Quarterly Report (10-q)

0000702513 Bank of Commerce Holdings false --12-31 Q3 2020 0 0 50,000,000 50,000,000 16,791,685 16,791,685 18,137,167 18,137,167 0.04 0.05 0.05 0.05 0.05 0.05 0.05 5 0 0 0 0 100 2.54 0 77.42 15.93 0 34.47 17.95 1 10.4 3.99 8 0 136 0 Excludes unvested restricted shares because they do not have dividend or voting rights Net income includes acquisition-related costs of ($113) thousand and $2.2 million of the three and nine months ended September 30, 2019, respectively. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-25135

Bank of Commerce Holdings

California	94-2823865
(State or jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

555 Capitol Mall, Suite 1255, Sacramento, California	95814
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (800) 421-2575

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	BOCH	NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ☐ No ☒

Outstanding shares of Common Stock, no par value, as of October 20, 2020: 16,786,685

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q

Part I. FINANCIAL INFORMATION
	Item 1. Financial Statements	3
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	75
	Item 4. Controls and Procedures	75

Part II. OTHER INFORMATION
	Item 1. Legal Proceedings	76
	Item 1A. Risk Factors	76
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	76
	Item 3. Defaults Upon Senior Securities	76
	Item 4. Mine Safety Disclosures	76
	Item 5. Other Information	76
	Item 6. Exhibits	77

SIGNATURES		78

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

	September 30,			December 31,
(Amounts in thousands, except share information)	2020			2019
Assets:
Cash and due from banks	$	22,884		$	21,338
Interest-bearing deposits in other banks		104,999			59,266
Total cash and cash equivalents		127,883			80,604

Securities available-for-sale, at fair value		337,032			286,950

Loans, net of deferred fees and costs		1,205,028			1,035,065
Allowance for loan and lease losses		(16,873	)		(12,231	)
Net loans		1,188,155			1,022,834

Premises and equipment, net		15,210			15,906
Other real estate owned		8			35
Life insurance		24,086			23,701
Deferred tax asset, net		2,571			4,553
Goodwill		11,671			11,671
Other intangible assets, net		4,235			4,809
Other assets		29,037			28,553
Total assets	$	1,739,888		$	1,479,616

Liabilities and shareholders' equity:
Liabilities:
Demand - noninterest-bearing	$	542,060		$	432,680
Demand - interest-bearing		280,370			239,258
Money market		403,785			307,559
Savings		151,016			135,888
Certificates of deposit		140,900			151,786
Total deposits		1,518,131			1,267,171

Term debt:
Federal Home Loan Bank of San Francisco borrowings		10,000			—
Other borrowings		10,000			10,000
Less unamortized debt issuance costs		(7	)		(43	)
Net term debts		19,993			9,957

Junior subordinated debentures		10,310			10,310
Other liabilities		18,104			17,700
Total liabilities		1,566,538			1,305,138

Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 16,791,685 as of September 30, 2020 and 18,137,167 as of December 31, 2019		58,872			71,311
Retained earnings		107,154			100,566
Accumulated other comprehensive income, net of tax		7,324			2,601
Total shareholders' equity		173,350			174,478
Total liabilities and shareholders' equity	$	1,739,888		$	1,479,616

See accompanying notes to consolidated financial statements.

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
(Amounts in thousands, except per share information)	2020		2019			2020			2019
Interest income:
Interest and fees on loans	$	13,448	$	13,013		$	39,010		$	37,891
Interest on taxable securities		1,284		1,609			4,195			5,106
Interest on tax-exempt securities		457		271			1,151			986
Interest on interest-bearing deposits in other banks		29		308			204			772
Total interest income		15,218		15,201			44,560			44,755
Interest expense:
Interest on demand - interest-bearing		71		117			256			372
Interest on money market		289		451			1,009			1,120
Interest on savings		74		131			287			365
Interest on certificates of deposit		420		491			1,351			1,478
Interest on Federal Home Loan Bank of San Francisco borrowings		—		—			5			247
Interest on other borrowings		184		183			552			623
Interest on junior subordinated debentures		50		106			201			329
Total interest expense		1,088		1,479			3,661			4,534
Net interest income		14,130		13,722			40,899			40,221
Provision for loan and lease losses		1,100		—			5,250			—
Net interest income after provision for loan and lease losses		13,030		13,722			35,649			40,221
Noninterest income:
Service charges on deposit accounts		142		177			463			532
ATM and point of sale fees		297		293			828			876
Payroll and benefit processing fees		152		158			465			486
Life insurance		125		126			396			410
Gain on sale of investment securities, net		258		12			482			137
Federal Home Loan Bank of San Francisco dividends		109		131			275			376
(Loss) gain on sale of OREO		—		—			(23	)		41
Other income		106		109			150			305
Total noninterest income		1,189		1,006			3,036			3,163
Noninterest expense:
Salaries and related benefits		5,126		5,005			15,978			15,880
Premises and equipment		951		933			2,631			2,836
FDIC insurance premium		101		(104	)		227			91
Data processing		581		582			1,697			1,796
Professional services		342		392			1,145			1,230
Telecommunications		157		194			484			547
Acquisition and merger		—		(113	)		—			2,193
Other expenses		1,132		1,411			4,281			4,261
Total noninterest expense		8,390		8,300			26,443			28,834
Income before provision for income taxes		5,829		6,428			12,242			14,550
Provision for income taxes		1,500		1,786			3,150			3,958
Net income	$	4,329	$	4,642		$	9,092		$	10,592

Earnings per share - basic	$	0.26	$	0.26		$	0.53		$	0.59
Weighted average shares - basic		16,660		18,130			17,004			17,918
Earnings per share - diluted	$	0.26	$	0.26		$	0.53		$	0.59
Weighted average shares - diluted		16,696		18,196			17,044			17,981

See accompanying notes to consolidated financial statements.

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Amounts in thousands)	2020			2019			2020			2019
Net income	$	4,329		$	4,642		$	9,092		$	10,592

Available-for-sale securities:
Changes in unrealized gains arising during the period		509			(81	)		7,187			7,725
Income taxes		(151	)		23			(2,124	)		(2,284	)
Change in unrealized gain, net of tax		358			(58	)		5,063			5,441

Reclassification adjustment for realized gains included in net income		(258	)		(12	)		(482	)		(137	)
Income taxes		76			4			142			41
Realized gains, net of tax		(182	)		(8	)		(340	)		(96	)
Net change in unrealized gains (losses) on available-for-sale securities		176			(66	)		4,723			5,345
Other comprehensive income (loss)		176			(66	)		4,723			5,345
Comprehensive income – Bank of Commerce Holdings	$	4,505		$	4,576		$	13,815		$	15,937

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Unaudited)

										Accumulated Other
				*Common*						*Comprehensive*
	*Common*			*Stock*			*Retained*			*(Loss) Income*
(Amounts in thousands except per share information)	*Shares*			*Amount*			*Earnings*			*Net of Tax*			*Total*
Balance at December 31, 2018		16,334		$	52,284		$	89,045		$	(3,008	)	$	138,321
Net income		—			—			2,306			—			2,306
Other comprehensive income, net of tax		—			—			—			2,514			2,514
Comprehensive income		—			—			—			—			4,820
Dividend declared on common stock ($0.04 per share)		—			—			(725	)		—			(725	)
Stock issued for Merchants acquisition		1,834			19,606			—			—			19,606
Stock compensation grants		6			58			—			—			58
Restricted stock granted, net		31			—			—			—			—
Stock options exercised		8			40			—			—			40
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			(22	)		—			—			(22	)
Balance at March 31, 2019		18,213		$	71,966		$	90,626		$	(494	)	$	162,098
Net income		—			—			3,644			—			3,644
Other comprehensive income, net of tax		—			—			—			2,897			2,897
Comprehensive income		—			—			—			—			6,541
Dividend declared on common stock ($0.05 per share)		—			—			(907	)		—			(907	)
Restricted stock granted, net		1			—			—			—			—
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			121			—			—			121
Balance at June 30, 2019		18,214		$	72,087		$	93,363		$	2,403		$	167,853
Net income		—			—			4,642			—			4,642
Other comprehensive loss, net of tax		—			—			—			(66	)		(66	)
Comprehensive income		—			—			—			—			4,576
Dividend declared on common stock ($0.05 per share)		—			—			(905	)		—			(905	)
Restricted stock granted, net		(2	)		—			—			—			—
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			113			—			—			113
Balance at September 30, 2019		18,212		$	72,200		$	97,100		$	2,337		$	171,637
Net income		—			—			4,369			—			4,369
Other comprehensive income, net of tax		—			—			—			264			264
Comprehensive income		—			—			—			—			4,633
Dividend declared on common stock ($0.05 per share)		—			—			(903	)		—			(903	)
Repurchase of common stock		(91	)		(1,010	)		—			—			(1,010	)
Restricted stock granted, net		13			—			—			—			—
Stock options exercised		3			12			—			—			12
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			109			—			—			109
Balance at December 31, 2019		18,137		$	71,311		$	100,566		$	2,601		$	174,478

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Unaudited) (Continued)

