Bank of Commerce Holdings Announces Results for the Second Quarter of 2021

Boise, Idaho, UNITED STATES


SACRAMENTO, California, July 23, 2021 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.917 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, 2021. Net income for the quarter ended June 30, 2021 was $4.1 million or $0.25 per share – diluted, compared with net income of $3.8 million or $0.23 per share – diluted, for the same period of 2020. Net income for the six months ended June 30, 2021 was $9.1 million or $0.54 per share – diluted, compared with net income of $4.8 million or $0.28 per share – diluted, for the same period of 2020.

Significant Items for the Second Quarter of 2021:

  • On June 23, 2021, we entered into a Merger Agreement with Columbia Banking Systems, Inc. with Columbia as the surviving entity; which was previously announced. The closing of the merger transaction is expected to occur during the fourth quarter of 2021.
  • The Bank continued to experience significant growth in deposits, which increased $83 million during the current quarter and increased $71 million during the previous quarter.
  • During the second quarter of 2021, we received $67.3 million in repayments on PPP loans.
  • The Company’s net interest margin declined to 3.16% for the current quarter compared to 3.46% for the prior quarter.

Randall S. Eslick, President and CEO commented: “The second quarter was a very exciting time for the company. In June, we announced that we entered into a merger agreement with Columbia Banking Systems, Inc. which we believe will, upon consummation, enhance financial returns to our shareholders and provide our customers with a more comprehensive range of loan and deposit products. We also continued to report very strong growth in deposits and competitive profits during a time when our industry is challenged by declining margins. I remain proud of all of our employees as they respond and adapt to the various changes facing them, our Company and our industry.”

Financial Highlights for the Second Quarter of 2021:

  • Net income of $4.1 million was an increase of $292 thousand (8%) from $3.8 million earned during the same period in the prior year. Earnings of $0.25 per share – diluted was an increase of $0.02 (9%) from $0.23 per share – diluted earned during the same period in the prior year and reflects the impact of the following:
    • $817 thousand in costs for the second quarter of 2021 associated with the merger with Columbia Banking Systems, Inc., most of which are not tax deductible.
    • $1.3 million provision for loan and leases losses for the second quarter of 2020.
  • Return on average assets decreased to 0.89% compared to 0.95% for the same period in the prior year.
  • Return on average equity was unchanged at 9.26% compared to the same period in the prior year.
  • Net interest income increased $181 thousand (1%) to $14.0 million compared to $13.8 million for the same period in the prior year.
  • Net interest margin declined to 3.16% compared to 3.64% for the same period in the prior year.
  • Average loans totaled $1.136 billion, a decrease of $45 million (4%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.775 billion, an increase of $252 million (17%) compared to average earning assets for the same period in the prior year.
  • Average deposits totaled $1.653 billion, an increase of $247 million (18%) compared to average deposits for the same period in the prior year.
    • Average non-maturing deposits totaled $1.514 billion, an increase of $251 million (20%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $139.4 million, a decrease of $3.6 million (2%) compared to the same period in the prior year.
  • The Company’s efficiency ratio was 61.5% compared to 56.1% during the same period in the prior year.
    • The Company’s efficiency ratio of 61.5% for the second quarter of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 5.4%.
  • Nonperforming assets at June 30, 2021 totaled $3.8 million or 0.20% of total assets, a decrease of $2.9 million (43%) since June 30, 2020. The decrease in nonperforming assets resulted from repayment of a $3.0 million nonaccrual borrowing relationship during the first quarter of 2021.
  • Book value per common share was $10.78 at June 30, 2021 compared to $10.13 at June 30, 2020.
  • Tangible book value per common share was $9.87 at June 30, 2021 compared to $9.17 at June 30, 2020.

Financial Highlights for the Six Months Ended June 30, 2021:

  • Net income of $9.1 million was an increase of $4.3 million (90%) from $4.8 million earned during the same period in the prior year. Earnings of $0.54 per share – diluted was an increase of $0.26 (93%) per share from $0.28 per share – diluted earned during the same period in the prior year and reflects the impact of the following:
    • $817 thousand in costs during the first six months of 2021 associated with the merger with Columbia Banking Systems, Inc., most of which was not tax deductible.
    • $4.2 million provision for loan and lease losses during the six months ended June 30, 2020.
    • $1.1 million in non-recurring costs during the first quarter of 2020 associated with the termination of a technology management services contract and a severance agreement; both previously announced.
    • 1.0 million shares of common stock repurchased during the six months ended June 30, 2020.
  • Return on average assets increased to 1.00% compared to 0.62% for the same period in the prior year.
  • Return on average equity increased to 10.22% compared to 5.65% for the same period in the prior year.
  • Net interest income increased $1.6 million (6%) to $28.4 million compared to $26.8 million for the same period in the prior year.
  • Net interest margin declined to 3.30% compared to 3.74% for the same period in the prior year.
  • Average loans totaled $1.138 billion, an increase of $31 million (3%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.734 billion, an increase of $296 million (21%) compared to average earning assets for the same period in the prior year.
  • Average deposits totaled $1.613 billion, an increase of $287 million (22%) compared to average deposits for the same period in the prior year.
    • Average non-maturing deposits totaled $1.476 billion, an increase of $295 million (25%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $137.0 million, a decrease of $8.1 million (6%) compared to the same period in the prior year.
  • The Company’s efficiency ratio was 59.3% compared to 63.1% for the same period in the prior year.
    • The Company’s efficiency ratio of 59.3% for the first six months of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 2.7%.
    • The Company’s efficiency ratio of 63.1% for the first six months of 2020 included $1.1 million of non-recurring costs, which increased the efficiency ratio by 3.9%.
  • Nonperforming assets at June 30, 2021 totaled $3.8 million or 0.20% of total assets, a decrease of $3.2 million (92% annualized) since December 31, 2020. The decrease in nonperforming assets resulted from repayment of a $3.0 million nonaccrual borrowing relationship during the first quarter of 2021.
  • Book value per common share was $10.78 at June 30, 2021 compared to $10.58 at December 31, 2020.
  • Tangible book value per common share was $9.87 at June 30, 2021 compared to $9.64 at December 31, 2020.

Impact of COVID-19:

  • During 2020, we funded 606 loans totaling $163.5 million under the first Small Business Administration Paycheck Protection Program (“PPP”). We continue to process loan forgiveness applications and, at June 30, 2021, we have 47 loans totaling $12.3 million remaining to be forgiven compared to 228 loans totaling $79.0 million at March 31, 2021.
  • During 2021, we funded an additional 247 loans totaling $47.3 million under the second PPP. The application period for the second PPP loan program ended on May 31, 2021. We began to process loan forgiveness applications during June, and at June 30, 2021, we have 234 loans totaling $46.7 million remaining to be forgiven.
  • We have experienced significant increases in deposit balances during the past year. All PPP loan funds were deposited into customer accounts at our bank and customer behavior has emphasized savings during the economic slowdown.
  • During the first quarter of 2021, the SBA extended their debt relief program and resumed making principal and interest payments on all of our SBA 7(a) loans, which totaled $29.0 million at June 30, 2021. Payment assistance varies by borrower, will continue for no more than eight months and is limited to a maximum $9 thousand per borrower per month.
  • At June 30, 2021, approximately 30% of our workforce is working remotely.
  • As of April 12, 2021, all of our offices have returned to pre-pandemic operating hours.

