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

Rhea-AI Summary

Bank of Commerce Holdings (NASDAQ: BOCH) reported a net income of $4.1 million for Q2 2021, up 8% year-over-year, with earnings per share increasing to $0.25. For the first half of 2021, net income rose 90% to $9.1 million. The company announced a merger with Columbia Banking Systems, expected to close in Q4 2021. Deposits grew by $83 million in Q2, while net interest income saw a slight increase. However, net interest margin fell to 3.16%. Nonperforming assets decreased significantly, reflecting improved asset quality.

Positive

• Net income for Q2 2021 increased by 8% to $4.1 million.
• Net income for the first half of 2021 surged 90% to $9.1 million.
• Deposits grew by $83 million during Q2 2021.
• Nonperforming assets decreased by 43% year-over-year.

Negative

• Net interest margin declined to 3.16% from 3.46% in the prior quarter.
• Average loans decreased by 4% year-over-year.

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

FAQ

What were the financial results for Bank of Commerce Holdings for Q2 2021?

For Q2 2021, Bank of Commerce Holdings reported a net income of $4.1 million, or $0.25 per diluted share.

How much did Bank of Commerce Holdings's deposits grow in Q2 2021?

Deposits increased by $83 million during the second quarter of 2021.

What is the expected timeline for the merger with Columbia Banking Systems?

The merger is expected to close in the fourth quarter of 2021.

How did the average loans change for Bank of Commerce Holdings in Q2 2021?

Average loans decreased by 4% year-over-year, totaling $1.136 billion.

What is the status of nonperforming assets for Bank of Commerce Holdings?

As of June 30, 2021, nonperforming assets totaled $3.8 million, a decrease of 43% compared to the previous year.