Bank of Commerce Holdings Announces Results for the Third Quarter of 2020

SACRAMENTO, Calif., Oct. 16, 2020 (GLOBE NEWSWIRE) -- Bank of Commerce Holdings (NASDAQ: BOCH) (the “Company”), a $1.740 billion asset bank holding company and parent company of Merchants Bank of Commerce (the “Bank”), today announced financial results for the quarter and nine months ended September 30, 2020. Net income for the quarter ended September 30, 2020 was $4.3 million or $0.26 per share – diluted, compared with net income of $4.6 million or $0.26 per share – diluted for the same period of 2019. Net income for the nine months ended September 30, 2020 was $9.1 million or $0.53 per share – diluted, compared with net income of $10.6 million or $0.59 per share – diluted for the same period of 2019.

Significant Items for the third quarter of 2020:

  • $1.1 million provision for loan and lease losses.
  • COVID-19 loan deferrals totaled $38.6 million at September 30, 2020. Loans with payment deferrals at June 30, 2020 totaling $82.5 million have resumed making payments.

Randall S. Eslick, President and CEO commented: “Throughout this unusual year we have not forgotten that we are responsible to many constituents. The pandemic has prompted us to physically modify our banking offices and many of our employees continue to work remotely. But these changes have not hindered our ability to diligently meet the needs of our depositors, borrowers and communities. We remain committed to protecting the health of our employees and customers and also to protecting the investment our owners have made in us.”

Financial highlights for the third quarter of 2020:

  • Net income of $4.3 million was a decrease of $313 thousand (7%) from $4.6 million earned during the same period in the prior year. Earnings of $0.26 per share – diluted was the same compared to the same period in the prior year and reflects the impact of the following:
    • 1.5 million shares of common stock repurchased between October of 2019 and April of 2020.
    • $1.1 million provision for loan and lease losses for the current quarter.
  • Net interest income increased $408 thousand (3%) to $14.1 million compared to $13.7 million for the same period in the prior year.
  • Net interest margin declined to 3.51% compared to 4.00% for the same period in the prior year.
  • Return on average assets decreased to 1.01% compared to 1.26% for the same period in the prior year.
  • Return on average equity decreased to 10.05% compared to 10.86% for the same period in the prior year.
  • Average loans totaled $1.209 billion, an increase of $180 million (17%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.601 billion, an increase of $241 million (18%) compared to average earning assets for the same period in the prior year.
  • Average deposits totaled $1.485 billion, an increase of $231 million (18%) compared to average deposits for the same period in the prior year.
    • Average non-maturing deposits totaled $1.345 billion, an increase of $248 million (23%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $139.8 million, a decrease of $17.9 million (11%) compared to same period in the prior year.
  • The Company’s efficiency ratio was 54.8% compared to 56.4% during the same period in the prior year.
  • Nonperforming assets at September 30, 2020 totaled $8.1 million or 0.47% of total assets, a decrease of $4.7 million (37%) since September 30, 2019. The decrease in nonperforming assets results from one $10.9 million commercial real estate loan which was placed in nonaccrual status in the first quarter of 2019 and sold in the fourth quarter of 2019.
  • Book value per common share was $10.32 at September 30, 2020 compared to $9.42 at September 30, 2019.
  • Tangible book value per common share was $9.38 at September 30, 2020 compared to $8.51 at September 30, 2019.

Financial highlights for the nine months ended September 30, 2020:

  • Net income of $9.1 million was a decrease of $1.5 million (14%) from $10.6 million earned during the same period in the prior year. Earnings of $0.53 per share – diluted was a decrease of $0.06 (10%) per share from $0.59 per share – diluted earned during the same period in the prior year and reflects the impact of the following:
    • 1.5 million shares of common stock repurchased between October of 2019 and April of 2020.
    • $5.3 million provision for loan and lease losses for the nine months ended September 30, 2020.
    • $1.1 million in non-recurring costs for the first quarter of 2020 associated with the termination of a technology management services contract and a previously announced severance agreement.
    • $2.7 million in non-recurring costs recorded during the nine months ended September 30, 2019 associated with our January 31, 2019 acquisition of Merchants National Bank of Sacramento and the name change of our subsidiary bank.
  • Net interest income increased $678 thousand (2%) to $40.9 million compared to $40.2 million for the same period in the prior year.
  • Net interest margin declined to 3.66% compared to 3.98% for the same period in the prior year.
  • Return on average assets decreased to 0.76% compared to 0.98% for the same period in the prior year.
  • Return on average equity decreased to 7.14% compared to 8.74% for the same period in the prior year.
  • Average loans totaled $1.142 billion, an increase of $124 million (12%) compared to average loans for the same period in the prior year.
  • Average earning assets totaled $1.493 billion, an increase of $143 million (11%) compared to the same period in the prior year.
  • Average deposits totaled $1.379 billion, an increase of $147 million (12%) compared to the same period in the prior year.
    • Average non-maturing deposits totaled $1.236 billion, an increase of $167 million (16%) compared to the same period in the prior year.
    • Average certificates of deposit totaled $143.3 million, a decrease of $19.7 million (12%) compared to the same period in the prior year.
  • The Company’s efficiency ratio was 60.2% compared to 66.5% for the same period in the prior year.
    • The Company’s efficiency ratio of 60.2% for the first nine months of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 57.7%.
    • The Company’s efficiency ratio of 66.5% for the first nine months of 2019 includes $2.7 million in non-recurring costs. The efficiency ratio excluding these non-recurring costs was 60.3%.
  • Nonperforming assets at September 30, 2020 totaled $8.1 million or 0.47% of total assets, an increase of $2.5 million (36% annualized) since December 31, 2019.
  • Book value per common share was $10.32 at September 30, 2020 compared to $9.62 at December 31, 2019.
  • Tangible book value per common share was $9.38 at September 30, 2020 compared to $8.71 at December 31, 2019.

Impact of COVID-19:

  • We have funded 606 loans totaling $163.5 million for the Small Business Administration’s Paycheck Protection Program (“PPP”) through September 30, 2020. The growth in our assets resulting from the PPP has impacted our Tier 1 Leverage capital ratio as we have not utilized the liquidity available to us from the Federal Reserve’s PPP Liquidity Facility and its associated beneficial capital treatment. Substantially all of the loans were made to existing customers and were funded under the two-year PPP loan program.
  • We have experienced significant increased deposit balances as all of the PPP loan funds were deposited into customer accounts at our bank and as a result of customer behavior that is focused on maintaining greater non-maturing deposit balances.
  • Organic loan growth continues to be slow as we maintain credit underwriting discipline in light of the current economic environment.
  • For the six month period from April through September SBA has made principal and interest payments on all our SBA 7(a) loans. The borrowers will resume responsibility for making their payments in October.
  • After considering qualitative factors, management determined that the Company’s goodwill was not impaired at September 30, 2020.
  • At September 30, 2020, our workforce totaled 211 employees of which 107 are working remotely.
  • All of our branch offices remain open, although they are operating under a reduced schedule. Our pandemic response team is continuing to modify and enhance our workforce and customer protection as additional information or requirements are promulgated by the state of California.