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 2021  2020  2021 2021  2020 
Net income $4,139  $3,847  $4,920  $9,059  $4,763 
Average total assets $1,869,294  $1,626,827  $1,790,447  $1,830,089  $1,540,423 
Average total earning assets $1,775,020  $1,523,157  $1,692,281  $1,733,879  $1,438,127 
Average shareholders' equity $179,329  $167,036  $178,162  $178,748  $169,578 
                     
Selected performance ratios                    
Return on average assets  0.89%  0.95%  1.11%  1.00%  0.62%
Return on average equity  9.26%  9.26%  11.20%  10.22%  5.65%
Efficiency ratio  61.5%  56.1%  57.1%  59.3%  63.1%
                     
Share and per share amounts                    
Weighted average shares - basic (1)  16,736   16,660   16,706   16,721   17,178 
Weighted average shares - diluted (1)  16,823   16,689   16,778   16,803   17,217 
Earnings per share - basic $0.25  $0.23  $0.29  $0.54  $0.28 
Earnings per share - diluted $0.25  $0.23  $0.29  $0.54  $0.28 
                     
  At June 30,   At March 31,   
Share and per share amounts 2021  2020  2021      
Common shares outstanding (2)  16,896   16,739   16,876         
Book value per common share (2) $10.78  $10.13  $10.50         
Tangible book value per common share (2)(3) $9.87  $9.17  $9.58         
                     
Capital ratios (4)                   
Bank of Commerce Holdings                   
Common equity tier 1 capital ratio  13.04%  12.34%  12.99%        
Tier 1 capital ratio  13.84%  13.18%  13.81%        
Total capital ratio  15.89%  15.27%  15.87%        
Tier 1 leverage ratio  9.37%  9.82%  9.61%        
Tangible common equity ratio (5)  8.77%  9.05%  8.91%        
                     
Merchants Bank of Commerce                    
Common equity tier 1 capital ratio  14.48%  13.72%  14.41%        
Tier 1 capital ratio  14.48%  13.72%  14.41%        
Total capital ratio  15.74%  14.97%  15.66%        
Tier 1 leverage ratio  9.80%  10.21%  10.03%        
                     
(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, 2021, the Company had total consolidated assets of $1.917 billion, gross loans of $1.091 billion, allowance for loan and lease losses (“ALLL”) of $17 million, total deposits of $1.697 billion, and shareholders’ equity of $182 million. Certain amounts for prior periods have been reclassified to conform to the current presentation. The results of reclassifications are not considered material and have no effect on previously reported equity or net income.

                        
TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(dollars in thousands)
                        
 At June 30,       At March 31,
   % of    % of  Change   % of
 2021 Total 2020 Total Amount % 2021 Total
Commercial$93,650  9% $126,024  10% $(32,374) (26)% $117,597  10%
Paycheck Protection Program ("PPP") 59,058  5   162,189  13   (103,131) (64)%  117,991  10 
Commercial real estate:                       
Construction and land development 30,494  3   41,371  3   (10,877) (26)%  32,145  3 
Non-owner occupied 626,819  57   557,466  47   69,353  12 %  592,157  52 
Owner occupied 168,296  15   179,337  15   (11,041) (6)%  165,367  14 
Residential real estate:                       
Individual Tax Identification Number ("ITIN") 26,912  2   31,083  3   (4,171) (13)%  27,839  2 
1-4 family mortgage 50,259  5   60,756  5   (10,497) (17)%  54,562  5 
Equity lines 17,827  2   20,938  2   (3,111) (15)%  18,600  2 
Consumer and other 17,430  2   27,176  2   (9,746) (36)%  19,685  2 
Gross loans 1,090,745  100%  1,206,340  100%  (115,595) (10)%  1,145,943  100%
Deferred (fees) and costs 551      (1,603)     2,154      143    
Loans, net of deferred fees and costs 1,091,296      1,204,737      (113,441)     1,146,086    
Allowance for loan and lease losses (17,194)     (16,089)     (1,105)     (17,027)   
Net loans$1,074,102     $1,188,648     $(114,546)    $1,129,059    
                        
Average loans during the quarter$1,135,521     $1,180,915     $(45,394) (4)% $1,140,315    
Average loans during the quarter (excluding PPP)$1,031,484     $1,048,139     $(16,655) (2)% $1,017,123    
Average yield on loans during the quarter 4.39 %    4.50 %    (0.11) (2)%  4.70 %  
Average yield on loans during the quarter (excluding PPP) 4.42 %    4.76 %    (0.34) (7)%  4.60 %  
Average yield on loans year to date 4.54 %    4.64 %    (0.10) (2)%  4.70 %  
Average yield on loans year to date (excluding PPP) 4.51 %    4.78 %    (0.27) (6)%  4.60 %  

The Company recorded gross loan balances of $1.091 billion at June 30, 2021, compared with $1.206 billion and $1.146 billion at June 30, 2020 and March 31, 2021, respectively, a decrease of $116 million and $55 million, respectively. The improving economic environment is reflected in the growth of our gross loans (excluding PPP loans) which increased $22.8 million (5% annualized) since December 31, 2020.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants of $694 thousand, $1.3 million and $810 thousand at June 30, 2021, June 30, 2020 and March 31, 2021, respectively. We recorded $115 thousand, $216 thousand and $110 thousand in accretion of the discount for these loans during the quarters ended June 30, 2021, June 30, 2020 and March 31, 2021, respectively.

Paycheck Protection Program (PPP)

We have funded 853 loans totaling $210.8 million under the two PPP loan programs through June 30, 2021.

First PPP Loan Program - 2020

During 2020, we originated 606 loans totaling $163.5 million in the first PPP loan program. Most of the loans have subsequently been forgiven and repaid. At June 30, 2021, we have 47 loans totaling $12.3 million in the program. The majority of the first program loans have a two-year term over which the loan fee income (net of loan origination costs) is earned. When a PPP loan is repaid prior to maturity, all unamortized fees and cost associated with the loan are accelerated into income. During the current quarter, 181 loans totaling $66.7 million were repaid and we recognized $560 thousand in accelerated net fee income compared to 259 loans repaid totaling $51.8 million and $1.0 million in accelerated net fee income in the prior quarter. At June 30, 2021, net loan fees totaling $142 thousand remain to be earned and we anticipate that most of it will be recognized during the third quarter of 2021.

Second PPP Loan Program - 2021

During the first quarter of 2021, the SBA announced a second PPP loan program. The SBA’s second PPP loan program provided first draw PPP loans to borrowers who were ineligible under the first PPP loan program (sole proprietors, ITIN business owners, small business owners with non-fraud felony convictions and small business owners who have struggled with student loan debt) and allowed second draw PPP loans to qualifying businesses that received a first draw under SBA’s first PPP loan program. The loans were available until May 31, 2021, were limited to $2 million, had a five-year term and SBA increased the lender fees for loans under $50 thousand to incentivize lenders to work with smaller borrowers.

During 2021, we originated 247 loans totaling $47.3 million in the second PPP loan program. During the second quarter, we began to process loan forgiveness applications. At June 30, 2021, we have 234 loans totaling $46.7 million in the program. We anticipate that the loans in the second PPP loan program will have a lower yield as net loan fee income will be recognized over a five-year term instead of the two-year term of the first program. Borrowers may submit a loan forgiveness application after using the loan proceeds and submitting an application for forgiveness of their first PPP loan. When a PPP loan is repaid prior to maturity, all unamortized fees and cost associated with the loan are accelerated into income. During the current quarter, 13 loans totaling $629 thousand were repaid and we recognized $28 thousand in accelerated net fee income. At June 30, 2021, net loan fees totaling $1.5 million remain to be earned.

The following tables provide additional information on the PPP loans by industry and by loan balance at June 30, 2021 for loans in both PPP loan programs.