										Accumulated Other
				*Common*						*Comprehensive*
	*Common*			*Stock*			*Retained*			*Income*
(Amounts in thousands except per share information)	*Shares*			*Amount*			*Earnings*			*Net of Tax*		*Total*
Balance at December 31, 2019		18,137		$	71,311		$	100,566		$	2,601	$	174,478
Net income		—			—			916			—		916
Other comprehensive income, net of tax		—			—			—			3,346		3,346
Comprehensive income		—			—			—			—		4,262
Dividend declared on common stock ($0.05 per share)		—			—			(838	)		—		(838	)
Repurchase of common stock		(1,352	)		(12,230	)		—			—		(12,230	)
Restricted stock granted, net		11			—			—			—		—
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			(14	)		—			—		(14	)
Balance at March 31, 2020		16,796		$	59,067		$	100,644		$	5,947	$	165,658
Net income		—			—			3,847			—		3,847
Other comprehensive income, net of tax		—			—			—			1,201		1,201
Comprehensive income		—			—			—			—		5,048
Dividend declared on common stock ($0.05 per share)		—			—			(833	)		—		(833	)
Repurchase of common stock		(57	)		(423	)		—			—		(423	)
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			105			—			—		105
Balance at June 30, 2020		16,739		$	58,749		$	103,658		$	7,148	$	169,555
Net income		—			—			4,329			—		4,329
Other comprehensive income, net of tax		—			—			—			176		176
Comprehensive income		—			—			—			—		4,505
Dividend on common stock ($0.05 per share)		—			—			(833	)		—		(833	)
Restricted stock granted, net		53			—			—			—		—
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—			123			—			—		123
Balance at September 30, 2020		16,792		$	58,872		$	107,154		$	7,324	$	173,350

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2020			2019
Cash flows from operating activities:
Net income	$	9,092		$	10,592
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		5,250			—
Provision for unfunded commitments		105			—
Provision for depreciation and amortization		894			1,055
Amortization of core deposit intangible		574			529
Amortization of debt issuance costs		36			36
Compensation expense associated with restricted stock		334			306
Tax benefits from vesting of restricted stock		(2	)		(6	)
Net gain on sale or call of securities		(482	)		(137	)
Amortization of premiums and accretion of discounts on investments, net		1,056			1,052
Amortization of premiums and accretion of discounts on acquired loans, net		(1,104	)		(1,201	)
Loss on disposal of fixed assets		132			—
Loss (gain) on sale of OREO		23			(41	)
Increase in cash surrender value of life insurance		(396	)		(410	)
Deferred compensation and salary continuation plan payments		(633	)		(1,072	)
Increase in deferred compensation and salary continuation plans		634			731
Increase (decrease) in deferred loan fees and costs		3,199			(53	)
(Increase) decrease in other assets		(1,759	)		1,516
Increase in other liabilities		1,369			513
Net cash provided by operating activities		18,322			13,410

Cash flows from investing activities:
Proceeds from maturities of and payments on available-for-sale securities		61,114			47,544
Proceeds from sale of available-for-sale securities		56,017			99,635
Purchases of available-for-sale securities		(160,759	)		(48,648	)
Investment in qualified affordable housing partnerships		(13	)		—
Net purchase of Federal Home Loan Bank of San Francisco stock		—			(34	)
Loan originations, net of principal repayments		(186,305	)		(27,697	)
Net repayment on loan pools		13,631			27,265
Purchase of premises and equipment		(353	)		(1,823	)
Proceeds from the sale of OREO		12			87
Acquisition of Merchants Holding Company, net of cash paid		—			(2,875	)
Net cash (used) provided by investing activities		(216,656	)		93,454

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2020			2019
Cash flows from financing activities:
Net increase (decrease) in demand, money market and savings deposits	$	261,846		$	(25,029	)
Net decrease in certificates of deposit		(10,886	)		(34,764	)
Advances on term debt		50,000			180,160
Repayment of term debt		(40,000	)		(183,656	)
Proceeds from stock options exercised		—			40
Repurchase of common stock		(12,653	)		—
Cash paid for shares surrendered for tax-withholding purposes		(120	)		(94	)
Cash dividends paid on common stock		(2,574	)		(2,282	)
Net cash provided (used) by financing activities		245,613			(65,625	)

Net increase in cash and cash equivalents		47,279			41,239
Cash and cash equivalents at beginning of year		80,604			47,365
Cash and cash equivalents at end of period	$	127,883		$	88,604

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2020			2019
Supplemental disclosures of cash flow activity:
Cash paid during the period for:
Income taxes	$	2,398		$	3,480
Interest	$	3,509		$	4,336
Operating leases	$	714		$	661
Supplemental disclosures of non-cash investing activities:
Transfer of loans to other real estate owned	$	8		$	74
Investment in qualified affordable housing partnership	$	1,000		$	—

Unrealized gain on investment securities available-for-sale, net of gains included in net income	$	6,705		$	7,588
Changes in net deferred tax asset related to changes in net unrealized gain on investment securities available-for-sale		(1,982	)		(2,243	)
Changes in accumulated other comprehensive income due to net unrealized gain on investment securities available-for-sale	$	4,723		$	5,345


Supplemental disclosures of non-cash financing activities:
Stock compensation grants	$	—		$	58
Cash dividend declared on common shares and payable after period-end	$	833		$	905
Right-of-use lease asset recorded on new leases	$	—		$	267
Right-of-use lease asset recorded on adoption of ASU No. 2016-02	$	—		$	3,998
Lease liability recorded on adoption of ASU No. 2016-02	$	—		$	4,363
Disclosures related to the acquisition of Merchants Holding Company:
Consideration paid	$	—		$	34,907
Assets acquired - fair value	$	—		$	215,055
Goodwill	$	—		$	11,006
Liabilities assumed - fair value	$	—		$	191,154

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”), is a corporation organized under the laws of California and a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”) with its principal offices in Sacramento, California. The Holding Company’s principal business is to serve as a holding company for Merchants Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) and for Bank of Commerce Mortgage (inactive). The Bank, which previously operated under three separate names, changed its name for all operations to Merchants Bank of Commerce effective May 20, 2019. We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 are derived from the unaudited interim consolidated financial statements or the audited consolidated financial statements, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The Company believes that all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and the disclosures made are adequate to make the information not misleading.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with prevailing practices within the banking and securities industries. In preparing such consolidated financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the Consolidated Balance Sheets and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the valuation and impairment of investment securities, the determination of the allowance for loan and lease losses (“ALLL”), income taxes, the valuation of goodwill and Other Real Estate Owned (“OREO”), and fair value measurements. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation. The results of reclassifications are not considered material and have no effect on previously reported net income or shareholders' equity. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2019 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2020 interim period shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Holding Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As of September 30, 2020 and December 31, 2019, the Company had one wholly-owned trust formed in 2005 to issue trust preferred securities and related common securities. We have not consolidated the accounts of the Trust in our consolidated financial statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”), Consolidation (“ASC 810”). We are not considered the primary beneficiary of the Trust (variable interest entity). As a result, the junior subordinated debentures issued by the Holding Company to the Trust are reflected on the Company’s Consolidated Balance Sheets.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in Other Assets and Other Liabilities in our Consolidated Balance Sheets. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an incremental borrowing rate, we use borrowing rates available under our existing line of credit with the Federal Home Loan Bank of San Francisco for periods similar to the lease terms as our incremental borrowing rate to determine the present value of future lease payments. Our lease terms may include options to extend or terminate the lease which we recognize when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Application of new accounting guidance

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities. The modifications and additions relate to Level 3 fair value measurements at the end of the reporting period. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted the requirements of this ASU on January 1, 2020 and added disclosure about significant observable inputs used to develop Level 3 fair value measurements prospectively. As the ASU’s requirements only relate to disclosures, the amendments will not impact our financial condition or results of operations.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 2. COMMON STOCK OUTSTANDING AND EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing income by the weighted-average number of common shares outstanding for the period, excluding unvested restricted stock awards which do not have voting rights or share in dividends. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Holding Company. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share.

The following is a computation of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(Amounts in thousands, except per share information)	2020		2019		2020		2019
Earnings Per Share:
Numerators:
Net income	$	4,329	$	4,642	$	9,092	$	10,592
Denominators:
Weighted average number of common shares outstanding - basic⁽¹⁾		16,660		18,130		17,004		17,918
Effect of potentially dilutive common shares ⁽²⁾		36		66		40		63
Weighted average number of common shares outstanding - diluted		16,696		18,196		17,044		17,981
Earnings per common share:
Basic	$	0.26	$	0.26	$	0.53	$	0.59
Diluted	$	0.26	$	0.26	$	0.53	$	0.59
Anti-dilutive restricted shares not included in diluted earnings per share calculation		73		—		63		—

⁽¹⁾	Excludes unvested restricted shares because they do not have dividend or voting rights
⁽²⁾	Represents the effects of the assumed exercise of stock options and vesting of non-participating restricted shares.

In 2019, we announced a stock repurchase program for 1.0 million shares of common stock that was subsequently increased to 1.5 million shares of common stock. Between October of 2019 and April 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.