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 Nine Months Ended 
Net income, average assets and September 30,   June 30, September 30,  
average shareholders' equity 2020  2019  2020 2020  2019 
Net income $4,329  $4,642  $3,847  $9,092  $10,592 
Average total assets $1,704,116  $1,462,444  $1,626,827  $1,595,386  $1,446,476 
Average total earning assets $1,601,436  $1,360,006  $1,523,157  $1,492,961  $1,350,173 
Average shareholders' equity $171,433  $169,608  $167,036  $170,201  $162,032 
                     
Selected performance ratios                    
Return on average assets  1.01%  1.26%  0.95%  0.76%  0.98%
Return on average equity  10.05%  10.86%  9.26%  7.14%  8.74%
Efficiency ratio  54.8%  56.4%  56.1%  60.2%  66.5%
                     
Share and per share amounts                    
Weighted average shares - basic (1)  16,660   18,130   16,660   17,004   17,918 
Weighted average shares - diluted (1)  16,696   18,196   16,689   17,044   17,981 
Earnings per share - basic $0.26  $0.26  $0.23  $0.53  $0.59 
Earnings per share - diluted $0.26  $0.26  $0.23  $0.53  $0.59 
                     
  At September 30,   At June 30,   
Share and per share amounts 2020  2019  2020      
Common shares outstanding (2)  16,792   18,212   16,739         
Book value per common share (2) $10.32  $9.42  $10.13         
Tangible book value per common share (2)(3) $9.38  $8.51  $9.17         
                     
Capital ratios (4)                   
Bank of Commerce Holdings                   
Common equity tier 1 capital ratio  12.61%  12.85%  12.34%        
Tier 1 capital ratio  13.44%  13.69%  13.18%        
Total capital ratio  15.53%  15.62%  15.27%        
Tier 1 leverage ratio  9.60%  11.28%  9.82%        
Tangible common equity ratio (5)  9.13%  10.64%  9.05%        
                     
Merchants Bank of Commerce                    
Common equity tier 1 capital ratio  14.01%  14.25%  13.72%        
Tier 1 capital ratio  14.01%  14.25%  13.72%        
Total capital ratio  15.26%  15.34%  14.97%        
Tier 1 leverage ratio  9.99%  11.74%  10.21%        
                     
(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 September 30, 2020, the Company had total consolidated assets of $1.740 billion, gross loans of $1.206 billion, allowance for loan and lease losses (“ALLL”) of $17 million, total deposits of $1.518 billion, and shareholders’ equity of $173 million.

TABLE 2
LOAN BALANCES BY TYPE - UNAUDITED
(dollars in thousands)
                        
 At September 30,       At June 30,
   % of    % of  Change   % of
 2020  Total 2019  Total Amount % 2020  Total
Commercial$121,025  10% $152,195  15% $(31,170) (20)% $126,024  10%
Paycheck protection program 163,493  14        163,493  100 %  162,189  13 
Real estate - construction and land development 40,289  3   35,606  3   4,683  13 %  41,371  3 
Real estate - commercial non-owner occupied 538,079  45   475,678  47   62,401  13 %  521,004  44 
Real estate - commercial owner occupied 210,455  17   210,767  20   (312)  %  215,799  18 
Real estate - residential - ITIN 30,071  2   34,036  3   (3,965) (12)%  31,083  3 
Real estate - residential - 1-4 family mortgage 57,867  5   64,747  6   (6,880) (11)%  60,756  5 
Real estate - residential - equity lines 20,296  2   22,729  2   (2,433) (11)%  20,938  2 
Consumer and other 24,490  2   37,324  4   (12,834) (34)%  27,176  2 
Gross loans 1,206,065  100%  1,033,082  100%  172,983  17 %  1,206,340  100%
Deferred fees and costs (1,037)     1,980      (3,017)     (1,603)   
Loans, net of deferred fees and costs 1,205,028      1,035,062      169,966      1,204,737    
Allowance for loan and lease losses (16,873)     (12,285)     (4,588)     (16,089)   
Net loans$1,188,155     $1,022,777     $165,378     $1,188,648    
                        
Average loans during the quarter$1,209,277     $1,029,534     $179,743  17 % $1,180,915    
Average loans during the quarter (excluding PPP)$1,046,187     $1,029,534     $16,653  2 % $1,048,139    
Average yield on loans during the quarter 4.42 %    5.01 %    (0.59) (12)%  4.50 %  
Average yield on all loans during the quarter (excluding PPP) 4.75 %    5.01 %    (0.26) (5)%  4.76 %  
Average yield on all loans year to date 4.56 %    4.98 %    (0.42) (8)%  4.64 %  
Average yield on all loans year to date (excluding PPP) 4.77 %    4.98 %    (0.21) (4)%  4.78 %  

The Company recorded gross loan balances of $1.206 billion at September 30, 2020, compared with $1.033 billion and $1.206 billion at September 30, 2019 and June 30, 2020, respectively, an increase of $173 million and a decrease of $275 thousand, respectively.

The average yield on loans during the quarter was 4.42% compared to 5.01% and 4.50% for the quarters ended September 30, 2019 and June 30, 2020, respectively. Yields in the current quarter were negatively impacted by PPP loans, which averaged $163.1 million and yielded 2.31%.

Gross loan balances in the table above include a net fair value discount for loans acquired from Merchants of $1.1 million, $1.3 million and $1.9 million at September 30, 2020, June 30, 2020 and September 30, 2019, respectively. We recorded $233 thousand, $216 thousand and $193 thousand in accretion of the discount for these loans during the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively.

We have funded 606 PPP loans totaling $163.5 million through September 30, 2020. Substantially all of the loans were made to existing customers and the loan proceeds were initially deposited with our institution. At origination, loan fee income net of loan origination costs totaled $4.3 million and is being earned over the 24-month life of the loans as a part of the loan yield. At September 30, 2020, $3.3 million remains to be earned in future quarters. The following tables provide additional information on the PPP loans by industry and by loan balance at September 30, 2020.


TABLE 3
PPP LOANS BY INDUSTRY - UNAUDITED
(dollars in thousands)
      
  At September 30, 2020
  Number Balance
Construction 98 $64,750
Healthcare and Social Assistance 96  17,701
Professional, Scientific and Tech Services 78  12,155
Accommodation and Food Services 51  10,328
Admin, Support, Waste Management and Remediation Services 20  7,383
Primary Metal Manufacturing 16  6,641
Retail Trade 59  8,050
Other 188  36,485
Total 606 $163,493


TABLE 4
PPP LOANS BY LOAN SIZE - UNAUDITED
(dollars in thousands)
        
 At September 30, 2020
 Balance Number Average Loan Size
$150,000 or less$20,604 390 $53
$150,001 to $350,000 25,406 110  231
$350,001 to $1,999,999 73,927 94  786
$2,000,000 or greater 43,556 12  3,630
Total$163,493 606 $270

During the third quarter of 2020, the SBA began accepting applications for PPP loan forgiveness. The bank has 60 days to review and approve an application before submitting it to SBA, and then the SBA has 90 days to process it for forgiveness. The following table presents the progress of our loans in the forgiveness process.