      
TABLE 3
PPP LOANS BY INDUSTRY - UNAUDITED
(dollars in thousands)
      
  At June 30, 2021
  Number Balance
Construction 39 $15,634
Healthcare and Social Assistance 42  4,326
Professional, Scientific and Tech Services 37  5,711
Accommodation and Food Services 39  9,185
Admin, Support, Waste Management and Remediation Services 9  2,064
Primary Metal Manufacturing 7  558
Retail Trade 19  3,340
Other 89  18,240
Total 281 $59,058


        
        
TABLE 4
PPP LOANS BY LOAN SIZE - UNAUDITED
(dollars in thousands)
        
 At June 30, 2021
 Balance Number Average Loan Size
$50,000 or less$2,232 101 $22
$50,001 to $150,000 7,047 83 $85
$150,001 to $350,000 10,723 51 $210
$350,001 to $1,999,999 31,884 43 $741
$2,000,000 or greater 7,172 3 $2,391
Total$59,058 281 $210

The following table presents the status of our loans in the forgiveness process.

                
                
TABLE 5
PPP LOANS FORGIVENESS APPLICATION STATUS - UNAUDITED
(dollars in thousands)
                
 At June 30, 2021 At March 31, 2021
 Balance Number Average Loan Size Balance Number Average Loan Size
First PPP loan program - 2020               
Borrower has not started application$314 7 $45 $5,425 49 $111
Borrower is working on application 3,348 15 $223  9,345 65 $144
Borrower has completed application and the bank is reviewing it 2,744 16 $172  6,381 35 $182
Bank has approved application and submitted it to SBA 5,804 6 $967  57,901 78 $742
Loans partially repaid (1) 137 3 $46  4 1 $4
PPP loans not fully repaid 12,347 47 $263  79,056 228 $347
                
Repayments 151,146 559 $270  84,437 378 $223
Total first PPP loan program - 2020 163,493 606 $270  163,493 606 $270
                
Second PPP loan program - 2021               
Borrower has not started application 42,506 221 $192  38,935 196 $199
Borrower is working on application 2,224 6 $371    $
Borrower has completed application and the bank is reviewing it 1,911 6 $319    $
Bank has approved application and submitted it to SBA 70 1 $70    $
PPP loans not fully repaid 46,711 234 $200  38,935 196 $199
                
Repayments 629 13 $48    $
Total second PPP loan program - 2021 47,340 247 $192  38,935 196 $199
                
Total PPP loans originated by bank$210,833 853 $247 $202,428 802 $252
                
(1) Borrowers who participated in the Economic Injury Disaster Loan ("EIDL") program had their forgiveness payment reduced by their EIDL advance. This reduction has subsequently been repealed and the SBA has remitted a reconciliation payment for previously-deducted EIDL advance amounts, plus interest.


                         
                         
TABLE 6
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(dollars in thousands)
                         
  At June 30,        At March 31,
    % of    % of  Change   % of
  2021 Total 2020 Total Amount % 2021 Total
Cash and due from banks $21,011 3% $29,630 7% $(8,619) (29)% $20,053 3%
Interest-bearing deposits in other banks  156,107 21   126,132 29   29,975  24 %  74,804 12 
Total cash and cash equivalents  177,118 24   155,762 36   21,356  14 %  94,857 15 
                         
Investment securities:                        
U.S. government and agencies  29,691 4   33,195 8   (3,504) (11)%  31,060 5 
Obligations of state and political subdivisions  136,467 18   76,888 18   59,579  77 %  128,841 21 
Residential mortgage backed securities and
collateralized mortgage obligations
  317,842 41   137,120 30   180,722  132 %  277,547 46 
Corporate securities      1,000    (1,000) (100)%    
Commercial mortgage backed securities  52,718 7   16,329 4   36,389  223 %  38,582 6 
Other asset backed securities  42,946 6   15,668 4   27,278  174 %  41,345 7 
Total investment securities - AFS  579,664 76   280,200 64   299,464  107 %  517,375 85 
                         
Total cash, cash equivalents and
investment securities
 $756,782 100% $435,962 100% $320,820  74 % $612,232 100%
                         
Average yield on interest-bearing due
from banks during the quarter
  0.10%    0.12%    (0.02)     0.11%  
Average yield on investment securities during the quarter - nominal  1.70%    2.61%    (0.91)     1.84%  
Average yield on investment securities
during the quarter - tax equivalent
  1.82%    2.78%    (0.96)     1.96%  

As of June 30, 2021, we maintained noninterest-bearing cash positions of $21.0 million and interest-bearing deposits of $156.1 million at the Federal Reserve Bank and correspondent banks. During the current quarter, we continued to invest our increased liquidity into our investment securities portfolio.

Unprecedented deposit growth during the last year as a result of PPP programs and changes in customer behavior has led to a significant increase in the size of our investment securities portfolio. Investment securities totaled $579.7 million at June 30, 2021, compared with $280.2 million and $517.4 million at June 30, 2020 and March 31, 2021, respectively.

During the second quarter of 2021, we purchased securities with a par value of $110.0 million and weighted average yield of 1.52% (1.57% tax equivalent). Investment purchases were comprised primarily of municipal bonds and mortgage backed securities. We sold securities with a par value of $26.1 million resulting in net realized gain of $64 thousand for the quarter ended June 30, 2021.

At June 30, 2021, our net unrealized gains on available-for-sale investment securities were $6.3 million compared with net unrealized gains of $10.1 million and $4.0 million at June 30, 2020 and March 31, 2021, respectively. The fluctuation in net unrealized gains was due to changes in market interest rates.

                        
                        
TABLE 7
DEPOSITS BY TYPE - UNAUDITED
(dollars in thousands)
                        
 At June 30,        At March 31,
   % of    % of   Change   % of
 2021 Total 2020 Total Amount % 2021 Total
Demand - noninterest-bearing$627,911 37% $521,751 35% $106,160  20 % $603,991 37%
Demand - interest-bearing 306,565 18   287,198 19   19,367  7 %  290,687 18 
Money market 463,639 27   405,322 27   58,317  14 %  425,251 26 
Total demand 1,398,115 82   1,214,271 81   183,844  15 %  1,319,929 81 
                        
Savings 162,325 10   142,389 10   19,936  14 %  160,834 10 
Total non-maturing deposits 1,560,440 92   1,356,660 91   203,780  15 %  1,480,763 91 
                        
Certificates of deposit 136,898 8   137,647 9   (749) (1)%  133,630 9 
Total deposits$1,697,338 100% $1,494,307 100% $203,031  14 % $1,614,393 100%

Total deposits at June 30, 2021, increased $203 million or 14% to $1.697 billion compared to June 30, 2020 and increased $83 million or 21% annualized compared to March 31, 2021. Total non-maturing deposits increased $203.8 million or 15% compared to the same date a year ago and increased $79.7 million or 22% annualized compared to March 31, 2021. The increase in non-maturing deposits compared to the same period one year ago was due to PPP loan program disbursements and changes in customer behavior, which is placing greater emphasis on savings during the economic slowdown. Management assumes that depositor behavior will change at a later date, but is unable to predict the timing of that change. Certificates of deposit decreased $749 thousand or 1% compared to the same date a year ago and increased $3.3 million or 10% annualized compared to March 31, 2021.

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

                                
                                
TABLE 8
AVERAGE COST OF FUNDS - UNAUDITED
For The Three Months Ended
                                
 June 30,  March 31, December 31, September 30, June 30, March 31, December 31, September 30,
 2021 2021 2020 2020 2020 2020 2019 2019
Interest-bearing deposits 0.22%  0.26%  0.29%  0.36%  0.43%  0.53%  0.56%  0.56%
Interest-bearing deposits and noninterest-bearing demand 0.14%  0.16%  0.19%  0.23%  0.28%  0.35%  0.38%  0.38%
All interest-bearing liabilities 0.29%  0.32%  0.37%  0.44%  0.52%  0.65%  0.68%  0.68%
All interest-bearing liabilities and noninterest-bearing demand 0.18%  0.21%  0.24%  0.29%  0.34%  0.43%  0.46%  0.46%

Equity

As detailed in Table 1, management believes the capital ratios remain adequate for the Company’s risk profile.

