Press Release BANK OF COMMERCE HOLDINGS (NASDAQ - BOCH)

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

Company Release - 1/17/2020 9:00 AM ET

SACRAMENTO, Calif., Jan. 17, 2020 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.480 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter and the year ended December 31, 2019. Net income for the quarter ended December 31, 2019 was $4.4 million or $0.24 per share – diluted, compared with net income of $4.8 million or $0.30 per share – diluted for the same period of 2018. Net income for the year ended December 31, 2019 was $15.0 million or $0.83 per share – diluted, compared with net income of $15.7 million or $0.96 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. During 2019 acquisition related costs totaled $2.2 million and costs related to the name change totaled $503 thousand. All significant costs for these two projects have now been absorbed.

Randall S. Eslick, President and CEO commented: “We are pleased to report that 2019 was another solid year for the company. We are proud of our high quality assets, the successful acquisition and integration of Merchants National Bank and the widespread acceptance of our new name, Merchants Bank of Commerce. Thanks to the hard work of our dedicated employees our company remains well positioned for continued success.”

Financial highlights for the year ended December 31, 2019:

  • Net income of $15.0 million was a decrease of $769 thousand (5%) from $15.7 million earned during the same period in the prior year. Earnings of $0.83 per share – diluted was an decrease of $0.13 (14%) from $0.96 per share – diluted earned during the same period in the prior year and reflects the impact of the following:
    • 1,834,142 shares of common stock issued during the first quarter of 2019 as part of our acquisition of Merchants and
    • 90,501 shares of common stock repurchased during the fourth quarter of 2019 as part of our previously announced share repurchase program.
  • Net interest income increased $6.0 million (13%) to $53.5 million compared to $47.5 million for the same period in the prior year.
  • Net interest margin improved to 3.94% compared to 3.90% for the same period in the prior year.
  • Return on average assets decreased to 1.03% compared to 1.22% for the same period in the prior year.
  • Return on average equity decreased to 9.09% compared to 12.08% for the same period in the prior year.
  • Average loans totaled $1.021 billion, an increase of $105 million (12%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.360 billion, an increase of $140 million (11%) compared to average earning assets for the same period in the prior year.
  • Average deposits totaled $1.245 billion, an increase of $146 million (13%) compared to average deposits for the same period in the prior year.
    • Average non-maturing deposits totaled $1.084 billion, an increase of $154 million (17%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $160.6 million, a decrease of $7.6 million (5%) compared to same period in the prior year.
  • The Company’s efficiency ratio was 64.5% compared to 62.5% during the same period in the prior year.
    • The Company’s efficiency ratio of 64.5% for 2019 includes $2.2 million in acquisition costs and $503 thousand in name change costs. The efficiency ratio excluding these non-recurring costs is 59.9%.
    • The Company’s efficiency ratio of 62.5% for 2018 includes $844 thousand in acquisition costs. The efficiency ratio excluding these non-recurring costs is 60.8%.
  • Nonperforming assets at December 31, 2019 totaled $5.7 million or 0.38% of total assets, an increase of $1.5 million since December 31, 2018. The increase was primarily caused by loans to one commercial real estate borrower that were moved to nonaccrual and had zero calculated impairment at December 31, 2019.
  • Book value per common share was $9.62 at December 31, 2019 compared to $8.47 at December 31, 2018.
  • Tangible book value per common share was $8.71 at December 31, 2019 compared to $8.36 at December 31, 2018.

Financial highlights for the fourth quarter of 2019:

  • Net income of $4.4 million ($0.24 per share – diluted) was a decrease of $470 thousand (10%) from $4.8 million ($0.30 per share – diluted) earned during the same period in the prior year and reflects the impact of the following:
    • 1,834,142 shares of common stock issued during the first quarter of 2019 as part of our acquisition of Merchants and
    • 90,501 shares of common stock repurchased during the fourth quarter of 2019 as part of our previously announced share repurchase program.
  • Net interest income increased $820 thousand (7%) to $13.3 million compared to $12.5 million for the same period in the prior year.
  • Net interest margin decreased to 3.80% compared to 3.93% for the same period in the prior year.
  • Return on average assets decreased to 1.16% compared to 1.44% for the same period in the prior year.
  • Return on average equity decreased to 10.06% compared to 14.32% for the same period in the prior year.
  • Average loans totaled $1.032 billion, an increase of $108 million (12%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.390 billion, an increase of $131 million (10%) compared the same period in the prior year.
  • Average deposits totaled $1.282 billion, an increase of $124 million (11%) compared the same period in the prior year.
    • Average non-maturing deposits totaled $1.129 billion, an increase of $128 million (13%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $153.2 million, a decrease of $3.8 million (2%) compared to the same period in the prior year.
  • The Company’s efficiency ratio was 58.7% compared to 65.1% for the same period in the prior year.
    • The Company’s efficiency ratio of 65.1% for the fourth quarter of 2018 includes $802 thousand in acquisition costs. The efficiency ratio excluding these non-recurring costs is 59.2%.
  • Nonperforming assets at December 31, 2019 totaled $5.7 million or 0.38% of total assets, a decrease of $7.2 million since September 30, 2019. The decrease was due to a sale of a $9.9 million nonaccrual commercial real estate loan.
  • Book value per common share was $9.62 at December 31, 2019 compared to $9.42 at September 30, 2019.
  • Tangible book value per common share was $8.71 at December 31, 2019 compared to $8.51 at September 30, 2019.