TABLE 5
PPP LOANS FORGIVENESS APPLICATION STATUS - UNAUDITED
(dollars in thousands)
        
 At September 30, 2020
 Balance Number Average Loan Size
Borrower has not started application$78,930 390 $202
Borrower is working on application 38,624 123  314
Borrower has completed application and the bank is reviewing it 32,400 73  444
Bank has approved application and submitted it to the SBA 13,539 20  677
SBA has approved the application and the loan has been repaid    
Total$163,493 606 $270

As of October 13, 2020, two of our PPP loans totaling $95 thousand that were outstanding on September 30, 2020 have been forgiven by the SBA.


TABLE 6
CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES - UNAUDITED
(dollars in thousands)
                         
  At September 30,        At June 30,
    % of    % of  Change   % of
  2020 Total 2019 Total Amount % 2020 Total
Cash and due from banks $22,884 5% $32,505 9% $(9,621) (30)% $29,630 7%
Interest-bearing deposits in other banks  104,999 23   56,099 16   48,900  87 %  126,132 29 
Total cash and cash equivalents  127,883 28   88,604 25   39,279  44 %  155,762 36 
                         
Investment securities:                        
U.S. government and agencies  31,811 7   40,467 11   (8,656) (21)%  33,195 8 
Obligations of state and political subdivisions  91,863 20   39,004 11   52,859  136 %  76,888 18 
Residential mortgage backed securities and
collateralized mortgage obligations
  165,693 35   165,994 46   (301)  %  137,120 30 
Corporate securities      2,992 1   (2,992) (100)%  1,000  
Commercial mortgage backed securities  19,576 4   22,822 6   (3,246) (14)%  16,329 4 
Other asset backed securities  28,089 6   1,062    27,027  2,545 %  15,668 4 
Total investment securities - AFS  337,032 72   272,341 75   64,691  24 %  280,200 64 
                         
Total cash, cash equivalents and
investment securities
 $464,915 100% $360,945 100% $103,970  29 % $435,962 100%
Average yield on interest-bearing due
from banks during the quarter
  0.12%    2.07%    (1.95)     0.12%  
Average yield on investment securities during the quarter - nominal  2.33%    2.75%    (0.42)     2.61%  
Average yield on investment securities
during the quarter - tax equivalent
  2.50%    2.85%    (0.35)     2.78%  

As of September 30, 2020, we maintained noninterest-bearing cash positions of $22.9 million and interest-bearing deposits of $105.0 million at the Federal Reserve Bank and correspondent banks.

Investment securities totaled $337.0 million at September 30, 2020, compared with $272.3 million and $280.2 million at September 30, 2019 and June 30, 2020, respectively. During the third quarter of 2020, we continued the deployment of excess cash into investment securities as deposits continued to grow. Investment purchases were comprised primarily of longer duration municipal bonds and lower coupon mortgage backed securities. During the third quarter of 2020, we purchased securities with a par value of $84.1 million and weighted average yield of 1.75% (2.09% tax equivalent) and sold securities with a par value of $5.8 million and weighted average yield of 2.67% (3.16% tax equivalent). The sales resulted in net realized gains of $258 thousand and $482 thousand for the quarter and nine months ended September 30, 2020, respectively.

Average securities balances for the quarters ended September 30, 2020, June 30, 2020 and September 30, 2019 were $296.8 million, $269.7 million and $271.6 million, respectively. Weighted average yields on securities balances for those same periods were 2.33%, 2.61% and 2.75%, respectively.

At September 30, 2020, our net unrealized gains on available-for-sale investment securities were $10.4 million compared with net unrealized gains of $3.3 million and $10.1 million at September 30, 2019 and June 30, 2020, respectively. The changes in net unrealized gains on the investment securities portfolio were due to changes in market interest rates.


TABLE 7
DEPOSITS BY TYPE - UNAUDITED
(dollars in thousands)
                        
 At September 30,        At June 30,
   % of    % of   Change   % of
 2020 Total 2019 Total Amount % 2020 Total
Demand - noninterest-bearing$542,060 36% $412,410 33% $129,650  31 % $521,751 35%
Demand - interest-bearing 280,370 18   239,547 19   40,823  17 %  287,198 19 
Money market 403,785 27   317,120 25   86,665  27 %  405,322 27 
Total demand 1,226,215 81   969,077 77   257,138  27 %  1,214,271 81 
                        
Savings 151,016 10   137,441 11   13,575  10 %  142,389 10 
Total non-maturing deposits 1,377,231 91   1,106,518 88   270,713  24 %  1,356,660 91 
                        
Certificates of deposit 140,900 9   155,621 12   (14,721) (9)%  137,647 9 
Total deposits$1,518,131 100% $1,262,139 100% $255,992  20 % $1,494,307 100%
                        

Total deposits at September 30, 2020, increased $256 million or 20% to $1.518 billion compared to September 30, 2019 and increased $23.8 million or 6% annualized compared to June 30, 2020. Total non-maturing deposits increased $270.7 million or 24% compared to the same date a year ago and increased $20.6 million or 6% annualized compared to June 30, 2020. 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 increasing non-maturing deposit balances. Certificates of deposit decreased $14.7 million or 9% compared to the same date a year ago and increased $3.3 million or 9% annualized compared to June 30, 2020. The decrease in certificates of deposits compared to the same period one year ago reflects our decision to reduce reliance on public deposits.


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
                                
 September 30,  June 30, March 31, December 31,  September 30,  June 30, March 31, December 31,
 2020 2020 2020 2019 2019 2019 2019 2018
Interest-bearing deposits 0.36%  0.43%  0.53%  0.56%  0.56%  0.54%  0.49%  0.45%
Interest-bearing deposits and noninterest-bearing demand 0.23%  0.28%  0.35%  0.38%  0.38%  0.37%  0.34%  0.31%
All interest-bearing liabilities 0.44%  0.52%  0.65%  0.68%  0.68%  0.74%  0.67%  0.61%
All interest-bearing liabilities and noninterest-bearing demand 0.29%  0.34%  0.43%  0.46%  0.46%  0.52%  0.46%  0.42%

Stock Repurchase Program

We previously announced a program to repurchase 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.


INCOME STATEMENT OVERVIEW

TABLE 9
SUMMARY INCOME STATEMENT - UNAUDITED
(dollars in thousands, except per share data)
                     
 For The Three Months Ended
 September 30,  Change June 30, Change
 2020 2019 Amount % 2020 Amount %
Interest income$15,218 $15,201 $17  0 % $14,997 $221  1 %
Interest expense 1,088  1,479  (391) (26)%  1,214  (126) (10)%
Net interest income 14,130  13,722  408  3 %  13,783  347  3 %
Provision for loan
and lease losses
 1,100    1,100  100 %  1,300  (200) (15)%
Noninterest income 1,189  1,006  183  18 %  955  234  25 %
Noninterest expense 8,390  8,300  90  1 %  8,270  120  1 %
Income before provision
for income taxes
 5,829  6,428  (599) (9)%  5,168  661  13 %
Provision for income taxes 1,500  1,786  (286) (16)%  1,321  179  14 %
Net income$4,329 $4,642 $(313) (7)% $3,847 $482  13 %
                     
Earnings per share - basic$0.26 $0.26 $   % $0.23 $0.03  13 %
Weighted average shares - basic 16,660  18,130  (1,470) (8)%  16,660     %
Earnings per share - diluted$0.26 $0.26 $   % $0.23 $0.03  13 %
Weighted average shares - diluted 16,696  18,196  (1,500) (8)%  16,689  7   %
Dividends declared per
common share
$0.05 $0.05 $   % $0.05 $   %


Third Quarter of 2020 Compared With The Third Quarter of 2019

Net income for the third quarter of 2020 decreased $313 thousand compared to the third quarter of 2019. In the current quarter, net interest income was $408 thousand higher, noninterest income was $183 thousand higher and income taxes were $286 thousand lower. These changes were partially offset by a provision for loan and lease losses that was $1.1 million higher and noninterest expense that was $90 thousand higher.