In late 2019, we announced a program to repurchase 1.0 million common shares which was later increased to 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.

In late 2020, we announced a new share repurchase program to repurchase up to 1.0 million shares of common stock over a period ending December 31, 2021. As of June 30, 2021, no shares have been repurchased under this plan.

INCOME STATEMENT OVERVIEW

                     
                     
TABLE 9
SUMMARY INCOME STATEMENT - UNAUDITED
(dollars in thousands, except per share data)
                     
 For The Three Months Ended
 June 30,  Change March 31, Change
 2021 2020 Amount % 2021 Amount %
Interest income$14,728 $14,997 $(269) (2)% $15,240 $(512) (3)%
Interest expense 764  1,214  (450) (37)%  822  (58) (7)%
Net interest income 13,964  13,783  181  1 %  14,418  (454) (3)%
Provision for loan and lease losses   1,300  (1,300) (100)%       %
Noninterest income 1,131  955  176  18 %  1,163  (32) (3)%
Noninterest expense 9,279  8,270  1,009  12 %  8,897  382  4 %
Income before provision
for income taxes
 5,816  5,168  648  13 %  6,684  (868) (13)%
Provision for income taxes 1,677  1,321  356  27 %  1,764  (87) (5)%
Net income$4,139 $3,847 $292  8 % $4,920 $(781) (16)%
                     
Earnings per share - basic$0.25 $0.23 $0.02  9 % $0.29 $(0.04) (14)%
Weighted average shares - basic 16,736  16,660  76   %  16,706  30   %
Earnings per share - diluted$0.25 $0.23 $0.02  9 % $0.29 $(0.04) (14)%
Weighted average shares - diluted 16,823  16,689  134  1 %  16,778  45   %
Dividends declared per common share$0.06 $0.05 $0.01  20 % $0.06 $   %

Second Quarter of 2021 Compared with the Second Quarter of 2020

Net income for the second quarter of 2021 increased $292 thousand compared to the second quarter of 2020. In the current quarter, net interest income was $181 thousand higher, provision for loan and lease losses was $1.3 million lower and noninterest income was $176 thousand higher. These positive changes were partially offset by noninterest expense that was $1.0 million higher and a provision for income taxes that was $356 thousand higher.

Net Interest Income

Net interest income increased $181 thousand compared to the same period a year ago.

Interest income for the second quarter of 2021 decreased $269 thousand or 2% to $14.7 million.

  • During the second quarter of 2021, we recognized $588 thousand in accelerated net fee income on PPP loans forgiven or repaid during the quarter. These accelerated loan fees increased the average yield on loans for the second quarter of 2021 by 21 basis points and increased the net interest margin for the second quarter of 2021 by 13 basis points.
  • PPP loans had an average balance of $104.0 million and yield of 4.10% (1.83% excluding accelerated fee income) for the second quarter of 2021 compared to an average balance of $132.8 million and yield of 2.46% for the same period a year ago.
  • Excluding PPP loans, interest and fees on loans decreased $1.0 million due to a $16.7 million decrease in average loan balances and a 34 basis point decrease in average yield.
  • Interest on investment securities increased $520 thousand due to a $265.6 million increase in average investment securities balances partially offset by a 91 basis point decrease in average yield.
  • Interest on interest-bearing deposits due from banks increased $6 thousand due to a $31.6 million increase in average interest-bearing deposit balances partially offset by a 1 basis point decrease in average yield. During 2020, in response to the economic effects of the COVID-19 pandemic, the Federal Reserve cut short-term interest rates by 150 to 175 basis points and has provided guidance that it expects interest rates to remain low for an extended period of time.

Interest expense for the second quarter of 2021 decreased $450 thousand or 37% to $764 thousand.

  • Interest expense on interest-bearing deposits decreased $385 thousand. Average interest-bearing demand and savings deposit balances increased $141.6 million, while average certificate of deposit balances decreased $3.6 million. The average rate paid on interest-bearing deposits decreased 21 basis points from 0.43% to 0.22%.
  • Interest expense on FHLB borrowings decreased $5 thousand. There were no FHLB borrowings during the current quarter. Average FHLB borrowings were $16.0 million during the same period a year ago. During the second quarter of 2020, we took advantage of a program offered by the FHLB that bore no interest. The average rate paid on FHLB borrowings was 0.13% during the second quarter of 2020.
  • Interest expense on other term debt decreased $46 thousand. The average debt balance was essentially unchanged, while the average rate paid decreased 188 basis points.
  • Interest expense on junior subordinated debentures decreased $14 thousand. The average debt balance was unchanged, while the average rate paid decreased 55 basis points.

Provision for Loan and Lease Losses

Many of our asset quality concerns from 2020 have moderated. No provision for loan and lease losses was necessary for the current quarter compared to a provision for loan and lease losses of $1.3 million in the same quarter a year ago. Nonaccrual loans decreased 43% since June 30, 2020 primarily due to repayment of two commercial real estate loans totaling $4.1 million. Net loan recoveries were $167 thousand during the current quarter compared to net loan charge-offs of $278 thousand during the same period a year ago. Most COVID-19 related loan payment deferrals have ended with limited negative impact on delinquencies. A more in depth discussion of our provision is provided below under the heading Provision for Loan and Lease Losses.

Noninterest Income

Noninterest income for the three months ended June 30, 2021 increased $176 thousand compared to the same period a year previous. The increase was primarily due to $138 thousand increase in ATM and point of sales fees and a $90 thousand increase in FHLB dividends partially offset by a $76 thousand decrease in gain on sale of investment securities.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2021 increased $1.0 million compared to the same period a year previous, mostly resulting from $817 thousand of merger related costs.

The Company’s efficiency ratio was 61.5% for the second quarter of 2021. The ratio during the same period in 2020 was 56.1%. The Company’s efficiency ratio of 61.5% for the second quarter of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 5.4%.

Income Tax Provision

For the three months ended June 30, 2021, our income tax provision of $1.7 million on pre-tax income of $5.8 million was an effective tax rate of 28.8%. The tax provision for the second quarter of the prior year was $1.3 million on pre-tax income of $5.2 million for an effective rate of 25.6%.

The current quarter income tax calculation included the impact of $772 thousand of non-deductible merger related costs, which increased the effective tax rate by 2.4%.

Second Quarter of 2021 Compared with the First Quarter of 2021

Net income for the second quarter of 2021 decreased $781 thousand compared to the first quarter of 2021. In the current quarter, net interest income was $454 thousand lower, noninterest income was $32 thousand lower and noninterest expense was $382 thousand higher. These negative variances were partially offset by a provision for income taxes that was $87 thousand lower.

Net Interest Income

Net interest income decreased $454 thousand over the prior quarter.

Interest income for the three months ended June 30, 2021 decreased $512 thousand or 3% to $14.7 million.

  • During the second quarter of 2021, we recognized $588 thousand in accelerated net fee income on PPP loans forgiven or repaid during the quarter compared to $1.0 million in the prior quarter. These accelerated loan fees increased the average yield on loans for the second and first quarter of 2021 by 21 basis points and 36 basis points, respectively. The accelerated loan fees increased the net interest margin for the second and first quarter of 2021 by 13 basis points and 24 basis points, respectively.
  • PPP loans had an average balance of $104.0 million and yield of 4.10% (1.83% excluding accelerated fee income) for the second quarter of 2021 compared to an average balance of $123.2 million and yield of 5.49% (2.20% excluding accelerated fee income) for the prior quarter.
  • Excluding PPP loans, interest and fees on loans decreased $181 thousand due to a 15 basis point decrease in average yield partially offset by a $14.4 million increase in average loan balances.
  • During the first quarter of 2021, we recognized $251 thousand in interest income from the repayment of a nonaccrual loan. The interest income recognized from that repayment increased the average yield on loans for the first quarter of 2021 by 9 basis points.
  • Interest on investment securities increased $276 thousand due to a $94.7 million increase in average investment security balances partially offset by a 13 basis point decrease in average yield.
  • Interest on interest-bearing deposits due from banks decreased $2 thousand due to a $7.2 million decrease in average balances and a 1 basis point decrease in average yield.