NOTE 3. SECURITIES

The following tables present the amortized costs, unrealized gains, unrealized losses and estimated fair values of our investment securities as of September 30, 2020, and December 31, 2019.

	As of September 30, 2020
			Gross		Gross
	*Amortized*		*Unrealized*		*Unrealized*			*Estimated*
(Amounts in thousands)	*Costs*		*Gains*		*Losses*			*Fair Values*
Available-for-sale securities:
U.S. government & agencies	$	30,942	$	879	$	(10	)	$	31,811
Obligations of state and political subdivisions		87,628		4,281		(46	)		91,863
Residential mortgage-backed securities and collateralized mortgage obligations		161,345		4,512		(165	)		165,692
Commercial mortgage-backed securities		18,920		665		(8	)		19,577
Other asset-backed securities		27,799		327		(37	)		28,089
Total	$	326,634	$	10,664	$	(266	)	$	337,032

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2019
			Gross		Gross
	*Amortized*		*Unrealized*		*Unrealized*			*Estimated*
(Amounts in thousands)	*Costs*		*Gains*		*Losses*			*Fair Values*
Available-for-sale securities:
U.S. government & agencies	$	38,291	$	469	$	(27	)	$	38,733
Obligations of state and political subdivisions		40,702		1,422		(26	)		42,098
Residential mortgage-backed securities and collateralized mortgage obligations		179,114		2,163		(442	)		180,835
Corporate securities		3,005		6		(45	)		2,966
Commercial mortgage-backed securities		19,126		221		(40	)		19,307
Other asset-backed securities		3,019		—		(8	)		3,011
Total	$	283,257	$	4,281	$	(588	)	$	286,950

The following table presents the contractual maturities of investment securities at September 30, 2020.

	Available-For-Sale
(Amounts in thousands)	Amortized Costs		Fair Values
Amounts maturing in:
One year or less	$	22,257	$	22,731
After one year through five years		110,662		115,225
After five years through ten years		50,087		51,569
After ten years		143,628		147,507
Total	$	326,634	$	337,032

The amortized costs and fair values of residential mortgage-backed securities, collateralized mortgage obligations and commercial mortgage securities are presented by their expected average life, rather than contractual maturity, because the underlying loans may be repaid without prepayment penalties.

At September 30, 2020 and December 31, 2019, securities with a fair value of $82.7 million and $81.4 million, respectively, were pledged as collateral to secure public fund deposits, Federal Home Loan Bank of San Francisco borrowings and for other purposes as required by law.

The following table presents the cash proceeds from sales of investment securities, and the associated gross realized gains and gross realized losses that have been included in earnings for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2020			2019			2020			2019
Investment Securities:
Proceeds from sales of investment securities	$	6,257		$	13,895		$	56,017		$	99,635

Gross realized gains on sales of investment securities:
U.S. government & agencies	$	—		$	10		$	—		$	48
Obligations of state and political subdivisions		249			10			339			305
Residential mortgage-backed securities and collateralized mortgage obligations		—			22			226			86
Corporate securities		12			—			12			—
Commercial mortgage-backed securities		—			5			38			7
Total gross realized gains on sales of investment securities		261			47			615			446

Gross realized losses on sales of investment securities:
U.S. government & agencies		—			(9	)		(14	)		(13	)
Obligations of state and political subdivisions		(3	)		(6	)		(7	)		(96	)
Residential mortgage-backed securities and collateralized mortgage obligations		—			(9	)		(112	)		(157	)
Commercial mortgage-backed securities		—			(11	)		—			(43	)
Total gross realized losses on sales of investment securities		(3	)		(35	)		(133	)		(309	)
Gain on sales of investment securities, net	$	258		$	12		$	482		$	137

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Investment securities that were in an unrealized loss position as of September 30, 2020 and December 31, 2019 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.

	As of September 30, 2020
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Values		Losses			Values		Losses			Values		Losses
Available-for-sale securities:
U.S. government & agencies	$	—	$	—		$	2,836	$	(10	)	$	2,836	$	(10	)
Obligations of state and political subdivisions		5,915		(46	)		—		—			5,915		(46	)
Residential mortgage-backed securities and collateralized mortgage obligations		17,671		(159	)		285		(6	)		17,956		(165	)
Commercial mortgage-backed securities		2,057		(8	)		—		—			2,057		(8	)
Other asset-backed securities		3,001		(37	)		—		—			3,001		(37	)
Total temporarily impaired securities	$	28,644	$	(250	)	$	3,121	$	(16	)	$	31,765	$	(266	)

	As of December 31, 2019
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Values		Losses			Values		Losses			Values		Losses
Available-for-sale securities:
U.S. government & agencies	$	6,473	$	(25	)	$	380	$	(2	)	$	6,853	$	(27	)
Obligations of state and political subdivisions		2,249		(26	)		—		—			2,249		(26	)
Residential mortgage-backed securities and collateralized mortgage obligations		31,817		(207	)		22,166		(235	)		53,983		(442	)
Corporate securities		—		—			955		(45	)		955		(45	)
Commercial mortgage-backed securities		1,464		(1	)		4,549		(39	)		6,013		(40	)
Other asset-backed securities		3,011		(8	)		—		—			3,011		(8	)
Total temporarily impaired securities	$	45,014	$	(267	)	$	28,050	$	(321	)	$	73,064	$	(588	)

At September 30, 2020 and December 31, 2019, the number of securities that were in an unrealized loss position was 31 and 63, respectively. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. Our investment policy requires securities at the time of purchase to be rated A3/A- or higher by Moody’s, S&P and Fitch rating agencies. Management monitors the published credit ratings of our investment portfolio for material rating or outlook changes. For all private-label securities collateralized by mortgages, management also monitors the credit characteristics of the underlying mortgages to identify potential credit losses, if any, in the portfolio. Because the decline in fair value is not due to credit quality concerns, because we have no plans to sell the securities before the recovery of their amortized cost, and because the Bank has the ability to hold the securities to maturity, these investments are not considered other-than-temporarily impaired.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the characteristics of our securities that are in unrealized loss positions at September 30, 2020 and December 31, 2019.

		Characteristics of securities in unrealized loss positions at
Available-for-sale securities:		**September 30, 2020 and December 31, 2019**
U.S. government & agencies		Direct obligations of the U.S. Government or obligations guaranteed by U.S. Government agencies.
Obligations of state and political subdivisions		General obligation issuances or revenue securities issued by municipalities and political subdivisions located within the U.S. secured by revenues from specific sources.
Residential mortgage-backed securities and collateralized mortgage obligations		Obligations issued by U.S. government sponsored entities or non-governmental entities collateralized by high quality mortgages on residential properties. Issuances by non-governmental entities usually include good credit enhancements. Of the residential mortgage-backed securities and collateralized mortgage obligations that we owned at September 30, 2020 and December 31, 2019, 83% and 79% were issued or guaranteed by U.S. government sponsored entities, respectively.
Corporate securities		Debt obligations generally issued or guaranteed by large U.S. corporate institutions.
Commercial mortgage-backed securities		Obligations issued by U.S. government sponsored entities or non-governmental entities collateralized by high quality mortgages on commercial properties. Issuances by non-governmental entities usually include good credit enhancements. Of the commercial mortgage-backed securities that we owned at September 30, 2020 and December 31, 2019, 100% were issued or guaranteed by U.S. government sponsored entities.
Other asset-backed securities		Obligations issued by non-governmental issuers secured by high quality loans with good credit enhancements.

NOTE 4. LOANS

Outstanding loan balances consisted of the following at September 30, 2020, and December 31, 2019.

	September 30,			December 31,
(Amounts in thousands)	2020			2019
Loan Portfolio:
Commercial	$	121,025		$	141,197
Paycheck protection program		163,493			—
Commercial real estate:
Construction and land development		40,289			26,830
Non-owner occupied		538,079			493,920
Owner occupied		210,455			218,833
Residential real estate:
Individual Tax Identification Number (“ITIN”)		30,071			33,039
1-4 family mortgage		57,867			63,661
Equity lines		20,296			22,099
Consumer and other		24,490			33,324
Gross loans		1,206,065			1,032,903
Deferred (fees) and costs		(1,037	)		2,162
Loans, net of deferred fees and costs		1,205,028			1,035,065
Allowance for loan and lease losses		(16,873	)		(12,231	)
Net loans	$	1,188,155		$	1,022,834

Certain loans are pledged as collateral for lines of credit with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank. Pledged loans totaled $527.5 million and $542.1 million at September 30, 2020 and December 31, 2019, respectively. In April of 2020, we received approval to participate in the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (‘PPPLF”). The credit facility provides term funding for loans made under the SBA’s Paycheck Protection Program (“PPP”). We have not yet taken advances under the PPPLF, but if in the future we do, they will be collateralized with PPP loans.

Gross loan balances in the table above include discounts on purchased loans and fair value discounts on loans acquired in conjunction with our acquisition of Merchants during the first quarter of 2019.

Discounts on purchased loans - Gross loan balances include net purchase discounts of $1.0 million and $1.5 million as of September 30, 2020, and December 31, 2019, respectively. When we purchase loans, they are typically purchased at a discount to enhance yield and compensate for credit risk. We have no purchased credit impaired loans as of September 30, 2020, and December 31, 2019.