Net Interest Income

Net interest income increased $408 thousand compared to the same period a year ago.

Interest income for the third quarter of 2020 increased $17 thousand or less than 1% to $15.2 million.

  • Interest and fees on loans increased $435 thousand due to a $179.7 million increase in average loan balances partially offset by a 59 basis point decrease in the average yield. Much of the 59 basis point decrease was caused by PPP loans which yielded only 2.31%. The yield on loans exclusive of PPP loans declined 26 basis points.
  • Interest on investment securities decreased $139 thousand due to a 41 basis point decrease in average yield partially offset by a $25.2 million increase in average securities balances.
  • Interest on interest-bearing deposits due from banks decreased $279 thousand due to a 195 basis point decrease in average yield that was partially offset by a $36.4 million increase in average interest-bearing deposit balances. During 2020, in response to the economic effects of the COVID-19 pandemic, the Federal Reserve cut its interest rates by 150 to 175 basis points which has resulted in a decrease in our interest income.

Interest expense for the third quarter of 2020 decreased $391 thousand or 26% to $1.1 million.

  • Interest expense on interest-bearing deposits decreased $336 thousand. Average interest-bearing demand and savings deposit balances increased $122.8 million, while average certificate of deposit balances decreased $17.9 million. The average rate paid on interest-bearing deposits decreased 20 basis points.
  • Average FHLB borrowings were $10.0 million in the current quarter. The borrowings bear no interest under a program offered by the FHLB during the second quarter of 2020 in response to COVID-19 liquidity concerns. There were no borrowings during the same period a year ago.
  • Interest expense on other term debt increased $1 thousand. The average rate paid on other term debt increased three basis points.
  • Interest expense on junior subordinated debentures decreased $56 thousand. The average rate paid on junior subordinated debentures decreased 215 basis points.

Provision for Loan and Lease Losses

Net loan loss charge-offs were $316 thousand for the current quarter compared to net loan loss charge-offs of $160 thousand for the same period a year ago. Net loan charge-offs during the current quarter were primarily related to the unguaranteed portion of two commercial loans that are partially guaranteed under the California Capital Access Program for Small Business.

We recognized deterioration in the credit environment due to the economic effects of COVID-19 and have made changes to our qualitative factors (Q-Factors) in calculating our ALLL. As a result we recorded a provision for loan and lease losses of $1.1 million for the third quarter of 2020. There was no provision for loan and lease losses in the third quarter of 2019. A discussion of our provision is provided following Table 11.

Noninterest Income

Noninterest income for the three months ended September 30, 2020 increased $183 thousand compared to the same period a year previous. The increase was due $246 thousand in net gains on sale of investment securities during the third quarter of 2020.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2020 increased $90 thousand compared to the same period a year previous. Increases in noninterest expense included the following items:

  • $121 thousand increase in salaries and related benefits.
  • $205 thousand increase in FDIC insurance premiums.

These increases were partially offset by decreases in travel, sponsorship and other noninterest expenses as a result of the pandemic.

The Company’s efficiency ratio was 54.8% for the third quarter of 2020. The ratio during the same period in 2019 was 56.4%.

Income Tax Provision

For the three months ended September 30, 2020, our income tax provision of $1.5 million on pre-tax income of $5.8 million was an effective tax rate of 25.7%. The tax provision for the third quarter of the prior year was $1.8 million on pre-tax income of $6.4 million for an effective rate of 27.8%. The effective tax rate has declined in the current period as a result of increased income from tax-exempt securities.

Third Quarter of 2020 Compared With The Second Quarter of 2020

Net income for the third quarter of 2020 increased $482 thousand compared to the second quarter of 2020. In the current quarter, net interest income was $347 thousand higher, provision for loan and lease losses was $200 thousand lower, noninterest income was $234 thousand higher. These changes were partially offset by noninterest expense that was $120 thousand higher and a provision for income taxes that was $179 thousand higher.

Net Interest Income

Net interest income increased $347 thousand over the prior quarter.

Interest income for the three months ended September 30, 2020 increased $221 thousand or 1% to $15.2 million.

  • Interest and fees on loans increased $224 thousand due to a $28.4 million increase in average loan balances partially offset by an eight basis point decrease in the average yield. Much of the eight basis point decrease was caused by PPP loans.
  • Interest on investment securities decreased $11 thousand due to a 28 basis point decrease in average yield partially offset by a $27.1 million increase in average securities balances.
  • Interest on interest-bearing deposits due from banks increased $8 thousand due to a $22.8 million increase in average balances.

Interest expense for the three months ended September 30, 2020 decreased $126 thousand or 10% to $1.1 million.

  • Interest expense on interest-bearing deposits decreased $110 thousand. Average interest-bearing demand and savings deposit balances increased $48.0 million, while average certificates of deposit decreased $3.2 million. The average rate paid on interest-bearing deposits decreased by seven basis points.
  • Interest expense on FHLB borrowings decreased $5 thousand. Average FHLB borrowings were $10.0 million in the current quarter compared to $16.0 million in the prior quarter. During the second quarter of 2020, we took an advance under our FHLB line of credit for $10.0 million, which bears no interest under a program offered by the FHLB during the second quarter of 2020 in response to COVID-19 liquidity concerns.
  • Interest expense on other term debt was unchanged at $184 thousand for both quarters.
  • Interest expense on other junior subordinated debentures decreased $11 thousand due to a 45 basis point decrease in the average rate paid.

Provision for Loan and Lease Losses

Net loan charge-offs were $316 thousand in the current quarter compared to $278 thousand in the prior quarter. As illustrated in Table 11 total nonaccrual loans increased by $1.4 million during the three months ended September 30, 2020 when compared to the previous quarter. Net loan charge-offs during the current quarter were primarily related to the unguaranteed portion of two commercial loans that are partially guaranteed under the California Capital Access Program for Small Business. Both loans were also placed in nonaccrual status during the quarter. We recorded a provision for loan and lease losses of $1.3 million and $1.1 million for the second and third quarters of 2020, respectively. A discussion of our provision is provided following Table 11.

Noninterest Income

Noninterest income for the three months ended September 30, 2020 increased $234 thousand including a $118 thousand increase in gain on sale of investment securities and $73 thousand increase in FHLB dividends.