Interest expense for the three months ended June 30, 2021 decreased $58 thousand or 7% to $764 thousand.

  • Interest expense on interest-bearing deposits decreased $60 thousand. Average interest-bearing demand and savings deposit balances increased $32.6 million and average certificates of deposit increased $4.9 million. The average rate paid on interest-bearing deposits decreased 4 basis points from 0.26% to 0.22%.
  • There were no FHLB borrowings during the current quarter. Average FHLB borrowings were $3.9 million in the prior quarter. The borrowings bore no interest under a program offered by the FHLB and were fully repaid at March 31, 2021.
  • Interest expense on other term debt decreased $1 thousand. The average debt balance remained unchanged, while the average rate paid decreased 2 basis points.
  • Interest expense on junior subordinated debentures decreased $1 thousand. The average debt balance remained unchanged, while the average rate paid decreased 2 basis points.

Provision for Loan and Lease Losses

Many of our asset quality concerns from 2020 have moderated. Net loan recoveries were $167 thousand for the current quarter compared to net loan recoveries of $117 thousand for the prior quarter. No provision for loan and lease losses was necessary for the current or prior quarter. A more in depth discussion of our provision is provided below under the heading Provision for Loan and Lease Losses.

Noninterest Income

Noninterest income for the three months ended June 30, 2021 decreased $32 thousand compared to the prior quarter. The first quarter of 2021 included a $221 thousand legal settlement, which was partial recovery of an investment security impairment loss recorded during the second quarter of 2016. The decrease was partially offset by an $83 thousand increase in ATM and point of sale fees, $57 thousand gain on sale of investment securities and $33 thousand increase in FHLB dividends.

Noninterest Expense

Noninterest expense for the three months ended June 30, 2021 increased $382 thousand compared to the prior quarter. The increase included $817 thousand of merger related costs in the current quarter. This increase was partially offset by a decrease in accrued vacation, salaries and related benefit costs of $434.

The Company’s efficiency ratio was 61.5% for the second quarter of 2021 compared with 57.1% for the prior quarter. The Company’s efficiency ratio of 61.5% for the second quarter of 2021 included $817 thousand of merger related costs, which increased the efficiency ratio by 5.4%.

Income Tax Provision

For the three months ended June 30, 2021, our income tax provision of $1.7 million on pre-tax income of $5.8 million was an effective tax rate of 28.8%. The income tax provision for the prior quarter of $1.8 million on pre-tax income of $6.7 million was an effective tax rate of 26.4%.

The current quarter income tax calculation included the impact of $772 thousand of non-deductible merger related costs, which increased the effective tax rate by 2.4%.

Earnings Per Share

Diluted earnings per share were $0.25 for the three months ended June 30, 2021 compared with diluted earnings per share of $0.23 for the same period a year ago and diluted earnings per share of $0.29 for the prior period. Net income and weighted average shares used to calculate earnings per share – diluted are summarized in Table 9 presented earlier in this press release.

                            
                            
TABLE 10a
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
                            
  For The Three Months Ended
  June 30, 2021 June 30, 2020 March 31, 2021
  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) $1,031,484 $11,366 4.42% $1,048,139 $12,411 4.76% $1,017,123 $11,547 4.60%
PPP loans  104,037  1,063 4.10%  132,776  813 2.46%  123,192  1,668 5.49%
Taxable securities  437,710  1,697 1.56%  211,195  1,329 2.53%  358,291  1,485 1.68%
Tax-exempt securities (3)  97,637  575 2.36%  58,540  423 2.91%  82,355  511 2.52%
Interest-bearing deposits in other banks  104,152  27 0.10%  72,507  21 0.12%  111,320  29 0.11%
Average interest-
earning assets
  1,775,020  14,728 3.33%  1,523,157  14,997 3.96%  1,692,281  15,240 3.65%
Cash and due from banks  21,819        21,564        21,744      
Premises and equipment, net  14,715        15,428        15,001      
Goodwill  11,671        11,671        11,671      
Other intangible assets, net  3,743        4,508        3,934      
Other assets  42,326        50,499        45,816      
Average total assets $1,869,294       $1,626,827       $1,790,447      
                            
Interest-bearing liabilities:                           
Interest-bearing demand $301,052  55 0.07% $261,907  85 0.13% $295,388  58 0.08%
Money market  443,067  180 0.16%  365,368  317 0.35%  425,113  195 0.19%
Savings  163,227  41 0.10%  138,500  95 0.28%  154,199  48 0.13%
Certificates of deposit  139,391  303 0.87%  142,955  467 1.31%  134,520  338 1.02%
Federal Home Loan Bank of San Francisco ("FHLB") borrowings     %  16,044  5 0.13%  3,889   %
Other borrowings  10,000  138 5.54%  9,976  184 7.42%  10,000  137 5.56%
Junior subordinated debentures  10,310  47 1.83%  10,310  61 2.38%  10,310  46 1.81%
Average interest-
bearing liabilities
  1,067,047  764 0.29%  945,060  1,214 0.52%  1,033,419  822 0.32%
Noninterest-bearing demand  606,625        497,636        562,155      
Other liabilities  16,293        17,095        16,711      
Shareholders’ equity  179,329        167,036        178,162      
Average liabilities and
shareholders’ equity
 $1,869,294       $1,626,827       $1,790,447      
Net interest income and
net interest margin (4)
    $13,964 3.16%    $13,783 3.64%    $14,418 3.46%
                            
(1) Interest income on loans, net of PPP includes net fees and costs of approximately $249 thousand, $138 thousand, and $204 thousand for the three months ended June 30, 2021 and 2020 and March 31, 2021, respectively. Interest income on PPP loans includes $806 thousand, $476 thousand and $1.4 million of net fees and costs for the three months ended June 30, 2021 and 2020 and March 31, 2021, respectively.
(2) Loans, net of PPP includes average nonaccrual loans of $3.9 million, $5.6 million and $6.2 million for the three months ended June 30, 2021 and 2020 and March 31, 2021, respectively.
(3) Interest income and yields on tax-exempt securities are presented on a nominal basis, not on a tax 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, 2021 and 2020 and March 31, 2021 included $115 thousand, $216 thousand and $110 thousand, respectively, in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 4, 7 and 4 basis points, respectively.
(5) Yields and rates are calculated by dividing income or expense by the average balance of assets or liabilities, respectively.


