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 duefrom 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 securitiesduring 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 provisionfor 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 andshareholders’ equity   $ 1,869,294               $ 1,626,827               $ 1,790,447            
Net interest income andnet 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 provisionfor 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 OfficerTelephone Direct (916) 677-5800

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

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

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