Noninterest Expense

Noninterest expense for the three months ended September 30, 2020 increased $120 thousand compared to the prior quarter. The increase was primarily due to a deferred PPP loan origination cost benefit of approximately $600 recorded in the prior quarter which did not recur in the current quarter. This was offset during the current quarter by accruals for incentives and unused vacation which were $408 thousand lower.

The Company’s efficiency ratio was 54.8% for the third quarter of 2020 compared with 56.1% for the prior quarter.

Income Tax Provision

For the three months ended September 30, 2020, our income tax provision of $1.5 million on pre-tax income of $5.8 million was an effective tax rate of 25.7%. The income tax provision for the prior quarter of $1.3 thousand on pre-tax income of $5.2 million was an effective tax rate of 25.6%.


Earnings Per Share

Diluted earnings per share were $0.26 for the three months ended September 30, 2020 compared with diluted earnings per share of $0.26 for the same period a year ago and diluted earnings per share of $0.23 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
  September 30, 2020 September 30, 2019 June 30, 2020
  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) $1,046,187 $12,499 4.75% $1,029,534 $13,013 5.01% $1,048,139 $12,411 4.76%
PPP loans  163,090  949 2.31%     %  132,776  813 2.46%
Taxable securities  228,045  1,284 2.24%  238,601  1,609 2.68%  211,195  1,329 2.53%
Tax-exempt securities (3)  68,766  457 2.64%  32,974  271 3.26%  58,540  423 2.91%
Interest-bearing deposits
in other banks
  95,348  29 0.12%  58,897  308 2.07%  72,507  21 0.12%
Average interest-
earning assets
  1,601,436  15,218 3.78%  1,360,006  15,201 4.43%  1,523,157  14,997 3.96%
Cash and due from banks  23,381        23,822        21,564      
Premises and equipment, net  15,365        15,922        15,428      
Goodwill  11,671        11,686        11,671      
Other intangible assets, net  4,318        5,083        4,508      
Other assets  47,945        45,925        50,499      
Average total assets $1,704,116       $1,462,444       $1,626,827      
                            
Interest-bearing liabilities:                           
Interest-bearing demand $279,744  71 0.10% $243,553  117 0.19% $261,907  85 0.13%
Money market  387,995  289 0.30%  309,188  451 0.58%  365,368  317 0.35%
Savings  146,074  74 0.20%  138,296  131 0.38%  138,500  95 0.28%
Certificates of deposit  139,757  420 1.20%  157,620  491 1.24%  142,955  467 1.31%
Federal Home Loan Bank of San Francisco borrowings  10,000   %     %  16,044  5 0.13%
Other borrowings net of unamortized debt issuance costs  9,988  184 7.33%  9,942  183 7.30%  9,976  184 7.42%
Junior subordinated
debentures
  10,310  50 1.93%  10,310  106 4.08%  10,310  61 2.38%
Average interest-
bearing liabilities
  983,868  1,088 0.44%  868,909  1,479 0.68%  945,060  1,214 0.52%
Noninterest-bearing demand  531,459        405,853        497,636      
Other liabilities  17,356        18,074        17,095      
Shareholders’ equity  171,433        169,608        167,036      
Average liabilities and
shareholders’ equity
 $1,704,116       $1,462,444       $1,626,827      
Net interest income and
net interest margin (4)
    $14,130 3.51%    $13,722 4.00%    $13,783 3.64%
                            
(1) Interest income on loans includes deferred fees and costs of approximately $240 thousand, $161 thousand, and $138 thousand for the three months ended September 30, 2020 and 2019 and June 30, 2020, respectively. Interest income on PPP loans includes $538 thousand and $476 thousand of fee income for the three months ended September 30, 2020 and June 30, 2020, respectively.
(2) Loans net of PPP includes average nonaccrual loans of $6.6 million, $13.2 million and $5.6 million for the three months ended September 30, 2020 and 2019 and June 30, 2020, respectively.
(3) Interest income and yields on tax-exempt securities are not presented on a taxable 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 September 30, 2020 and 2019 and June 30, 2020 included $233 thousand, $193 thousand and $216 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 basis points. Net interest income for the three months ended September 30, 2020 included $949 thousand in interest and fee income from PPP loans with an average balance of $163.1 million for the quarter, which decreased the net interest margin by 14 basis points.
(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.



TABLE 10b
NET INTEREST MARGIN - UNAUDITED
(dollars in thousands)
                   
  For The Nine Months Ended
  September 30, 2020 September 30, 2019
  Average    Yield / Average    Yield /
  Balance Interest(1) Rate (5) Balance Interest(1) Rate (5)
Interest-earning assets:                  
Loans net of PPP (2) $1,042,685 $37,248 4.77% $1,017,127 $37,891 4.98%
PPP loans  98,857  1,762 2.38%     %
Taxable securities  225,558  4,195 2.48%  247,139  5,106 2.76%
Tax-exempt securities (3)  54,112  1,151 2.84%  40,912  986 3.22%
Interest-bearing deposits
in other banks
  71,749  204 0.38%  44,995  772 2.29%
Average interest-
earning assets
  1,492,961  44,560 3.99%  1,350,173  44,755 4.43%
Cash and due from banks  22,314        22,375      
Premises and equipment, net  15,514        15,445      
Goodwill  11,671        10,450      
Other intangible assets, net  4,508        4,780      
Other assets  48,418        43,253      
Average total assets $1,595,386       $1,446,476      
                   
Interest-bearing liabilities:                  
Interest-bearing demand $258,420  256 0.13% $241,924  372 0.21%
Money market  353,775  1,009 0.38%  299,694  1,120 0.50%
Savings  140,048  287 0.27%  136,254  365 0.36%
Certificates of deposit  143,305  1,351 1.26%  163,020  1,478 1.21%
Federal Home Loan Bank of San Francisco borrowings  8,759  5 0.08%  12,894  247 2.56%
Other borrowings net of unamortized debt issuance costs  9,976  552 7.39%  11,213  623 7.43%
Junior subordinated
debentures
  10,310  201 2.60%  10,310  329 4.27%
Average interest-
bearing liabilities
  924,593  3,661 0.53%  875,309  4,534 0.69%
Noninterest-bearing demand  483,490        391,208      
Other liabilities  17,102        17,927      
Shareholders’ equity  170,201        162,032      
Average liabilities and shareholders’ equity $1,595,386       $1,446,476      
Net interest income and
net interest margin (4)
    $40,899 3.66%    $40,221 3.98%
                   
(1) Interest income on loans includes deferred fees and costs of approximately $636 thousand and $433 thousand for the nine months ended September 30, 2020 and 2019, respectively. Interest income on PPP loans includes $1.0 million of fee income for the nine months ended September 30, 2020.
(2) Loans net of PPP includes average nonaccrual loans of $5.8 million and $11.8 million for the nine months ended September 30, 2020 and 2019, respectively.
(3) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
(4) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the nine months ended September 30, 2020 and 2019 included $612 thousand and $431 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 and 6 basis points, respectively. Net interest income for the nine months ended September 30, 2020 included $1.8 million in interest and fee income from PPP loans with an average balance of $98.9 million for the nine months ended September 30, 2020, which decreased the net interest margin by 9 basis points.
(5) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.



