quarter. There was no provision for loan and lease losses in the prior quarter.

Noninterest Income

Noninterest income for the three months ended September 30, 2019 decreased $94 thousand, the decrease was not concentrated in any one item.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2019 decreased $1.3 million. The decrease was due to:

  • $803 thousand in costs related to the acquisition and name change in the prior quarter that did not recur.
  • $263 thousand in decreased salaries and benefit cost.
  • $193 thousand in Small Bank Assessment Credits from the FDIC.

The Company’s efficiency ratio was 56.4% for the third quarter of 2019; the ratio during the prior quarter was 65.9%.

Income Tax Provision

For the three months ended September 30, 2019, our income tax provision of $1.8 million on pre-tax income of $6.4 million was an effective tax rate of 27.8%. The income tax provision for the prior quarter of $1.3 million on pre-tax income of $5.0 million was an effective tax rate of 26.9%. The Company’s effective tax rate has increased as credits and deductions comprised a smaller percentage of pre-tax income. The increase during the current quarter was also due to the write-off of a $41 thousand deferred tax asset resulting from expiration of a capital loss carryforward.

Earnings Per Share

Diluted earnings per share were $0.26 for the three months ended September 30, 2019 compared with diluted earnings per share of $0.25 for the same period a year ago and diluted earnings per share of $0.20 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. During the third quarter of 2019, we adopted a share repurchase program that authorizes the Company to purchase up to one million shares of its common stock over a period ending March 31, 2020. As of October 18, 2019 no shares have been repurchased under the program.

                            
TABLE 9a
NET INTEREST MARGIN - UNAUDITED
(amounts in thousands)
                            
  For The Three Months Ended
  September 30, 2019 September 30, 2018 June 30, 2019
  Average    Yield / Average    Yield / Average    Yield /
  Balance Interest(1) Rate (5) Balance Interest(1) Rate (5) Balance Interest(1) Rate (5)
Interest-earning assets:                           
Net loans (2) $1,029,534 $13,013 5.01% $930,863 $11,568 4.93% $1,028,187 $12,847 5.01%
Taxable securities  238,601  1,609 2.68%  199,883  1,209 2.40%  249,907  1,733 2.78%
Tax-exempt securities (3)  32,974  271 3.26%  48,561  400 3.27%  39,501  328 3.33%
Interest-bearing deposits
in other banks
  58,897  308 2.07%  50,397  254 2.00%  35,605  219 2.47%
Average interest-
earning assets
  1,360,006  15,201 4.43%  1,229,704  13,431 4.33%  1,353,200  15,127 4.48%
Cash and due from banks  23,822        21,834        21,942      
Premises and equipment, net  15,922        13,768        15,819      
Goodwill and core deposit intangible, net  16,769        1,888        16,995      
Other assets  45,925