Selected Tax Items:

Financial performance for 2018 includes “selected tax items” which complicate reporting period comparisons. The 2018 results include a $1.5 million decrease in our income tax provision composed of a $988 thousand reversal of our uncertain tax position and a $484 thousand benefit as a result of our cost segregation study and tangible property review. These items were previously disclosed in our form 10-K filed March 12, 2019. Management believes that our financial results are more comparative excluding the impact of these selected tax items.

Non-GAAP Financial Measures

In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP), this press release contains certain non-GAAP financial measures. We believe that these non-GAAP financial measures provide investors with information useful in understanding the Company’s financial performance; however, readers of this document are urged to review these non-GAAP financial measures in conjunction with the GAAP results as reported.

  
SELECTED NON-GAAP FINANCIAL INFORMATION - UNAUDITED 
(amounts in thousands except per share data) 
                    
  For The Three Months Ended For The Twelve Months Ended 
Reconciliation of Net Income (GAAP) to Net Income December 31,   September 30, December 31,  
Excluding Selected Tax Items (non-GAAP): 2019  2018   2019 2019 2018  
Net income (GAAP) $ 4,369   $ 4,839    $ 4,642   $ 14,961  $ 15,730   
Selected tax items:                   
Reversal of uncertain tax position (GAAP)   —    (988)    —    —   (988) 
Benefit from cost segregation study and
tangible property review (GAAP)
   —    (484)    —    —   (484) 
Total selected tax items   —    (1,472)    —    —   (1,472) 
Net income excluding selected tax items (non-GAAP) $ 4,369   $ 3,367    $ 4,642   $ 14,961  $ 14,258   
                    
Earnings per share - diluted (GAAP) $ 0.24   $ 0.30    $ 0.26   $ 0.83  $ 0.96   
Effect of selected tax items   —    (0.09)    —    —   (0.09) 
Earnings per share - diluted excluding
selected tax items (non-GAAP)
 $ 0.24   $ 0.21    $ 0.26   $ 0.83  $ 0.87   
                    
GAAP Information:                   
Return on average assets  1.16%  1.44 %  1.26%  1.03% 1.22 %
Return on average equity  10.06%  14.32 %  10.86%  9.09% 12.08 %
Effective tax rate  26.1%  (1.7)%  27.8%  26.9% 18.7 %
                    
Non-GAAP Ratios:                   
Return on average assets excluding selected tax items  1.16%  1.01 %  1.26%  1.03% 1.11 %
Return on average equity excluding selected tax items  10.06%  9.97 %  10.86%  9.09% 10.95 %
Effective tax rate excluding selected tax items  26.1%  29.2 %  27.8%  26.9% 26.3 %

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 Twelve Months Ended 
Net income, average assets and December 31,   September 30, December 31,  
average shareholders' equity 2019  2018  2019 2019 2018 
Net income $ 4,369   $ 4,839   $ 4,642   $ 14,961  $ 15,730  
Average total assets $ 1,492,643   $ 1,328,817   $ 1,462,444   $ 1,458,112  $ 1,288,841  
Average total earning assets $ 1,390,446   $ 1,259,709   $ 1,360,006   $ 1,360,325  $ 1,220,135  
Average shareholders' equity $ 172,385   $ 134,033   $ 169,608   $ 164,642  $ 130,218  
                    
Selected performance ratios                   
Return on average assets  1.16%  1.44%  1.26%  1.03% 1.22%
Return on average equity  10.06%  14.32%  10.86%  9.09% 12.08%
Efficiency ratio  58.7%  65.1%  56.4%  64.5% 62.5%
                    