Fair value discount - Gross loan balances include a fair value discount of $1.1 million and $1.7 million at September 30, 2020 and December 31, 2019, respectively for loans acquired in conjunction with our acquisition of Merchants during the first quarter of 2019. We recorded $233 thousand and $193 thousand in accretion of the discount for these loans during the three months ended September 30, 2020 and 2019, respectively. We recorded $612 thousand and $431 thousand in accretion of the discount for these loans during the nine months ended September 30, 2020 and 2019, respectively.

Short-Term Loan Modifications

We have made short-term COVID-19 related loan payment deferrals on 107 loans totaling $38.6 million. In accordance with the CARES Act and regulatory guidance, these modified loans are not troubled debt restructurings and are not considered to be past due or non-performing. The deferrals range from one to six months as determined on a case-by-case basis considering the nature of the business and the impact of COVID-19. Without these deferrals past due loan totals would have been higher at September 30, 2020. The payment deferral period for most of these loans ends during the fourth quarter of 2020. We cannot predict the impact to past due loan totals once the deferral periods end.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Past Due Loans

Past due loans (gross), segregated by loan portfolio were as follows, as of September 30, 2020, and December 31, 2019.

													Recorded
	30-59		60-89		*90 or Greater*								*Investment >*
	*Days Past*		*Days Past*		*Days Past*		*Total Past*						*90 Days and*
(Amounts in thousands)	*Due*		*Due*		*Due*		*Due*		*Current*		*Total*		*Accruing*
Past Due Loans at September 30, 2020
Commercial	$	—	$	—	$	—	$	—	$	121,025	$	121,025	$	—
Paycheck protection program		—		—		—		—		163,493		163,493		—
Commercial real estate:
Construction and land development		—		—		—		—		40,289		40,289		—
Non-owner occupied		—		—		1,062		1,062		537,017		538,079		—
Owner occupied		—		—		2,993		2,993		207,462		210,455		—
Residential real estate:
ITIN		76		—		105		181		29,890		30,071		—
1-4 family mortgage		—		—		—		—		57,867		57,867		—
Equity lines		15		—		—		15		20,281		20,296		—
Consumer and other		58		65		—		123		24,367		24,490		—
Total	$	149	$	65	$	4,160	$	4,374	$	1,201,691	$	1,206,065	$	—

													Recorded
	30-59		60-89		*90 or Greater*								*Investment >*
	*Days Past*		*Days Past*		*Days Past*		*Total Past*						*90 Days and*
(Amounts in thousands)	*Due*		*Due*		*Due*		*Due*		*Current*		*Total*		*Accruing*
Past Due Loans at December 31, 2019
Commercial	$	71	$	—	$	—	$	71	$	141,126	$	141,197	$	—
Commercial real estate:
Construction and land development		—		—		—		—		26,830		26,830		—
Non-owner occupied		—		—		—		—		493,920		493,920		—
Owner occupied		655		—		3,103		3,758		215,075		218,833		—
Residential real estate:
ITIN		371		323		43		737		32,302		33,039		—
1-4 family mortgage		—		—		—		—		63,661		63,661		—
Equity lines		100		—		—		100		21,999		22,099		—
Consumer and other		200		50		—		250		33,074		33,324		—
Total	$	1,397	$	373	$	3,146	$	4,916	$	1,027,987	$	1,032,903	$	—

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Nonaccrual Loans

Nonaccrual loans, segregated by loan portfolio, were as follows as of September 30, 2020 and December 31, 2019.

	September 30,		December 31,
(Amounts in thousands)	2020		2019
Nonaccrual Loans:
Commercial	$	1,549	$	61
Commercial real estate:
Non-owner occupied		1,062		—
Owner occupied		3,750		3,103
Residential real estate:
ITIN		1,574		2,221
1-4 family mortgage		145		191
Consumer and other		18		40
Total	$	8,098	$	5,616

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, as shown in the table below.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2020		2019		2020		2019
Nonaccrual Loans:
Interest income, net of tax	$	108	$	115	$	238	$	484

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Impaired Loans

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. The following tables summarize impaired loans by loan portfolio as of September 30, 2020 and December 31, 2019.

	As of September 30, 2020
			Unpaid
	*Recorded*		*Principal*		*Related*
(Amounts in thousands)	*Investment*		*Balance*		*Allowance*
Impaired Loans:
With no related allowance recorded:
Commercial	$	1,458	$	1,811	$	—
Commercial real estate:
Non-owner occupied		1,062		1,097		—
Owner occupied		3,750		3,865		—
Residential real estate:
ITIN		4,995		6,591		—
1-4 family mortgage		145		205		—
Total with no related allowance recorded	$	11,410	$	13,569	$	—

With an allowance recorded:
Commercial	$	622	$	622	$	122
Residential real estate:
ITIN		176		176		12
Equity lines		131		131		65
Consumer and other		18		18		5
Total with an allowance recorded	$	947	$	947	$	204

By loan portfolio:
Commercial	$	2,080	$	2,433	$	122
Commercial real estate		4,812		4,962		—
Residential real estate		5,447		7,103		77
Consumer and other		18		18		5
Total impaired loans	$	12,357	$	14,516	$	204

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2019
			Unpaid
	*Recorded*		*Principal*		*Related*
(Amounts in thousands)	*Investment*		*Balance*		*Allowance*
Impaired Loans:
With no related allowance recorded:
Commercial	$	94	$	251	$	—
Commercial real estate:
Owner occupied		3,103		3,103		—
Residential real estate:
ITIN		5,723		7,386		—
1-4 family mortgage		191		313		—
Total with no related allowance recorded	$	9,111	$	11,053	$	—

With an allowance recorded:
Commercial	$	562	$	563	$	159
Residential real estate:
ITIN		455		455		38
Equity lines		231		231		116
Consumer and other		40		40		11
Total with an allowance recorded	$	1,288	$	1,289	$	324

By loan portfolio:
Commercial	$	656	$	814	$	159
Commercial real estate		3,103		3,103		—
Residential real estate		6,600		8,385		154
Consumer and other		40		40		11
Total impaired loans	$	10,399	$	12,342	$	324

The following tables summarize average recorded investment and interest income recognized on impaired loans by loan portfolio for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended				Three Months Ended
	September 30, 2020				September 30, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Average Recorded Investment and Interest Income:
Commercial	$	1,078	$	15	$	807	$	10
Commercial real estate:
Non-owner occupied		1,062		—		10,887		7
Owner occupied		3,682		—		—		—
Residential real estate:
ITIN		5,241		35		6,490		40
1-4 family mortgage		146		—		204		—
Equity lines		132		2		238		4
Consumer and other		18		—		21		—
Total	$	11,359	$	52	$	18,647	$	61

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	Nine Months Ended				Nine Months Ended
	September 30, 2020				September 30, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Amounts in thousands)	Investment		Recognized		Investment		Recognized
Average Recorded Investment and Interest Income:
Commercial	$	777	$	32	$	1,377	$	42
Commercial real estate:
Non-owner occupied		590		—		10,307		30
Owner occupied		3,356		—		—		—
Residential real estate:
ITIN		5,546		106		6,694		123
1-4 family mortgage		171		—		194		—
Equity lines		194		10		306		14
Consumer and other		32		—		22		—
Total	$	10,666	$	148	$	18,900	$	209

The impaired loans on which these interest income amounts were recognized are primarily accruing troubled debt restructured loans. Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement.

Troubled Debt Restructurings

As of September 30, 2020, we had $6.3 million in troubled debt restructurings compared to $6.5 million as of December 31, 2019. As of September 30, 2020, we had 92 loans that qualified as troubled debt restructurings, of which 91 were performing according to their restructured terms. Troubled debt restructurings represented 0.52% of gross loans (0.61% of gross loans excluding PPP loans) as of September 30, 2020, compared to 0.63% at December 31, 2019.

At September 30, 2020 and December 31, 2019, impaired loans of $4.3 million and $4.8 million, respectively, were classified as performing troubled debt restructured loans.

For a troubled debt restructured loan to be on accrual status, the loan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. As of September 30, 2020 and December 31, 2019, we had no obligations to lend additional funds on any troubled debt restructured loans. There was one new troubled debt restructuring on a $650 thousand commercial real estate loan during the nine months ended September 30, 2020. The borrower was impacted by COVID-19 but the loan did not qualify to be exempt from TDR status under the new TDR guidance issued by the financial institution regulators or under the CARES act.

The types of modifications offered can generally be described in the following categories:

Maturity – A modification in which the maturity date is changed.

Payment Deferral – A modification in which a portion of the principal is deferred.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following tables present the period ended balances of newly restructured loans and the types of modifications that occurred during the nine months ended September 30, 2020 and 2019. There were no new troubled debt restructurings during the three months ended September 30, 2020 and 2019.