                   
                   
TABLE 10b
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
                   
  For The Six Months Ended
  June 30, 2021 June 30, 2020
  Average    Yield / Average    Yield /
  Balance Interest(1) Rate (5) Balance Interest(1) Rate (5)
Interest-earning assets:                  
Loans net of PPP (2) $1,024,343 $22,913 4.51% $1,040,914 $24,749 4.78%
PPP loans  113,562  2,731 4.85%  66,388  813 2.46%
Taxable securities  398,220  3,182 1.61%  224,300  2,911 2.61%
Tax-exempt securities (3)  90,038  1,086 2.43%  46,705  694 2.99%
Interest-bearing deposits in other banks  107,716  56 0.10%  59,820  175 0.59%
Average interest-
earning assets
  1,733,879  29,968 3.49%  1,438,127  29,342 4.10%
Cash and due from banks  21,781        21,775      
Premises and equipment, net  14,858        15,591      
Goodwill  11,671        11,671      
Other intangible assets, net  3,838        4,604      
Other assets  44,062        48,655      
Average total assets $1,830,089       $1,540,423      
                   
Interest-bearing liabilities:                  
Interest-bearing demand $298,236  113 0.08% $247,641  185 0.15%
Money market  434,140  375 0.17%  336,477  720 0.43%
Savings  158,738  89 0.11%  137,002  213 0.31%
Certificates of deposit  136,969  641 0.94%  145,098  931 1.29%
Federal Home Loan Bank of San Francisco ("FHLB") borrowings  1,934   %  8,132  5 0.12%
Other borrowings  10,000  275 5.55%  9,970  368 7.42%
Junior subordinated debentures  10,310  93 1.82%  10,310  151 2.95%
Average interest-
bearing liabilities
  1,050,327  1,586 0.30%  894,630  2,573 0.58%
Noninterest-bearing demand  584,513        459,241      
Other liabilities  16,501        16,974      
Shareholders’ equity  178,748        169,578      
Average liabilities
and shareholders’ equity
 $1,830,089       $1,540,423      
Net interest income and
net interest margin (4)
    $28,382 3.30%    $26,769 3.74%
                   
(1) Interest income on loans, net of PPP includes net fees and costs of approximately $453 thousand and $395 thousand for the six months ended June 30, 2021 and 2020, respectively. Interest income on PPP loans includes $2.2 million and $476 thousand of net fees and costs for the six months ended June 30, 2021 and 2020, respectively.
(2) Loans, net of PPP includes average nonaccrual loans of $5.0 million and $5.5 million for the six months ended June 30, 2021 and 2020, respectively.
(3) Interest income and yields on tax-exempt securities are presented on a nominal basis, not on a tax 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, 2021 and 2020 included $225 thousand and $379 thousand, respectively, in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 4 and 7 basis points, respectively.
(5) Yields and rates are calculated by dividing income or expense by the average balance of the assets or liabilities, respectively.


                    
                    
TABLE 11 
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,
 2021 2021 2020 2020 2020
ALLL beginning balance$17,027   $16,910   $16,873   $16,089   $15,067  
Provision for loan and lease losses charged to expense             1,100    1,300  
Loans charged-off (72)   (90)   (86)   (502)   (356) 
Loan and lease loss recoveries 239    207    123    186    78  
ALLL ending balance$17,194   $17,027   $16,910   $16,873   $16,089  
                    
 At June 30,  At March 31, At December 31, At September 30, At June 30,
 2021 2021 2020 2020 2020
Nonaccrual loans:                   
Commercial$1,506   $1,520   $1,535   $1,549   $7  
Commercial real estate:                   
Non-owner occupied 606    626    640    1,712    1,717  
Owner occupied 89    95    3,094    3,100    2,992  
Residential real estate:                   
ITIN 1,463    1,529    1,585    1,574    1,738  
1-4 family mortgage 133    137    141    145    180  
Consumer and other 16    17    18    18    37  
Total nonaccrual loans 3,813    3,924    7,013    8,098    6,671  
Accruing troubled debt restructured loans:                   
Commercial 430    494    498    531    592  
Residential real estate:                   
ITIN 3,374    3,420    3,466    3,597    3,642  
Equity lines 112    121    126    131    221  
Total accruing restructured loans 3,916    4,035    4,090    4,259    4,455  
Total impaired loans$7,729   $7,959   $11,103   $12,357   $11,126  
                    
Gross loans at period end$1,090,745   $1,145,943   $1,139,732   $1,206,065   $1,206,340  
                    
Impaired loans to gross loans 0.71 %  0.69 %  0.97 %  1.02 %  0.92 %
Impaired loans to gross loans (excluding PPP) (1) 0.75 %  0.77 %  1.10 %  1.19 %  1.07 %
Nonaccrual loans to gross loans 0.35 %  0.34 %  0.62 %  0.67 %  0.55 %
Nonaccrual loans to gross loans (excluding PPP) (2) 0.37 %  0.38 %  0.70 %  0.78 %  0.64 %
                    
Allowance for loan and lease losses as a percent of:             
Gross loans 1.58 %  1.49 %  1.48 %  1.40 %  1.33 %
Gross loans (excluding PPP) (3) 1.67 %  1.66 %  1.68 %  1.62 %  1.54 %
Nonaccrual loans 450.93 %  433.92 %  241.12 %  208.36 %  241.18 %
Impaired loans 222.46 %  213.93 %  152.30 %  136.55 %  144.61 %
                    
(1) Impaired loans to gross loans (excluding PPP) is computed by dividing the impaired loans by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA.
(2) Nonaccrual loans to gross loans (excluding PPP) is computed by dividing the nonaccrual loans by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA.
(3) ALLL to gross loans (excluding PPP) is computed by dividing the ALLL by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA.

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, may not be indicative of future losses. In response to quantitative data deficiencies, we have placed greater reliance on qualitative factors (Q-Factors).

Many of our COVID-19 related credit concerns have moderated and no provision for loan and lease losses was required during the first or second quarter of 2021. Net loan loss recoveries were $167 thousand during the second quarter of 2021, $117 thousand during the first quarter of 2021 and most of our borrowers who received a COVID-19 related loan payment deferral have resumed making their payments. This compares with the second quarter of 2020 when concerns over COVID-19 necessitated a provision for loan and lease losses of $1.3 million.

Our ALLL methodology supported an ALLL of $17.2 million at June 30, 2021, an increase of 2% compared to our ALLL of $16.9 million at December 31, 2020 and an increase of 7% compared to our ALLL of $16.1 million at June 30, 2020. Management believes the Company’s ALLL is adequate at June 30, 2021. 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, 2021, the recorded investment in loans classified as impaired totaled $7.7 million, with a corresponding specific reserve of $159 thousand compared to impaired loans of $8.0 million, with a corresponding specific reserve of $188 thousand at March 31, 2021 and impaired loans of $11.1 million with a corresponding specific reserve of $270 thousand at June 30, 2020.

                     
                     
TABLE 12
TROUBLED DEBT RESTRUCTURINGS - UNAUDITED
(dollars in thousands)
                     
  At June 30,  At March 31, At December 31, At September 30, At June 30,
  2021 2021 2020 2020 2020
Nonaccrual $1,869  $1,947  $2,007  $2,063  $2,194 
Accruing  3,916   4,035   4,090   4,259   4,455 
Total troubled debt restructurings $5,785  $5,982  $6,097  $6,322  $6,649 
                     
Troubled debt restructurings as a percent of:                    
Gross loans  0.53%  0.52%  0.53%  0.52%  0.55%
Gross loans (excluding PPP) (1)  0.56%  0.58%  0.60%  0.61%  0.64%
                     
(1) Troubled debt restructuring to gross loans (excluding PPP) is computed by dividing troubled debt restructurings by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA.

There were no new troubled debt restructurings during the three months ended June 30, 2021. As of June 30, 2021, 89 loans were classified as troubled debt restructurings, of which 88 were performing according to their restructured terms. Of the 89 troubled debt restructurings, 81 were ITIN loans totaling $4.6 million which are serviced by a third party.

Troubled Debt Restructuring Guidance

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

We have responded to the needs of our borrowers in accordance with the CARES Act and regulatory guidance to grant short-term COVID-19 related loan modifications. These modified loans are not troubled debt restructurings and are not considered to be past due or non-performing. We have granted payment deferrals ranging from one to six months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19. For some borrowers who were initially granted a payment deferral of less than six months, we have granted an additional payment deferral period on a case-by-case basis.

We maintain close contact with our borrowers to update our understanding of the impact of the pandemic on them, their businesses and the underlying collateral for our loans. For borrowers who continue to have been granted a loan payment deferral, we have evaluated their credit quality position and the potential for loss of principal.