TABLE 11 
ALLOWANCE FOR LOAN AND LEASE LOSSES ROLL FORWARD AND IMPAIRED LOAN TOTALS - UNAUDITED 
(dollars in thousands) 
                    
 For The Three Months Ended
 September 30,  June 30, March 31, December 31,  September 30,
 2020 2020 2020 2019 2019
Beginning balance ALLL$16,089   $15,067   $12,231   $12,285   $12,445  
Provision for loan and lease losses 1,100    1,300    2,850          
Loans charged-off (502)   (356)   (169)   (174)   (319) 
Loan loss recoveries 186    78    155    120    159  
Ending balance ALLL$16,873   $16,089   $15,067   $12,231   $12,285  
                    
 At September 30,  At June 30, At March 31, At December 31,  At September 30,
 2020 2020 2020 2019 2019
Nonaccrual loans:                   
Commercial$1,549   $7   $39   $61   $139  
Real estate - commercial non-owner occupied 1,062    1,062            10,099  
Real estate - commercial owner occupied 3,750    3,647    3,103    3,103      
Real estate - residential - ITIN 1,574    1,738    1,878    2,221    2,339  
Real estate - residential - 1-4 family mortgage 145    180    184    191    198  
Consumer and other 18    37    39    40    21  
Total nonaccrual loans 8,098    6,671    5,243    5,616    12,796  
Accruing troubled debt restructured loans:                   
Commercial 531    592    592    595    629  
Real estate - residential - ITIN 3,597    3,642    3,891    3,957    4,072  
Real estate - residential - equity lines 131    221    226    231    236  
Total accruing troubled debt restructured loans 4,259    4,455    4,709    4,783    4,937  
                    
All other accruing impaired loans                   
                    
Total impaired loans$12,357   $11,126   $9,952   $10,399   $17,733  
                    
Gross loans outstanding at period end$1,206,065   $1,206,340   $1,052,245   $1,032,903   $1,033,082  
                    
Impaired loans to gross loans 1.02 %  0.92 %  0.95 %  1.01 %  1.72 %
Nonaccrual loans to gross loans 0.67 %  0.55 %  0.50 %  0.54 %  1.24 %
                    
Allowance for loan and lease losses as a percent of:             
Gross loans 1.40 %  1.33 %  1.43 %  1.18 %  1.19 %
Nonaccrual loans 208.36 %  241.18 %  287.37 %  217.79 %  96.01 %
Impaired loans 136.55 %  144.61 %  151.40 %  117.62 %  69.28 %



TABLE 12 
ALLOWANCE, RESERVE AND DISCOUNT - UNAUDITED 
(dollars in thousands) 
                    
 At September 30,  At June 30, At March 31, At December 31,  At September 30,
 2020 2020 2020 2019 2019
ALLL$16,873  $16,089  $15,067  $12,231  $12,285 
Reserve for unfunded commitments 800   800   695   695   695 
Discount on acquired loans (1) 1,060   1,293   1,509   1,672   1,860 
Total allowance, reserve and discount$18,733  $18,182  $17,271  $14,598  $14,840 
                    
Gross loans$1,206,065  $1,206,340  $1,052,245  $1,032,903  $1,033,082 
PPP loans 163,493   162,189          
Total gross loans net of PPP loans$1,042,572  $1,044,151  $1,052,245  $1,032,903  $1,033,082 
                    
Total allowance, reserve and discount as a percentage of
total gross loans net of PPP loans
 1.80%  1.74%  1.64%  1.41%  1.44%
(1) Discount on acquired loans includes fair value discount for loans acquired from Merchants in January of 2019.


COVID‐19 Loan Analysis

During the third quarter of 2020, we continued to proactively monitor our loan portfolio by maintaining 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.

We have segmented our commercial loan and commercial real estate loan portfolios (86% of gross loans excluding PPP loans) to identify those loans in industries that are most at risk or where other information indicates the borrower may be significantly impacted by the effects of COVID-19. The following table presents loans by industry that are most at risk or where other information indicates the loan or borrower may be highly impacted by COVID-19 and the related loan modifications. The table below includes $10.0 million and $21.3 million of SBA 7(a) (generally 75% guaranteed) loans in the high risk and low to moderate risk categories, respectively.

TABLE 13
COVID-19 LOAN ANALYSIS - UNAUDITED
(dollars in thousands)
                             
 At September 30, 2020
 Individually Analyzed Loans With a
COVID-19 Risk Of
        Loan Modifications
       Low and              Low and
 High Moderate PPP Total High Moderate
 # Amount Amount Amount Amount # Amount # Amount
CRE and C&I                            
Industries highly impacted by COVID-19:                            
Retail trade12 $15,896  $24,641  $8,050  $48,587  $   $ 
Health care and social assistance46  14,148   12,847   17,701   44,696 6  3,608  1  954 
Hotels, motels and bed-and-breakfast inns17  34,635      1,402   36,037 3  9,986     
Other services7  6,014   18,318   2,967   27,299 1  2,032  1  231 
Restaurants, bars and caterers20  11,103      6,370   17,473 2  1,606     
Educational services3  7,348   303   2,693   10,344        
Arts, entertainment and recreation20  4,200   60   4,579   8,839 5  1,698     
Other industries22  17,255   739,069   119,731   876,055 3  4,032  10  10,757 
Residential, Consumer and All Other not individually analyzed     136,735      136,735     116  3,714 
Total147 $110,599  $931,973  $163,493  $1,206,065 20 $22,962  128 $15,656 
                             
% to gross loans   9.17%  77.27%  13.56%       1.90%    1.30%


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, are not indicative of potential losses related to a pandemic such as we are currently experiencing with COVID-19. In response to quantitative data deficiencies, we have placed greater reliance on qualitative factors (Q-Factors).

At September 30, 2020, our review of the adequacy of our allowance for loan and lease losses (ALLL) focused on our Q-Factor for “changes in the volume and severity of past due loans and other similar conditions”. We considered concentrations of credit in industries that are more likely to be significantly impacted by the effects of COVID-19. We evaluated our C&I portfolio by NAICS code and our CRE portfolio for concentrations of tenants and businesses in higher risk industries or for loans with higher LTVs. We also completed analyses on individual borrowers who may be higher risk. After updating this work, during the third quarter we significantly increased our Q-Factor for “changes in the volume and severity of past due loans and other similar conditions”. Our ALLL methodology, adjusted for the revised Q-Factor discussed above necessitated an ALLL of $16.9 million at September 30, 2020, an increase of 38% compared to our ALLL of $12.2 million at December 31, 2019. A provision for loan and lease losses of $1.1 million was recorded during the current quarter compared to $1.3 million in the prior quarter. There was no provision for loan and lease loss during the same quarter a year ago. Our ALLL as a percentage of gross loans was 1.40% as of September 30, 2020 compared to 1.19% as of September 30, 2019 and 1.33% as of June 30, 2020. Excluding SBA guaranteed PPP loans our ALLL as a percentage of gross loans was 1.62% as of September 30, 2020 compared to 1.54% as of June 30, 2020.