	Modification Types For the Nine Months Ended September 30, 2020						Modification Types For the Nine Months Ended September 30, 2019
(Amounts in thousands)	Maturity		Payment Deferral		Total		Maturity		Payment Deferral		Total
Troubled Debt Restructurings:
Commercial	$	—	$	—	$	—	$	66	$	—	$	66
Commercial real estate:
Owner occupied		—		650		650		—		—		—
Total	$	—	$	650	$	650	$	66	$	—	$	66

For the nine month periods ended September 30, 2020 and 2019, the tables below provide information regarding the number of loans where the contractual terms have been restructured in a manner, which grants a concession to a borrower experiencing financial difficulties.

	For the Nine Months Ended September 30, 2020						For the Nine Months Ended September 30, 2019
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	*Number of*		*Recorded*		*Recorded*		*Number of*		*Recorded*		*Recorded*
(Dollars in thousands)	*Contracts*		*Investment*		*Investment*		*Contracts*		*Investment*		*Investment*
Troubled Debt Restructurings:
Commercial		—	$	—	$	—		1	$	99	$	99
Commercial real estate:
Owner occupied		1		654		654		—		—		—
Total		1	$	654	$	654		1	$	99	$	99

There were no loans modified as a troubled debt restructuring within the previous twelve months for which there was a payment default (after restructuring) during the three and nine months ended September 30, 2020 and 2019.

Performing and Nonperforming Loans

We define a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, or is 90 days past due and still accruing, or has been restructured and does not comply with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. Performing and nonperforming loans, segregated by loan portfolio, were as follows at September 30, 2020 and December 31, 2019.

	September 30, 2020
(Amounts in thousands)	Performing		Nonperforming		Total
Performing and Nonperforming Loans:
Commercial	$	119,476	$	1,549	$	121,025
Paycheck protection program		163,493		—		163,493
Commercial real estate:
Construction and land development		40,289		—		40,289
Non-owner occupied		537,017		1,062		538,079
Owner occupied		206,705		3,750		210,455
Residential real estate:
ITIN		28,497		1,574		30,071
1-4 family mortgage		57,722		145		57,867
Equity lines		20,296		—		20,296
Consumer and other		24,472		18		24,490
Total	$	1,197,967	$	8,098	$	1,206,065

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	December 31, 2019
(Amounts in thousands)	Performing		Nonperforming		Total
Performing and Nonperforming Loans:
Commercial	$	141,136	$	61	$	141,197
Commercial real estate:
Construction and land development		26,830		—		26,830
Non-owner occupied		493,920		—		493,920
Owner occupied		215,730		3,103		218,833
Residential real estate:
ITIN		30,818		2,221		33,039
1-4 family mortgage		63,470		191		63,661
Equity lines		22,099		—		22,099
Consumer and other		33,284		40		33,324
Total	$	1,027,287	$	5,616	$	1,032,903

Credit Quality Ratings

Management assigns a credit quality rating (risk grade) to each loan. The foundation or primary factor in determining the appropriate credit quality rating is the degree of a debtor’s willingness and ability to perform as agreed. In conjunction with evaluating the performing versus nonperforming nature of our loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (rating) for each loan portfolio:

Pass Grade: A Pass loan is a strong credit with no existing or known weaknesses that may require management’s close attention. Some pass loans require short-term enhanced monitoring to determine when the credit relationship would merit either an upgrade or a downgrade. Loans classified as Pass Grade specifically demonstrate:

●

Strong Cash Flows – borrower’s cash flows must meet or exceed our minimum debt service coverage ratio.

●

Collateral Margin – generally, the borrower must have pledged an acceptable collateral class with an adequate collateral margin.

●

Qualitative Factors – in addition to meeting our minimum cash flow and collateral requirements, a number of other qualitative factors are also factored into assigning a Pass Grade including the borrower’s level of leverage (debt to equity), prospects, history and experience in their industry, credit history, and any other relevant factors including a borrower’s character.

Those borrowers who qualify for unsecured loans must fully demonstrate above average cash flows and strong secondary sources of repayment to mitigate the lack of unpledged collateral.

Watch Grade: The credit is acceptable but the borrower has experienced a temporary setback or adverse information has been received, and may exhibit one or more of the characteristics shown in the list below. This risk grade could apply to credits on a temporary basis pending a full review. Credits with this risk grade will require more handling time and increased management. The list below contains characteristics of this risk grade, but individually do not automatically cause the loan to be assigned a Watch Grade.

●

The primary source of repayment may be weakening causing greater reliance on the secondary source of repayment or

●

The primary source of repayment is adequate, but the secondary source of repayment is insufficient

●

In-depth financial analysis would compare to the lower quartile in two or more of the major components of the Risk Management Association Annual Statement Studies

●

Volatile or deteriorating collateral

●

Management decisions may be called into question

●

Delinquencies in bank credits or other financial/trade creditors

●

Frequent overdrafts

●

Significant change in management/ownership

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Special Mention Grade: Credits in this grade are potentially weak and deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the credit. Special Mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. The list below exhibits the characteristics of this grade, but individually do not automatically cause the borrower to be assigned a grade of Special Mention:

●

Inadequate or incomplete loan documentation or perfection of collateral, or any other deviation from prudent lending practices

●

Credit is structured in a manner in which the timing of the repayment source does not match the payment schedule or maturity, materially jeopardizing repayment

●

Current economic or market conditions exist which may affect the borrower's ability to perform or affect the Bank's collateral position

●

Adverse trends in the borrower's operations or continued deterioration in the borrower’s financial condition that has not yet reached a point where the retirement of debt is jeopardized. A credit in this grade should have favorable prospects of the deteriorating financial trends reversing within a reasonable timeframe.

●

The borrower is less than cooperative or unable to produce current and adequate financial information

Substandard Grade: A Substandard credit is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard credits have a well-defined weakness or weaknesses that jeopardize the liquidation or timely collection of the debt. Substandard credits are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. However, a potential loss does not have to be recognizable in an individual credit for it to be considered a substandard credit. As such, substandard credits may or may not be graded as impaired.

The following represents, but is not limited to, the potential characteristics of a Substandard Grade and do not necessarily generate automatic reclassification into this loan grade:

●

Sustained or substantial deteriorating financial trends,

●

Unresolved management problems,

●

Collateral is insufficient to repay debt; collateral is not sufficiently supported by independent sources, such as asset-based financial audits, appraisals, or equipment evaluations,

●

Improper perfection of lien position, which is not readily correctable,

●

Unanticipated and severe decline in market values,

●

High reliance on secondary source of repayment,

●

Legal proceedings, such as bankruptcy or a divorce, which has substantially decreased the borrower’s capacity to repay the debt,

●

Fraud committed by the borrower,

●

IRS liens that take precedence,

●

Forfeiture statutes for assets involved in criminal activities,

●

Protracted repayment terms outside of policy that are for longer than the same type of credit in our portfolio,

●

Any other relevant quantitative or qualitative factor that negatively affects the current net worth and paying capacity of the borrower or of the collateral pledged, if any.

Doubtful Grade: A Doubtful loan has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain pending factors that may work to the advantage and strengthening of the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include, but are not limited to:

●

Proposed merger(s),

●

Acquisition or liquidation procedures,

●

Capital injection,

●

Perfecting liens on additional collateral,

●

Refinancing plans.

Generally, a Doubtful Grade does not remain outstanding for a period greater than six months. Within six months, the pending events should have been resolved. Based on resolution of the pending events, the credit grade should have improved or the principal balance charged against the ALLL.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize loans by internal risk grades and by loan class as of September 30, 2020 and December 31, 2019.

	As of September 30, 2020
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Loan Portfolio:
Commercial	$	106,597	$	8,736	$	125	$	5,567	$	—	$	121,025
Paycheck protection program		163,493		—		—		—		—		163,493
Commercial real estate:
Construction and land development		37,839		2,450		—		—		—		40,289
Non-owner occupied		508,803		21,859		6,355		1,062		—		538,079
Owner occupied		155,290		41,289		—		13,876		—		210,455
Residential real estate:
ITIN		26,583		—		—		3,488		—		30,071
1-4 family mortgage		56,213		208		—		1,446		—		57,867
Equity lines		20,296		—		—		—		—		20,296
Consumer and other		24,472		—		—		18		—		24,490
Total	$	1,099,586	$	74,542	$	6,480	$	25,457	$	—	$	1,206,065

	As of December 31, 2019
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Loan Portfolio:
Commercial	$	125,222	$	14,974	$	833	$	168	$	—	$	141,197
Commercial real estate:
Construction and land development		26,810		20		—		—		—		26,830
Non-owner occupied		454,493		32,902		5,424		1,101		—		493,920
Owner occupied		195,950		7,224		1,220		14,439		—		218,833
Residential real estate:
ITIN		28,609		—		—		4,430		—		33,039
1-4 family mortgage		62,485		985		—		191		—		63,661
Equity lines		22,012		—		—		87		—		22,099
Consumer and other		33,283		—		—		41		—		33,324
Total	$	948,864	$	56,105	$	7,477	$	20,457	$	—	$	1,032,903

The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $81 thousand and $100 thousand at September 30, 2020 and December 31, 2019, respectively.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

Our ALLL is based on management’s estimate of future loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topics 450 and 310. In June of 2016, the FASB issued a new standard under ASC 326 the Current Expected Credit Losses methodology (“CECL”). We have the option to delay until January 2023 the implementation of the new methodology and have not determined when it will be implemented or the financial impact.