Share and per share amounts                   
Weighted average shares - basic (1)   18,068     16,265     18,130     17,956    16,248  
Weighted average shares - diluted (1)   18,150     16,345     18,196     18,024    16,332  
Earnings per share - basic $ 0.24   $ 0.30   $ 0.26   $ 0.83  $ 0.97  
Earnings per share - diluted $ 0.24   $ 0.30   $ 0.26   $ 0.83  $ 0.96  
                    
  At December 31,   At September 30,   
Share and per share amounts 2019  2018  2019     
Common shares outstanding (2)   18,137     16,334     18,212         
Book value per common share (2) $ 9.62   $ 8.47   $ 9.42         
Tangible book value per common share (2)(3) $ 8.71   $ 8.36   $ 8.51         
                    
Capital ratios (4)                  
Bank of Commerce Holdings                  
Common equity tier 1 capital ratio  13.19%  12.79%  12.85%       
Tier 1 capital ratio  14.04%  13.71%  13.69%       
Total capital ratio  15.97%  15.82%  15.62%       
Tier 1 leverage ratio  11.30%  11.21%  11.28%       
Tangible common equity ratio (5)  10.80%  10.46%  10.64%       
                    
Merchants Bank of Commerce                   
Common equity tier 1 capital ratio  14.39%  13.23%  14.25%       
Tier 1 capital ratio  14.39%  13.23%  14.25%       
Total capital ratio  15.48%  14.42%  15.34%       
Tier 1 leverage ratio  11.58%  10.81%  11.74%       
                    
(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 December 31, 2019, the Company had total consolidated assets of $1.480 billion, gross loans of $1.033 billion, allowance for loan and lease losses (“ALLL”) of $12 million, total deposits of $1.267 billion, and shareholders’ equity of $174 million.

  
TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(amounts in thousands)
                        
 At December 31,       At September 30,
   % of    % of  Change   % of
 2019  Total 2018  Total Amount % 2019  Total
Commercial$ 141,197   14% $ 135,543   14% $ 5,654    4  % $ 152,195   15%
Real estate - construction and land development  26,830   3    22,563   2    4,267    19  %   35,606   3 
Real estate - commercial non-owner occupied  493,920   48    433,708   46    60,212    14  %   475,678   47 
Real estate - commercial owner occupied  218,833   21    204,622   22    14,211    7  %   210,767   20 
Real estate - residential - ITIN  33,039   3    37,446   4    (4,407)  (12)%   34,036   3 
Real estate - residential - 1-4 family mortgage  63,661   6    34,366   4    29,295    85  %   64,747   6 
Real estate - residential - equity lines  22,099   2    26,958   3    (4,859)  (18)%   22,729   2 
Consumer and other  33,324   3    51,045   5    (17,721)  (35)%   37,324   4 
Gross loans  1,032,903   100%   946,251   100%   86,652    9  %   1,033,082   100%
Deferred fees and costs  2,162        1,927        235        1,980     
Loans, net of deferred fees and costs  1,035,065        948,178        86,887        1,035,062     
Allowance for loan and lease losses  (12,231)      (12,292)      61        (12,285)   
Net loans$ 1,022,834      $ 935,886      $ 86,948      $ 1,022,777     
                        
Average loans during the quarter$ 1,031,702      $ 923,409      $ 108,293    12  % $ 1,029,534     
Average yield on loans during the quarter 4.86 %    4.94 %     (0.08)     5.01 %  
Average yield on loans during the year 4.95 %    4.91 %     0.04       4.98 %  

The Company recorded gross loan balances of $1.033 billion at December 31, 2019, compared with $946 million and $1.033 billion at December 31, 2018 and September 30, 2019, respectively, an increase of $87 million and a decrease of $179 thousand, 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 4.86% compared to 4.94% and 5.01% for the quarters ended December 31, 2018 and September 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 $1.7 million and $1.9 million at December 31, 2019 and September 30, 2019, respectively. We recorded $193 thousand and $188 thousand in accretion of the discount for these loans during the third and fourth quarters of 2019, respectively.