Management believes the Company’s ALLL is adequate at September 30, 2020. 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 September 30, 2020, the recorded investment in loans classified as impaired totaled $12.4 million, with a corresponding specific reserve of $204 thousand compared to impaired loans of $17.7 million with a corresponding specific reserve of $335 thousand at September 30, 2019 and impaired loans of $11.1 million, with a corresponding specific reserve of $270 thousand at June 30, 2020. The increase in impaired loans during the current quarter was due to two commercial loans totaling $1.4 million that were placed on nonaccrual status during the third quarter of 2020.

TABLE 14
TROUBLED DEBT RESTRUCTURINGS - UNAUDITED
(dollars in thousands)
                     
  At September 30,  At June 30, At March 31, At December 31,  At September 30,
  2020 2020 2020 2019 2019
Nonaccrual $2,063  $2,194  $1,611  $1,680  $1,746 
Accruing  4,259   4,455   4,709   4,783   4,937 
Total troubled debt restructurings $6,322  $6,649  $6,320  $6,463  $6,683 
                     
Troubled debt restructurings as a percentage of total gross loans  0.52%  0.55%  0.60%  0.63%  0.65%


There were no new troubled debt restructurings during the three months ended September 30, 2020. As of September 30, 2020, we had 92 restructured loans that qualified as troubled debt restructurings, of which 91 were performing according to their restructured terms.

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 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 that where initially granted a deferral of less than 6 months, we have granted an additional deferral period on a case-by-case basis. Since March of 2020, we have granted 261 payment deferrals totaling $125.3 million. As of September 30, 2020 loans totaling $82.5 million have resumed making payments.

The following tables present approved loan deferrals that are still in effect at September 30, 2020. For the loans with payment deferrals at September 30, 2020, nine borrowers also received a PPP loan through our U.S. Small Business Administration (“SBA”) department.


TABLE 15a
COVID-19 LOAN DEFERRALS - UNAUDITED
(dollars in thousands)
                
  Payments Scheduled to Resume In The Three Months Ended   
  December 31, 2020 March 31, 2021     
  # Amount # Amount # Total
Length of 1st deferral granted:               
3 months 2 $1,748  $ 2 $1,748
5 months 2  935    2  935
6 months 18  19,986 3  484 21  20,470
Length of 2nd deferral granted:               
2 months 1  2,873    1  2,873
3 months 7  6,865 1  2,033 8  8,898
Total loan deferrals 30  32,407 4  2,517 34  34,924
                
Loans serviced by others (1)       114  3,694
Total 60 $64,814 8 $5,034 182 $73,542
(1) Loans serviced by others are small residential mortgages and consumer home improvement loans, which are deferred on a short-term basis up to a maximum of six months.



TABLE 15b
COVID-19 LOAN DEFERRALS BY INDUSTRY - UNAUDITED
(dollars in thousands)
                
  Payments Scheduled to Resume In The Three Months Ended   
  December 31, 2020 March 31, 2021     
Industry: # Amount # Amount # Total
Health care and social assistance 6 $4,550 1 $12 7 $4,562
Hotels, motels and bed-and-breakfast inns 3  9,986    3  9,986
Other services 1  231 1  2,033 2  2,264
Restaurants, bars and caterers 2  1,605    2  1,605
Arts, entertainment and recreation 5  1,698    5  1,698
Other industries 13  14,337 2  472 15  14,809
Total loan deferrals 30  32,407 4  2,517 34  34,924
                
Loans serviced by others (1)       114  3,694
Total 60 $64,814 8 $5,034 182 $73,542
(1) Loans serviced by others are small residential mortgages and consumer home improvement loans, which are deferred on a short-term basis up to a maximum of six months.


The following table presents nonperforming assets at the dates indicated.

TABLE 16
NONPERFORMING ASSETS - UNAUDITED
(dollars in thousands)
                     
  At September 30,  At June 30, At March 31, At December 31,  At September 30,
  2020 2020 2020 2019 2019
Total nonaccrual loans $8,098  $6,671  $5,243  $5,616  $12,796 
90 days past due and still accruing        2       
Total nonperforming loans  8,098   6,671   5,245   5,616   12,796 
                     
Other real estate owned ("OREO")  8   8   8   35   58 
Total nonperforming assets $8,106  $6,679  $5,253  $5,651  $12,854 
                     
Nonperforming loans to gross loans  0.67%  0.55%  0.50%  0.54%  1.24%
Nonperforming assets to total assets  0.47%  0.39%  0.36%  0.38%  0.87%


The following table summarizes when loans are projected to reprice by year and rate index as of September 30, 2020.

TABLE 17
LOANS BY RATE INDEX AND PROJECTED REPRICING - UNAUDITED
(dollars in thousands)
                         
 At September 30, 2020
                 Years 6      
                 Through Beyond    
Rate Index: Year 1 Year 2 Year 3 Year 4 Year 5 Year 10 Year 10 Total
Fixed $151,140 $112,246 $80,366 $31,253 $28,809 $163,536 $22,862 $590,212
Variable:                        
Prime  84,620  4,712  7,187  6,788  7,724  1,412    112,443
5 Year Treasury  46,749  60,366  87,327  66,646  105,976  48,013    415,077
7 Year Treasury  3,252  609  4,764  5,631  368  13,560    28,184
1 Year LIBOR  21,748              21,748
Other Indexes  5,627  1,668  2,030  1,443  7,314  10,278  906  29,266
Total variable  161,996  67,355  101,308  80,508  121,382  73,263  906  606,718
                         
Nonaccrual  2,109  1,026  994  695  498  2,015  761  8,098
Total $315,245 $180,627 $182,668 $112,456 $150,689 $238,814 $24,529 $1,205,028


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 18
LOAN FLOORS - UNAUDITED
(dollars in thousands)
          
  At September 30, 2020
  Loans At Loans Above   
  Floor Rate Floor Rate Total
Variable rate loans with floors:         
Prime $58,674 $4,977 $63,651
5 year Treasury  339,407  47,132  386,539
7 Year Treasury  28,184    28,184
1 Year LIBOR    726  726
Other Indexes  15,141  1,260  16,401
  $441,406 $54,095  495,501
          
Variable rate loans without floors:         
Prime        48,792
5 year Treasury        28,538
1 Year LIBOR        21,022
Other Indexes        12,865
         111,217
          
Total accruing variable rate loans       $606,718
          
Nonaccrual        8,098
Total variable rate loans       $614,816



TABLE 19
UNAUDITED CONSOLIDATED
BALANCE SHEET
(dollars in thousands, except per share data)
                
 At September 30,  Change At June 30,
  2020  2019  $ % 2020 
Assets:               
Cash and due from banks $22,884   $32,505   $(9,621) (30)% $29,630  
Interest-bearing deposits in other banks  104,999    56,099    48,900   87  %  126,132  
Total cash and cash equivalents  127,883    88,604    39,279   44  %  155,762  
                
Securities available-for-sale, at fair value  337,032    272,341    64,691   24  %  280,200  
Loans, net of deferred fees and costs  1,205,028    1,035,062    169,966   16  %  1,204,737  
Allowance for loan and lease losses  (16,873)  (12,285)  (4,588) (37)%  (16,089)
Net loans  1,188,155    1,022,777    165,378   16  %  1,188,648  
                