The following tables summarize activity within the ALLL by portfolio for the three and nine months ended September 30, 2020 and 2019.

	For the Three Months Ended September 30, 2020
				Paycheck
				Protection		Commercial		Residential
(Amounts in thousands)	Commercial			Program		Real Estate		Real Estate			Consumer			Unallocated			Total
ALLL by Loan Portfolio:
Beginning balance	$	2,400		$	—	$	10,936	$	1,306		$	870		$	577		$	16,089
Charge-offs		(353	)		—		—		(31	)		(118	)		—			(502	)
Recoveries		—			—		—		69			117			—			186
Provision		393			—		813		(22	)		(41	)		(43	)		1,100
Ending balance	$	2,440		$	—	$	11,749	$	1,322		$	828		$	534		$	16,873

	For the Three Months Ended September 30, 2019
				Paycheck
				Protection		Commercial		Residential
(Amounts in thousands)	Commercial			Program		Real Estate		Real Estate			Consumer			Unallocated			Total
ALLL by Loan Portfolio:
Beginning balance	$	2,104		$	—	$	7,598	$	1,070		$	1,070		$	603		$	12,445
Charge-offs		(81	)		—		—		(43	)		(195	)		—			(319	)
Recoveries		5			—		—		104			50			—			159
Provision		(84	)		—		120		(77	)		66			(25	)		—
Ending balance	$	1,944		$	—	$	7,718	$	1,054		$	991		$	578		$	12,285

	For the Nine Months Ended September 30, 2020
				Paycheck
				Protection		Commercial			Residential
(Amounts in thousands)	Commercial			Program		Real Estate			Real Estate			Consumer			Unallocated		Total
ALLL by Loan Portfolio:
Beginning balance	$	1,822		$	—	$	8,096		$	1,032		$	933		$	348	$	12,231
Charge-offs		(353	)		—		(145	)		(66	)		(463	)		—		(1,027	)
Recoveries		22			—		—			131			266			—		419
Provision		949			—		3,798			225			92			186		5,250
Ending balance	$	2,440		$	—	$	11,749		$	1,322		$	828		$	534	$	16,873

	For the Nine Months Ended September 30, 2019
				Paycheck
				Protection		Commercial			Residential
(Amounts in thousands)	Commercial			Program		Real Estate			Real Estate			Consumer			Unallocated		Total
ALLL by Loan Portfolio:
Beginning balance	$	2,205		$	—	$	7,116		$	1,173		$	1,356		$	442	$	12,292
Charge-offs		(227	)		—		(233	)		(181	)		(685	)		—		(1,326	)
Recoveries		916			—		—			204			199			—		1,319
Provision		(950	)		—		835			(142	)		121			136		—
Ending balance	$	1,944		$	—	$	7,718		$	1,054		$	991		$	578	$	12,285

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ. The unallocated portion of the ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2020 and December 31, 2019, the unallocated allowance amount represented 3% of the ALLL. The following tables summarize the ALLL and the recorded investment in loans and leases as of September 30, 2020 and December 31, 2019.

	As of September 30, 2020
			Paycheck
			Protection		Commercial		Residential
(Amounts in thousands)	Commercial		Program		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	122	$	—	$	—	$	77	$	5	$	—	$	204
Collectively evaluated for impairment		2,318		—		11,749		1,245		823		534		16,669
Total	$	2,440	$	—	$	11,749	$	1,322	$	828	$	534	$	16,873
Gross loans:
Individually evaluated for impairment	$	2,080	$	—	$	4,812	$	5,447	$	18	$	—	$	12,357
Collectively evaluated for impairment		118,945		163,493		784,011		102,787		24,472		—		1,193,708
Total gross loans	$	121,025	$	163,493	$	788,823	$	108,234	$	24,490	$	—	$	1,206,065

	As of December 31, 2019
			Paycheck
			Protection		Commercial		Residential
(Amounts in thousands)	Commercial		Program		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	159	$	—	$	—	$	154	$	11	$	—	$	324
Collectively evaluated for impairment		1,663		—		8,096		878		922		348		11,907
Total	$	1,822	$	—	$	8,096	$	1,032	$	933	$	348	$	12,231
Gross loans:
Individually evaluated for impairment	$	656	$	—	$	3,103	$	6,600	$	40	$	—	$	10,399
Collectively evaluated for impairment		140,541		—		736,480		112,199		33,284		—		1,022,504
Total gross loans	$	141,197	$	—	$	739,583	$	118,799	$	33,324	$	—	$	1,032,903

The ALLL totaled $16.9 million or 1.40% of total gross loans (1.62% of gross loans excluding PPP loans) at September 30, 2020 and $12.2 million or 1.18% at December 31, 2019. As of September 30, 2020 and December 31, 2019, we had commitments to extend credit of $263.1 million and $275.1 million, respectively. The reserve for unfunded commitments recorded in Other Liabilities in the Consolidated Balance Sheets at September 30, 2020 and December 31, 2019 was $800 thousand and $695 thousand, respectively.

We believe that the ALLL was adequate as of 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 additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.

COVID‐19

We anticipate that the COVID‐19 pandemic will result in continued economic recession and increased loan losses, particularly in certain hard hit industries such as airlines, travel and hospitality, retail and energy sectors. As a result, we have significantly increased our qualitative credit risk factors for “changes in international, national, regional and local conditions” and “changes in the volume and severity of past due loans and other similar conditions”.

ALLL Methodology

We have lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. We review and approve these policies and procedures annually. Monitoring and reporting systems supplement the review process with regular frequency as related to loan production, loan quality, concentrations of credit, potential problem loans, loan delinquencies, and nonperforming loans.

We formally assess the adequacy of the ALLL on a quarterly basis. The ALLL is based upon estimates of future loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan and lease portfolio. Our ALLL methodology incorporates management’s current judgments, and reflects management’s estimate of future loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 Contingencies (“ASC 450”) and ASC Topic 310 Receivables (“ASC 310”).

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Management’s assessment of the ALLL is based on our continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provides the foundation for the three major components of the ALLL:

(1)

Historical valuation allowances established in accordance with ASC 450, for groups of similarly situated loan pools.

(2)

General valuation allowances established in accordance with ASC 450, that are based on qualitative credit risk factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Loss estimation factors are based on analysis of local economic factors. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole.

(3)

Specific valuation allowances established in accordance with ASC 310, that are based on estimated probable losses on specific impaired loans.

All three components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge-off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.

The allowance is increased by provisions charged to expense and reduced by net charge-offs. In periodic evaluations of the adequacy of the allowance balance, management considers past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors.

Our assessment of the adequacy of the ALLL includes the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially rated when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default.

Our loan portfolio is evaluated by general loan class including commercial, commercial real estate (which includes construction and other real estate), residential real estate (which includes 1-4 family and home equity loans), consumer and other loans. In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. These loan pools are similarly risk-graded and each portfolio is evaluated by identifying all relevant risk characteristics that are common to these segmented groups of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge-offs or recoveries, among other relevant credit risk factors. We periodically review and update our historical loss ratios based on net charge-off experience for each loan and lease class. Other credit risk factors are also reviewed periodically and adjusted as necessary to account for any changes in potential loss exposure.

General valuation allowances, as prescribed by ASC 450, are based on qualitative factors such as changes in asset quality trends, concentrations of credit or changes in concentrations of credit, changes in underwriting standards, changes in experience or depth of lending staff or management, the effectiveness of loan grading and the internal loan review function, and any other relevant factors. Management evaluates each qualitative component quarterly to determine the associated risks to the quality of our loan portfolio.

Impaired loans

Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. For collateral dependent loans, this can be accomplished by charging off the impaired portion of the loan based on the underlying value of the collateral. For non-collateral dependent loans, we establish a specific component within the ALLL based on the present value of the future cash flows. If we determine the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged off against the ALLL. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Risk Characteristics and Underwriting

The following is a brief summary, by loan type, of management’s evaluation of the general risk characteristics and underwriting standards:

Commercial Loans – Commercial loans are underwritten after evaluating the borrower’s financial ability to maintain profitability including future expansion objectives. In addition, the borrower’s qualitative qualities are evaluated, such as management skills and experience, ethical traits, and overall business acumen. Commercial loans are primarily extended based on the cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The borrower’s cash flow may deviate from initial projections, and the value of collateral securing these loans may change.

Most commercial loans are generally secured by the assets being financed and other business assets such as accounts receivable or inventory. Management may also incorporate a personal guarantee; however, some short-term loans may be extended on an unsecured basis. Repayment of commercial loans secured by accounts receivable may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

PPP Loans - The Paycheck Protection Program (“PPP”) was launched in April of 2020 to provide small businesses assistance in the form of forgivable 100% guaranteed U.S. Small Business Administration (“SBA”) loans. We have actively participated in the PPP, funding $163.5 million to 606 existing customers as of September 30, 2020. This financial support of our customers’ businesses may help moderate Commercial and Commercial Real Estate loan losses. The PPP loans are underwritten following guidelines and an approval process issued by the SBA and pose essentially no credit risk to the loan portfolio. During the third quarter of 2020, we began accepting applications for PPP loan forgiveness.

