ex_266013.htm

EX-99.1 2 ex_266013.htm EXHIBIT 99.1 ex_266013.htm

Exhibit 99.1

For Immediate Release:

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

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:

	o	$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.
	o	$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.

	o	Average non-maturing deposits totaled $1.514 billion, an increase of $251 million (20%) compared to the same period in the prior year.
	o	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:

	o	$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.
	o	$4.2 million provision for loan and lease losses during the six months ended June 30, 2020.
	o	$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.
	o	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.

	o	Average non-maturing deposits totaled $1.476 billion, an increase of $295 million (25%) compared to the same period in the prior year.
	o	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.

	o	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%.
	o	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 shares of common stock, which was later increased to 1.5 million shares of common stock. 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 and 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 and 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