Premises and equipment, net  15,210    16,084    (874) (5)%  15,466  
Other real estate owned     58    (50) (86)%   
Life insurance  24,086    23,576    510    %  23,968  
Deferred tax asset, net  2,571    4,818    (2,247) (47)%  2,645  
Goodwill  11,671    11,671       %  11,671  
Other intangible assets, net  4,235    5,001    (766) (15)%  4,426  
Other assets  29,037    27,497    1,540    %  29,102  
Total assets $1,739,888   $1,472,427   $267,461   18  % $1,711,896  
                
Liabilities and shareholders' equity:               
Demand - noninterest-bearing $542,060   $412,410   $129,650   31  % $521,751  
Demand - interest-bearing  280,370    239,547    40,823   17  %  287,198  
Money market  403,785    317,120    86,665   27  %  405,322  
Savings  151,016    137,441    13,575   10  %  142,389  
Certificates of deposit  140,900    155,621    (14,721) (9)%  137,647  
Total deposits  1,518,131    1,262,139    255,992   20  %  1,494,307  
                
Term debt:               
Federal Home Loan Bank of San Francisco borrowings  10,000       10,000   100  %  10,000  
Other borrowings  10,000    10,000       %  10,000  
Unamortized debt issuance costs  (7)  (55)  48   87  %  (19)
Net term debt  19,993    9,945    10,048   101  %  19,981  
                
Junior subordinated debentures  10,310    10,310       %  10,310  
Other liabilities  18,104    18,396    (292) (2)%  17,743  
Total liabilities  1,566,538    1,300,790    265,748   20  %  1,542,341  
                
Shareholders' equity:               
Common stock  58,872    72,200    (13,328) (18)%  58,749  
Retained earnings  107,154    97,100    10,054   10  %  103,658  
Accumulated other comprehensive income, net of tax  7,324    2,337    4,987   213  %  7,148  
Total shareholders' equity  173,350    171,637    1,713    %  169,555  
                
Total liabilities and shareholders' equity $1,739,888   $1,472,427   $267,461   18  % $1,711,896  
                
Total interest-earning assets $1,636,661   $1,360,184   $276,477   20  % $1,600,922  
Shares outstanding  16,792    18,212    (1,420) (8)%  16,739  
Book value per share (1) $10.32   $9.42   $0.90   10  % $10.13  
Tangible book value per share (1) $9.38   $8.51   $0.87   10  % $9.17  
                 
(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 20
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
  For The Three Months Ended For The Nine Months Ended
  September 30,  Change June 30, September 30,
  2020 2019 $ % 2020 2020  2019
Interest income:                     
Interest and fees on loans $13,448 $13,013 $435  3 % $13,224 $39,010  $37,891
Interest on taxable securities  1,284  1,609  (325) (20)%  1,329  4,195   5,106
Interest on tax-exempt securities  457  271  186  69 %  423  1,151   986
Interest on interest-bearing deposits in other banks  29  308  (279) (91)%  21  204   772
Total interest income  15,218  15,201  17   %  14,997  44,560   44,755
Interest expense:                     
Interest on demand deposits  71  117  (46) (39)%  85  256   372
Interest on money market  289  451  (162) (36)%  317  1,009   1,120
Interest on savings  74  131  (57) (44)%  95  287   365
Interest on certificates of deposit  420  491  (71) (14)%  467  1,351   1,478
Interest on Federal Home Loan Bank of
San Francisco borrowings
         %  5  5   247
Interest on other borrowings  184  183  1  1 %  184  552   623
Interest on junior subordinated debentures  50  106  (56) (53)%  61  201   329
Total interest expense  1,088  1,479  (391) (26)%  1,214  3,661   4,534
Net interest income  14,130  13,722  408  3 %  13,783  40,899   40,221
Provision for loan and lease losses  1,100    1,100  100 %  1,300  5,250   
Net interest income after provision
for loan and lease losses
  13,030  13,722  (692) (5)%  12,483  35,649   40,221
Noninterest income:                     
Service charges on deposit accounts  142  177  (35) (20)%  152  463   532
ATM and point of sale fees  297  293  4  1 %  263  828   876
Payroll and benefit processing fees  152  158  (6) (4)%  143  465   486
Life insurance  125  126  (1) (1)%  148  396   410
Gain on investment securities, net  258  12  246  2,050 %  140  482   137
Federal Home Loan Bank of
San Francisco dividends
  109  131  (22) (17)%  36  275   376
(Loss) gain on sale of OREO         %    (23)  41
Other income  106  109  (3) (3)%  73  150   305
Total noninterest income  1,189  1,006  183  18 %  955  3,036   3,163



TABLE 20 - CONTINUED
UNAUDITED
INCOME STATEMENT
(dollars in thousands, except per share data)
                      
  For The Three Months Ended For The Nine Months Ended
  September 30,  Change June 30, September 30,
  2020 2019  $ % 2020 2020 2019
Noninterest expense:                     
Salaries and related benefits  5,126  5,005   121  2 %  4,965  15,978  15,880
Premises and equipment  951  933   18  2 %  826  2,631  2,836
Federal Deposit Insurance Corporation
insurance premium
  101  (104)  205  197 %  90  227  91
Data processing  581  582   (1)  %  585  1,697  1,796
Professional services  342  392   (50) (13)%  469  1,145  1,230
Telecommunications  157  194   (37) (19)%  156  484  547
Acquisition and merger    (113)  113  100 %      2,193
Other expenses  1,132  1,411   (279) (20)%  1,179  4,281  4,261
Total noninterest expense  8,390  8,300   90  1 %  8,270  26,443  28,834
Income before provision for income taxes  5,829  6,428   (599) (9)%  5,168  12,242  14,550
Provision for income taxes  1,500  1,786   (286) (16)%  1,321  3,150  3,958
Net income $4,329 $4,642  $(313) (7)% $3,847 $9,092 $10,592
                      
Earnings per share - basic $0.26 $0.26  $   % $0.23 $0.53 $0.59
Weighted average shares - basic  16,660  18,130   (1,470) (8)%  16,660  17,004  17,918
Earnings per share - diluted $0.26 $0.26  $   % $0.23 $0.53 $0.59
Weighted average shares - diluted  16,696  18,196   (1,500) (8)%  16,689  17,044  17,981



TABLE 21
UNAUDITED CONDENSED CONSOLIDATED
QUARTERLY AVERAGE BALANCE SHEETS
(dollars in thousands)
                
  For The Three Months Ended
  September 30,  June 30, March 31, December 31,  September 30,
  2020 2020 2020 2019 2019
Earning assets:               
Loans $1,209,277 $1,180,915 $1,033,689 $1,031,702 $1,029,534
Taxable securities  228,045  211,195  237,405  245,487  238,601
Tax-exempt securities  68,766  58,540  34,869  32,158  32,974
Interest-bearing deposits in other banks  95,348  72,507  47,135  81,099  58,897
Total earning assets  1,601,436  1,523,157  1,353,098  1,390,446  1,360,006
                
Cash and due from banks  23,381  21,564  21,987