Commercial Real Estate (“CRE”) Loans – CRE loans are subject to similar underwriting standards and processes as commercial loans. CRE loans are viewed predominantly as cash flow loans and secondarily as loans collateralized by real estate. Generally, CRE lending involves larger principal amounts with repayment largely dependent on the successful operation of the property securing the loan or the business conducted on the collateralized property. CRE loans tend to be more adversely affected by conditions in the real estate markets or by general economic conditions.

The properties securing the CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce our exposure to adverse economic events that affect any single industry. We monitor and evaluate CRE loans based on occupancy status (investor versus owner occupied), collateral, geography, and risk grade criteria.

Generally, CRE loans are made to developers and builders that are secured by non-owner occupied properties require the borrower to have had an existing relationship with the Company and a proven record of success. Construction loans are underwritten utilizing feasibility studies, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment largely dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is secured. These loans are closely monitored by on-site inspections, and are considered to have higher inherent risks than other CRE loans due to their ultimate repayment sensitivity to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

Residential Real Estate Loans – We do not originate consumer real estate mortgage loans. The majority of our loans secured by non owner occupied residential real estate are made either as part of a commercial relationship and subject to similar underwriting standards and processes as the CRE portfolio, or loans that were purchased in a prior year as part of a pool of loans. Purchased loan pools are evaluated based on risk characteristics established for each segmented group of loans. These characteristics include a significant emphasis on historical losses within each loan group, inherent risks for each, and specific loan class characteristics such as trends related to nonaccrual loans, past due loans, criticized loans, net charge-offs or recoveries, among other relevant credit risk factors. Residential equity lines of credit are included in the discussion of consumer loans below.

We originate some single-family residence construction loans. The loan amounts are no greater than $1 million and are short-term real estate secured financing for the construction of a single-family residence to be occupied by the owner. The loans have a draw down feature with interest only payments, and a balloon payment at the 12-month maturity. All of these loans are refinanced and paid-off by the borrower’s permanent mortgage lender who provided the initial pre-approved mortgage financing. These loans are underwritten utilizing financial analysis of the borrower and are generally based upon estimates of cost and value associated with the complete project (as-is value). These estimates may be inaccurate. The loan disbursement and monitoring process is controlled utilizing similar processes as our CRE construction loans.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Consumer Loans – Our consumer loan originations are generally limited to home equity loans with nominal originations in unsecured personal loans. The portfolio also includes unsecured consumer home improvement loans and residential solar panel loans secured by UCC filings. We are highly dependent on third party credit scoring analysis to supplement the internal underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by management and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

Concentrations of Credit Risk

As of September 30, 2020, approximately 74% of our gross loan portfolio (86% excluding PPP loans) is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. Deterioration in economic conditions particularly in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

Credit review

Confirmation of the quality of our loan grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. We maintain an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors, Loan Committee and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

Reserve For Unfunded Commitments

The reserve for unfunded commitments, which is included in Other Liabilities in the Consolidated Balance Sheets, was $800 thousand and $695 thousand at September 30, 2020 and December 31, 2019, respectively. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis. Based upon changes in the amount of commitments, loss experience, and economic conditions we recorded $105 thousand of provision expense for the nine months ended September 30, 2020. The provision expense is recorded in other noninterest expense in the Consolidated Statements of Income.

NOTE 5. QUALIFIED AFFORDABLE HOUSING PARTNERSHIP INVESTMENTS

We have invested in five separate LIHTC partnerships, which provide the Company with CRA credit. Additionally, the investments in LIHTC partnerships provide us with tax credits and with operating loss tax benefits over an approximately 23-year period. The tax credits and the operating loss tax benefits that are generated by each of the properties are expected to exceed the total value of the investments we made and provide returns on the investments of between 2% and 6% over the life of the investment.

Our investments in Qualified Affordable Housing Partnerships totaled $3.1 million at September 30, 2020. These investments are recorded in Other Assets with a corresponding funding obligation of $1.3 million recorded in Other Liabilities in our Consolidated Balance Sheets. None of the original investments will be repaid. The investments in LIHTC partnerships are being accounted for using the proportional amortization method, under which we amortize the initial cost of an investment in proportion to the amount of the tax credits and other tax benefits received, and recognize the net investment performance in the Consolidated Statements of Income as a component of income tax expense. During the first quarter of 2020, we invested $1.0 million in an additional LIHTC partnership, Boston Capital.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following tables present our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at September 30, 2020 and December 31, 2019. In addition, the tables reflect the tax credits and tax benefits, amortization of the investment and the net impact to our income tax provision for the nine months ended September 30, 2020 and 2019.

	At September 30, 2020						For the Nine Months Ended September 30, 2020
	Original		Current		Unfunded		Tax Credits		Amortization		Net
	Investment		Recorded		Liability		and		of		Income Tax
(Amounts in thousands)	Value		Investment		Obligation		Benefits		Investments		Benefit (Expense)
Qualified Affordable Housing Partnerships:
Raymond James California Housing Opportunities Fund II	$	2,000	$	717	$	22	$	149	$	135	$	14
WNC Institutional Tax Credit Fund 38, L.P.		1,000		335		—		78		65		13
Merritt Community Capital Corporation Fund XV, L.P.		2,500		903		316		167		164		3
California Affordable Housing Fund		2,454		181		—		18		29		(11	)
Boston Capital		1,000		962		987		49		38		11
Total	$	8,954	$	3,098	$	1,325	$	461	$	431	$	30

	At December 31, 2019						For the Nine Months Ended September 30, 2019
	Original		Current		Unfunded		Tax Credits		Amortization		Net
	Investment		Recorded		Liability		and		of		Income Tax
(Amounts in thousands)	Value		Investment		Obligation		Benefits		Investments		Benefit (Expense)
Qualified Affordable Housing Partnerships:
Raymond James California Housing Opportunities Fund II	$	2,000	$	852	$	22	$	150	$	135	$	15
WNC Institutional Tax Credit Fund 38, L.P.		1,000		400		—		81		68		13
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,067		316		168		165		3
California Affordable Housing Fund		2,454		210		—		18		29		(11	)
Total	$	7,954	$	2,529	$	338	$	417	$	397	$	20

The following tables present our generated tax credits and tax benefits from investments in qualified affordable housing partnerships for the three and nine months ended September 30, 2020 and 2019.

	For the Three Months Ended
	September 30, 2020				September 30, 2019
	Generated		Tax Benefits From		Generated		Tax Benefits from
(Amounts in thousands)	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
Qualified Affordable Housing Partnerships:
Raymond James California Housing Opportunities Fund II	$	43	$	7	$	43	$	7
WNC Institutional Tax Credit Fund 38, L.P.		22		4		23		4
Merritt Community Capital Corporation Fund XV, L.P.		48		8		48		8
California Affordable Housing Fund		1		6		—		6
Boston Capital		11		5		—		—
Total	$	125	$	30	$	114	$	25

	For the Nine Months Ended
	September 30, 2020				September 30, 2019
	Generated		Tax Benefits From		Generated		Tax Benefits from
(Amounts in thousands)	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
Qualified Affordable Housing Partnerships:
Raymond James California Housing Opportunities Fund II	$	128	$	21	$	128	$	22
WNC Institutional Tax Credit Fund 38, L.P.		66		12		70		11
Merritt Community Capital Corporation Fund XV, L.P.		144		23		144		24
California Affordable Housing Fund		—		18		—		18
Boston Capital		34		15		—		—
Total	$	372	$	89	$	342	$	75

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table reflects the anticipated net income tax benefit and (expense) at September 30, 2020 that is expected to be recognized over the remaining lives of the investments.

(Amounts in thousands)
Qualified Affordable Housing Partnerships:													2024
Anticipated income tax benefit, net less													and
amortization of investments	2020			2021			2022			2023			thereafter		Total
Raymond James California Housing Opportunities Fund II	$	4		$	19		$	19		$	18		$	16	$	76
WNC Institutional Tax Credit Fund 38, L.P.		4			16			14			13			14		61
Merritt Community Capital Corporation Fund XV, L.P.		1			3			3			3			4		14
California Affordable Housing Fund		(3	)		(14	)		(13	)		(35	)		—		(65	)
Boston Capital		4			23			24			23			171		245
Total income tax benefit, net	$	10		$	47		$	47		$	22		$	205	$	331

NOTE 6. TERM DEBT

Term debt at September 30, 2020 and December 31, 2019 consisted of the following.

(Amounts in thousands)	September 30, 2020			December 31, 2019
Term Debt:
Federal Home Loan Bank of San Francisco borrowings	$	10,000		$	—
Subordinated Debt		10,000			10,000
Unamortized debt issuance costs		(7	)		(43	)
Net term debt	$	19,993		$	9,957

Future contractual maturities of term debt at September 30, 2020 are as follows.