Most loan payment deferrals have ended and borrowers have resumed making payments. At June 30, 2021, payment deferrals were extant for 16 loans totaling $4.1 million compared to 26 loans totaling $4.1 million at March 31, 2021. Loans with a payment deferral at June 30, 2021 consisted of two SBA 504 commercial real estate loans totaling $3.2 million and 14 first trust deed residential mortgage loans totaling $827 thousand.

Past Due Loans

Past due loans as of June 30, 2021 decreased $3.3 million to $1.9 million, compared to $5.2 million as of June 30, 2020 and decreased $1.9 million compared to $3.8 million as of March 31, 2021. The decreases in past due loans was primarily due to collection of our largest nonaccrual borrowing relationship totaling $3.0 million that was repaid in the first quarter of 2021, a $1.1 million commercial real estate loan that was repaid in the current quarter and a $626 thousand nonaccrual commercial real estate loan that was brought current in the current quarter.

The following table presents nonperforming assets at the dates indicated.

                     
                     
TABLE 13
NONPERFORMING ASSETS - UNAUDITED
(dollars in thousands)
                     
  At June 30,  At March 31, At December 31, At September 30, At June 30,
  2021 2021 2020 2020 2020
Total nonaccrual loans $3,813  $3,924  $7,013  $8,098  $6,671 
90 days past due and still accruing               
Total nonperforming loans  3,813   3,924   7,013   8,098   6,671 
                     
Other real estate owned ("OREO")        8   8   8 
Total nonperforming assets $3,813  $3,924  $7,021  $8,106  $6,679 
                     
Gross loans $1,090,745  $1,145,943  $1,139,732  $1,206,065  $1,206,340 
PPP loans (1)  59,058   117,991   130,814   163,493   162,189 
Total gross loans, net of PPP loans $1,031,687  $1,027,952  $1,008,918  $1,042,572  $1,044,151 
                     
Nonperforming loans to gross loans  0.35%  0.34%  0.62%  0.67%  0.55%
Nonperforming loans to gross loans (excluding PPP) (2)  0.37%  0.38%  0.70%  0.78%  0.64%
Nonperforming assets to total assets  0.20%  0.21%  0.40%  0.47%  0.39%
                     
(1) PPP loans are fully guaranteed by SBA and no allowance is provided for them.
(2) Nonperforming loans to gross loans (excluding PPP) is computed by dividing nonperforming loans by total gross loans excluding gross PPP loans. Management believes that the ratio excluding PPP loans is meaningful when comparing to periods that do not include PPP loans, which are guaranteed by the SBA, and are expected to be forgiven and repaid by the SBA.

The following table summarizes when loans are projected to reprice by year and rate index as of June 30, 2021.

                         
                         
TABLE 14
LOANS BY RATE INDEX AND PROJECTED REPRICING PERIOD - UNAUDITED
(dollars in thousands)
                         
 At June 30, 2021
                 Years 6      
                 Through Beyond    
Rate Index: Year 1 Year 2 Year 3 Year 4 Year 5 Year 10 Year 10 Total
Fixed $59,225 $67,622 $46,869 $44,062 $39,279 $217,043 $39,971 $514,071
Variable:                        
Prime  61,925  4,939  6,593  5,116  8,584  329    87,486
5 Year Treasury  51,583  70,562  54,639  95,601  100,033  50,097    422,515
7 Year Treasury  2,901  4,465  5,315          12,681
1 Year LIBOR  16,772              16,772
Other Indexes  3,432  2,206  2,063  10,427  2,183  12,284  1,363  33,958
Total accruing variable rate loans  136,613  82,172  68,610  111,144  110,800  62,710  1,363  573,412
                         
Nonaccrual  796  770  721  434  234  747  111  3,813
Total $196,634 $150,564 $116,200 $155,640 $150,313 $280,500 $41,445 $1,091,296

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 15
LOAN FLOORS - UNAUDITED
(dollars in thousands)
                
 Variable Rate Loans at June 30, 2021
 With Floors Without   
  At Floor Rate Above Floor Rate Total Floors Total
Prime $43,035 $6,055 $49,090 $38,396 $87,486
5 year Treasury  356,362  43,826  400,188  22,327  422,515
7 Year Treasury  12,681    12,681    12,681
1 Year LIBOR    701  701  16,071  16,772
Other Indexes  16,639  815  17,454  16,504  33,958
Total accruing variable rate loans $428,717 $51,397 $480,114 $93,298  573,412
                
Nonaccrual              3,813
Total variable rate loans             $577,225


                
                
TABLE 16
UNAUDITED
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except per share data)
                
 At June 30,  Change At March 31,
  2021 2020 $ % 2021
Assets:               
Cash and due from banks $21,011  $29,630  $(8,619) (29)% $20,053 
Interest-bearing deposits in other banks  156,107   126,132   29,975  24 %  74,804 
Total cash and cash equivalents  177,118   155,762   21,356  14 %  94,857 
                
Securities available-for-sale, at fair value  579,664   280,200   299,464  107 %  517,375 
Loans, net of deferred fees and costs  1,091,296   1,204,737   (113,441) (9)%  1,146,086 
Allowance for loan and lease losses  (17,194)  (16,089)  (1,105) (7)%  (17,027)
Net loans  1,074,102   1,188,648   (114,546) (10)%  1,129,059 
                
Premises and equipment, net  14,514   15,466   (952) (6)%  14,792 
Life insurance  24,462   23,968   494  2 %  24,320 
Deferred tax asset, net  5,234   2,645   2,589  98 %  5,929 
Goodwill  11,671   11,671      %  11,671 
Other intangible assets, net  3,661   4,426   (765) (17)%  3,852 
Other assets  26,727   29,110   (2,383) (8)%  27,247 
Total assets $1,917,153  $1,711,896  $205,257  12 % $1,829,102 
                
Liabilities and shareholders' equity:               
Demand - noninterest-bearing $627,911  $521,751  $106,160  20 % $603,991 
Demand - interest-bearing  306,565   287,198   19,367  7 %  290,687 
Money market  463,639   405,322   58,317  14 %  425,251 
Savings  162,325   142,389   19,936  14 %  160,834 
Certificates of deposit  136,898   137,647   (749) (1)%  133,630 
Total deposits  1,697,338   1,494,307   203,031  14 %  1,614,393 
                
Term debt:               
Federal Home Loan Bank of San Francisco ("FHLB") borrowings     10,000   (10,000) (100)%   
Other borrowings  10,000   10,000      %  10,000 
Unamortized debt issuance costs     (19)  19  100 %   
Net term debt  10,000   19,981   (9,981) (50)%  10,000 
                
Junior subordinated debentures  10,310   10,310      %  10,310 
Other liabilities  17,368   17,743   (375) (2)%  17,259 
Total liabilities  1,735,016   1,542,341   192,675  12 %  1,651,962 
                
Shareholders' equity:               
Common stock  59,422   58,749   673  1 %  59,215 
Retained earnings  118,276   103,658   14,618  14 %  115,142 
Accumulated other comprehensive income, net of tax  4,439   7,148   (2,709) (38)%  2,783 
Total shareholders' equity  182,137   169,555   12,582  7 %  177,140 
                
Total liabilities and shareholders' equity $1,917,153  $1,711,896  $205,257  12 % $1,829,102 
                
Total interest-earning assets $1,820,765  $1,600,922  $219,843  14 % $1,734,314 
Shares outstanding  16,896   16,739   157  1 %  16,876 
Book value per share (1) $10.78  $10.13  $0.65  6 % $10.50 
Tangible book value per share (1) $9.87  $9.17  $0.70  8 % $9.58 
                