  
TABLE 3
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(amounts in thousands)
                         
  At December 31,        At September 30,
    % of    % of  Change   % of
  2019 Total 2018 Total Amount % 2019 Total
Cash and due from banks $ 21,338  6% $ 23,692  8% $ (2,354)  (10)% $ 32,505  9%
Interest-bearing deposits in other banks   59,266  16    23,673  8    35,593    150  %   56,099  16 
Total cash and cash equivalents   80,604  22    47,365  16    33,239    70  %   88,604  25 
                         
Investment securities:                        
U.S. government and agencies   38,733  11    40,087  13    (1,354)  (3)%   40,467  11 
Obligations of state and political subdivisions   42,098  11    50,530  17    (8,432)  (17)%   39,004  11 
Residential mortgage backed securities and
collateralized mortgage obligations
   180,835  49    138,503  45    42,332    31  %   165,994  46 
Corporate securities   2,966  1    2,922  1    44    2  %   2,992  1 
Commercial mortgage backed securities   19,307  5    24,762  8    (5,455)  (22)%   22,822  6 
Other asset backed securities   3,011  1    124   —    2,887    2,328  %   1,062   — 
Total investment securities - AFS   286,950  78    256,928  84    30,022    12  %   272,341  75 
                         
Total cash, cash equivalents and
investment securities
 $ 367,554  100% $ 304,293  100% $ 63,261    21  % $ 360,945  100%
Average yield on interest-bearing due
from banks and investment securities
during the quarter - nominal
  2.39%    2.66%     (0.27)     2.63%  
Average yield on interest-bearing due
from banks and investment securities
during the quarter - tax equivalent
  2.47%    2.77%     (0.30)     2.71%  

As of December 31, 2019, we maintained noninterest-bearing cash positions of $21.3 million and interest-bearing deposits of $59.3 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $287.0 million at December 31, 2019, compared with $256.9 million and $272.3 million at December 31, 2018 and September 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 $18.0 million and $118.0 million during the quarter and the year ended December 31, 2019, respectively. The sales resulted in net realized gains of $49 thousand and $186 thousand for the quarter and the year ended December 31, 2019, respectively.

Average securities balances and weighted average tax equivalent yields for the quarters ended December 31, 2019 and 2018 were $277.6 million and 2.71% compared to $261.0 million and 2.91%, respectively.

At December 31, 2019, our net unrealized gains on available-for-sale investment securities were $3.7 million compared with net unrealized losses of $4.3 million and unrealized gains of $3.3 million at December 31, 2018 and September 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 December 31,        At September 30,
   % of    % of   Change   % of
 2019 Total 2018 Total Amount % 2019 Total
Demand - noninterest-bearing$ 432,680  34% $ 347,199  31% $ 85,481   25 % $ 412,410  33%
Demand - interest-bearing  239,258  19    252,202  22    (12,944) (5)%   239,547  19 
Money market  307,559  24    265,093  23    42,466   16 %   317,120  25 
Total demand  979,497  77    864,494  76    115,003   13 %   969,077  77 
                        
Savings  135,888  11    114,840  10    21,048   18 %   137,441  11 
Total non-maturing deposits  1,115,385  88    979,334  86    136,051   14 %   1,106,518  88 
                        
Certificates of deposit  151,786  12    152,382  14    (596) 0 %   155,621  12 
Total deposits$ 1,267,171  100% $ 1,131,716  100% $ 135,455   12 % $ 1,262,139  100%
                        

Total deposits at December 31, 2019, increased $135 million or 12% to $1.267 billion compared to December 31, 2018 and increased $5 million or 2% annualized compared to September 30, 2019. Total non-maturing deposits increased $136.1 million or 14% compared to the same date a year ago and increased $8.9 million or 3% annualized compared to September 30, 2019. Certificates of deposit decreased $596 thousand or less than 1% compared to the same date a year ago and decreased $3.8 million or 10% annualized compared to September 30, 2019.

         
TABLE 5
WHOLESALE AND RECIPROCAL DEPOSITS - UNAUDITED
(amounts in thousands)
         
 At December 31,  At September 30,
 2019 2018 2019
CDARS / ICS reciprocal deposits$ 64,030  $ 83,666  $ 57,897 
Online listing service wholesale time deposits  248    22,015    248 
Total wholesale and reciprocal deposits$ 64,278  $ 105,681  $ 58,145 

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 6
AVERAGE COST OF FUNDS - UNAUDITED
For The Three Months Ended
                                
 December 31,  September 30, June 30, March 31, December 31,  September 30, June 30, March 31,
 2019 2019 2019 2019 2018 2018 2018 2018
Interest-bearing deposits 0.56%  0.56%  0.54%  0.49%  0.45%  0.42%  0.41%  0.41%
Interest-bearing deposits and noninterest-bearing demand 0.38%