(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 17
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,
  2021 2020 $ % 2021 2021 2020
Interest income:                     
Interest and fees on loans $12,429 $13,224 $(795) (6)% $13,215 $25,644 $25,562
Interest on taxable securities  1,697  1,329  368  28 %  1,485  3,182  2,911
Interest on tax-exempt securities  575  423  152  36 %  511  1,086  694
Interest on interest-bearing deposits in other banks  27  21  6  29 %  29  56  175
Total interest income  14,728  14,997  (269) (2)%  15,240  29,968  29,342
Interest expense:                     
Interest on demand deposits  55  85  (30) (35)%  58  113  185
Interest on money market  180  317  (137) (43)%  195  375  720
Interest on savings  41  95  (54) (57)%  48  89  213
Interest on certificates of deposit  303  467  (164) (35)%  338  641  931
Interest on FHLB borrowings    5  (5) (100)%      5
Interest on other borrowings  138  184  (46) (25)%  137  275  368
Interest on junior subordinated debentures  47  61  (14) (23)%  46  93  151
Total interest expense  764  1,214  (450) (37)%  822  1,586  2,573
Net interest income  13,964  13,783  181  1 %  14,418  28,382  26,769
Provision for loan and lease losses    1,300  (1,300) (100)%      4,150
Net interest income after provision
for loan and lease losses
  13,964  12,483  1,481  12 %  14,418  28,382  22,619
Noninterest income:                     
Service charges on deposit accounts  160  152  8  5 %  148  308  321
ATM and point of sale fees  401  263  138  52 %  318  719  531
Payroll and benefit processing fees  160  143  17  12 %  169  329  313
Life insurance  123  148  (25) (17)%  121  244  271
Gain on investment securities, net  64  140  (76) (54)%  7  71  224
FHLB dividends  126  36  90  250 %  93  219  166
Legal settlement         %  221  221  
Other income  97  73  24  33 %  86  183  21
Total noninterest income  1,131  955  176  18 %  1,163  2,294  1,847


                      
                      
TABLE 17 - 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,
  2021 2020 $ % 2021 2021 2020
Noninterest expense:                     
Salaries and related benefits  5,205  4,965  240  5 %  5,639  10,844  10,852
Premises and equipment  973  826  147  18 %  959  1,932  1,680
FDIC insurance premium  124  90  34  38 %  110  234  126
Data processing  546  585  (39) (7)%  548  1,094  1,116
Professional services  278  469  (191) (41)%  301  579  803
Telecommunications  145  156  (11) (7)%  170  315  327
Merger costs  817    817  100 %    817  
Other expenses  1,191  1,179  12  1 %  1,170  2,361  3,149
Total noninterest expense  9,279  8,270  1,009  12 %  8,897  18,176  18,053
Income before provision for income taxes  5,816  5,168  648  13 %  6,684  12,500  6,413
Provision for income taxes  1,677  1,321  356  27 %  1,764  3,441  1,650
Net income $4,139 $3,847 $292  8 % $4,920 $9,059 $4,763
                      
Earnings per share - basic $0.25 $0.23 $0.02  9 % $0.29 $0.54 $0.28
Weighted average shares - basic  16,736  16,660  76   %  16,706  16,721  17,178
Earnings per share - diluted $0.25 $0.23 $0.02  9 % $0.29 $0.54 $0.28
Weighted average shares - diluted  16,823  16,689  134  1 %  16,778  16,803  17,217


                
                
TABLE 18
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,
  2021 2021 2020 2020 2020
Earning assets:               
Loans $1,135,521 $1,140,315 $1,172,705 $1,209,277 $1,180,915
Taxable securities  437,710  358,291  304,242  228,045  211,195
Tax-exempt securities  97,637  82,355  73,207  68,766  58,540
Interest-bearing deposits in other banks  104,152  111,320  124,390  95,348  72,507
Total earning assets  1,775,020  1,692,281  1,674,544  1,601,436  1,523,157
                
Cash and due from banks  21,819  21,744  22,413  23,381  21,564
Premises and equipment, net  14,715  15,001  15,162  15,365  15,428
Life insurance  24,395  24,265  24,147  24,028  23,899
Deferred tax asset, net  5,599  4,287  2,738  2,501  3,016
Goodwill  11,671  11,671  11,671  11,671  11,671
Other intangible assets, net  3,743  3,934  4,126  4,318  4,508
Other assets  12,332  17,264  20,136  21,416  23,584
Total assets $1,869,294 $1,790,447 $1,774,937 $1,704,116 $1,626,827
                
Liabilities and shareholders' equity:               
Demand - noninterest-bearing $606,625 $562,155 $552,601 $531,459 $497,636
Demand - interest-bearing  301,052  295,388  283,213  279,744  261,907
Money market  443,067  425,113  430,014  387,995  365,368
Savings  163,227  154,199  151,223  146,074  138,500
Certificates of deposit  139,391  134,520  138,380  139,757  142,955
Total deposits  1,653,362  1,571,375  1,555,431  1,485,029  1,406,366
                
Federal Home Loan Bank of San Francisco ("FHLB") borrowings    3,889  7,120  10,000  16,044
Other borrowings  10,000  10,000  9,999  9,988  9,976
Junior subordinated debentures  10,310  10,310  10,310  10,310  10,310
Other liabilities  16,293  16,711  17,557  17,356  17,095
Total liabilities  1,689,965  1,612,285  1,600,417  1,532,683  1,459,791
                
Shareholders' equity  179,329  178,162  174,520  171,433  167,036
Liabilities & shareholders' equity $1,869,294 $1,790,447 $1,774,937 $1,704,116 $1,626,827


                
                
TABLE 19
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,
  2021 2020 2020 2019 2018
Earning assets:              
Loans $1,137,905 $1,107,302 $1,149,375 $1,020,801 $915,360
Taxable securities  398,220  224,300  245,336  246,723  207,407
Tax-exempt securities  90,038  46,705  58,912  38,706  50,330
Interest-bearing deposits in other banks  107,716  59,820  84,982  54,095  47,038
Total earning assets  1,733,879  1,438,127  1,538,605  1,360,325  1,220,135
                
Cash and due from banks  21,781  21,775  22,339  22,806  20,468
Premises and equipment, net  14,858  15,591  15,426  15,598  13,952
Life insurance  24,330  23,968  23,960  23,371  22,148
Deferred tax asset, net  4,947  2,645  3,126  5,430  7,567
Goodwill  11,671  11,671  11,671  10,758  665
Other intangible assets, net  3,838  4,604  4,412  4,807  1,252
Other assets  14,785  22,042  20,980  15,017  2,654
Total assets $1,830,089 $1,540,423 $1,640,519 $1,458,112 $1,288,841
                
Liabilities and shareholders' equity:               
Demand - noninterest-bearing $584,513 $459,241 $500,862 $400,588 $332,197
Demand - interest-bearing  298,236  247,641  264,652  242,516  238,328
Money market  434,140  336,477  372,939  304,340  250,685
Savings  158,738  137,002  142,857  136,733  109,025
Certificates of deposit  136,969  145,098  142,067  160,550  168,183
Total deposits  1,612,596  1,325,459  1,423,377  1,244,727  1,098,418
                
Federal Home Loan Bank of San Francisco ("FHLB") borrowings  1,934  8,132  8,347  9,644  22,466
Other borrowings  10,000  9,970  9,981  10,895  15,143
Junior subordinated debentures  10,310  10,310  10,310  10,310  10,310
Other liabilities  16,501  16,974  17,217  17,894  12,286
Total liabilities  1,651,341  1,370,845  1,469,232  1,293,470  1,158,623
                
Shareholders' equity  178,748  169,578  171,287  164,642  130,218
Liabilities & shareholders' equity $1,830,089 $1,540,423 $1,640,519 $1,458,112 $1,288,841

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 along the Interstate 5 corridor from Sacramento to Yreka and in the wine region north of San Francisco. The Bank was incorporated as a California banking corporation on November 25, 1981 and opened for business on October 22, 1982. The Company’s common stock is listed on the NASDAQ Global Market and trades under the symbol “BOCH”.

Contact Information:

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

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

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