(Amounts in thousands)	2020		2021		2022		2023		2024		Thereafter		Total
Future Maturities:
Federal Home Loan Bank of San Francisco borrowings	$	5,000	$	5,000	$	—	$	—	$	—	$	—	$	10,000
Subordinated Debt		—		—		—		—		—		10,000		10,000
Total future maturities	$	5,000	$	5,000	$	—	$	—	$	—	$	10,000	$	20,000

Federal Home Loan Bank of San Francisco Borrowings

We have an available line of credit with the Federal Home Loan Bank of San Francisco of $390.6 million at September 30, 2020, subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The line of credit is secured by an investment in Federal Home Loan Bank of San Francisco stock, certain real estate secured loans that have been specifically pledged to the Federal Home Loan Bank of San Francisco pursuant to collateral requirements, and certain pledged securities held in the Bank’s investment securities portfolio.

The Bank had $10.0 million in borrowings from the Federal Home Loan Bank of San Francisco at September 30, 2020. The borrowing has an interest rate of 0% with $5.0 million due in November of 2020 and $5.0 million due in May of 2021. There were no borrowings outstanding from the Federal Home Loan Bank of San Francisco at December 31, 2019. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2020 and year ended December 31, 2019 was $8.8 million and $9.6 million, respectively. The maximum amount outstanding from the Federal Home Loan Bank of San Francisco at any month end during the nine months ended September 30, 2020 and year ended December 31, 2019 was $40.0 million. As of September 30, 2020, the Bank was required to hold an investment in Federal Home Loan Bank of San Francisco stock of $7.4 million recorded in Other Assets in the Consolidated Balance Sheets. Our investments in Federal Home Loan Bank of San Francisco stock are restricted investment securities, carried at cost, evaluated for impairment, and excluded from securities accounted for under ASC Topic 320 and ASC Topic 321.

As of September 30, 2020, we have pledged $513.3 million of our commercial real estate and residential real estate loans and $32.8 million in securities as collateral for the line of credit with the Federal Home Loan Bank of San Francisco.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Senior Debt

In December of 2015, the Holding Company entered into a senior debt loan agreement to borrow $10.0 million from another financial institution. During the second quarter of 2019, we completed the early repayment and termination of this variable-rate debt agreement.

Subordinated Debt

In December of 2015, the Holding Company issued $10.0 million in aggregate principal amount of fixed to floating rate Subordinated Notes due in 2025. The Subordinated Debt initially bears interest at 6.88% per annum through December 19, 2020, payable semi-annually. Thereafter, interest on the Subordinated Debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points, payable quarterly until the maturity date. In December of 2015, the Holding Company incurred subordinated debt issuance costs of $210 thousand, which are being amortized over the initial five-year-term as additional interest expense.

The Subordinated Debt is subordinate and junior in right of payment to the prior payment in full of all existing and future claims of creditors and depositors of the Holding Company and its subsidiaries, whether now outstanding or subsequently created. The Subordinated Debt ranks equally with all other unsecured subordinated debt, except any which by its terms is expressly stated to be subordinated to the Subordinated Debt. The Subordinated Debt ranks senior to all preferred stock and common stock of the Holding Company and all future junior subordinated debt obligations. The Subordinated Debt is recorded as term debt on the Holding Company’s balance sheet; however, for regulatory purposes, it is treated as Tier 2 capital by the Holding Company.

The Subordinated Debt will mature on December 10, 2025 but may be prepaid at the Holding Company’s option and with regulatory approval at any time on or after five years after the closing date or at any time upon certain events, such as a change in the regulatory capital treatment of the Subordinated Debt or the interest on the Subordinated Debt is no longer deductible by the Holding Company for United States federal income tax purposes.

Federal Funds

We have entered into nonbinding unsecured federal funds line of credit agreements with three financial institutions to support short-term liquidity needs. The lines totaled $75.0 million at September 30, 2020 and had interest rates ranging from 0.12% to 0.30%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions. The credit arrangements are reviewed and renewed annually. At September 30, 2020 and December 31, 2019, we had no outstanding federal funds purchased balances and no outstanding advances on any of the Bank’s federal funds lines of credit.

Federal Reserve Bank

We have an available line of credit with the Federal Reserve Bank totaling $8.4 million at September 30, 2020, subject to collateral requirements, namely the amount of certain pledged loans. At September 30, 2020 and December 31, 2019, we had no outstanding advances on our line of credit with the Federal Reserve Bank. As of September 30, 2020, we have pledged $14.2 million of our commercial loans as collateral for the credit line with the Federal Reserve Bank.

In April of 2020, we received approval from the Federal Reserve Bank to participate in the Paycheck Protection Program Liquidity Facility (“PPPLF”). The credit facility provides term funding for loans made under the PPP. Advances under the PPPLF will be collateralized with PPP loans, bear a fixed rate of interest at 0.35% and are to be repaid as the underlying loans are paid down, forgiven, or sold to the SBA. Participating institutions will receive preferential capital treatment for loans that are funded with this borrowing facility. To date, we have not utilized the liquidity available to us under the PPPLF and its associated beneficial capital treatment.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

Our consolidated financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of our business and involve elements of credit, liquidity, and interest rate risk. In the normal course of business we are party to financial instruments with off-balance sheet credit risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve elements of credit and interest rate risk similar to the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of our commitments and contingent liabilities at September 30, 2020 and December 31, 2019.

(Amounts in thousands)	September 30, 2020		December 31, 2019
Commitments:
Commitments to extend credit	$	254,987	$	267,248
Standby letters of credit		4,723		4,406
Affordable housing grant sponsorships		3,338		3,338
Access to housing and economic assistance for development grant sponsorships		60		110
Total commitments and contingent liabilities	$	263,108	$	275,102

We were not required to perform on any financial guarantees during the nine months ended September 30, 2020, or during the year ended December 31, 2019. At September 30, 2020, approximately $4.4 million of standby letters of credit will expire within one year, and $322 thousand will expire thereafter.

Affordable Housing Grants and Access to Housing and Economic Assistance for Development Grant Sponsorships

In fulfilling our CRA responsibilities, we are a sponsor for various nonprofit organizations that receive cash grants from the Federal Home Loan Bank of San Francisco. Those grants require the nonprofit organization to comply with stipulated conditions of the grant over specified periods of time which typically vary from 10 to 15 years. If the nonprofit organization fails to comply, Federal Home Loan Bank of San Francisco can require us to refund the amount of the grant to Federal Home Loan Bank of San Francisco. To mitigate this contingent credit risk, our Credit Administration underwrites the financial strength of the nonprofit organization and reviews their systems of internal control to determine, as best as possible, that they will comply with the conditions of the grant.

Death Benefit Agreement

The Company has entered into agreements with certain employees to pay a cash benefit to designated beneficiaries following the death of the employee. The payment will be made only if, at the time of death, the deceased employee was employed by the Bank and the Bank owned a life insurance policy on the employee’s life. Depending on specific facts and circumstances, the payment amount can vary up to a maximum of $225 thousand per employee and may be taxable to the beneficiary. Neither the employee nor the designated beneficiaries have a claim against the Bank’s life insurance policy on the employee’s life.

Legal Proceedings

We are involved in various pending and threatened legal actions arising in the ordinary course of business and if necessary, we maintain reserves for losses from legal actions, which are both probable and estimable. In our opinion, the disposition of claims currently pending will not have a material adverse effect on our financial position or results of operations.

Concentrations of Credit Risk

We grant many loans collateralized by real estate. In our judgment, a concentration exists in real estate related loans, which represented approximately 74% of our gross loan portfolio (86% of our gross loan portfolio excluding PPP loans) and 83% of our gross loan portfolio at September 30, 2020 and December 31, 2019, respectively. We underwrite real estate loans in accordance with loan policies that set underwriting criteria, including property types, loan-to-value limits and minimum debt service coverage ratios. We employ a variety of real estate concentration risk management tools including monitoring of limits on concentration levels, limits by property type and geography, annual property reviews including site visits and portfolio stress testing.

Although we believe such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in our principal market areas in particular, could have an adverse impact on the repayment of these loans. Business and personal incomes, cash flows from rental operations, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.

We recognize the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to other depository institutions in aggregate or individually, we have established general standards for selecting correspondent banks as well as internal limits for allowable exposure to other depository institutions in aggregate or individually. In addition, we have an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 8. LEASES

We lease eight locations under non-cancelable operating leases. The leases contain various provisions for increases in rental rates based on predetermined escalation schedules. Substantially all of the leases include the option to extend or terminate the lease term one or more times following expiration of the initial term at a rental rate established in the lease. For leases where we are reasonably certain that we will exercise the option to renew the lease, we have recognized those options in our right-of-use lease asset and liability. We had no other (financing, short-term or variable) lease arrangements during the current period or the prior year.

We have applied ASC Topic 842 as of January 1, 2019 and elected the practical expedients package for all of our leases. In accordance with the practical expedients package we were not required to reassess whether any expired or existing contracts are leases or contain leases. We were also not required to reassess the lease classification for existing or expired leases between operating and finance leases. We have recorded a liability in Other Liabilities in our Consolidated Balance Sheets representing the present value of the remaining minimum lease payments and we have recorded an offsetting right-of-use asset in Other Assets in our Consolidated Balance Sheets. The present value calculation uses a discount rate, which is based on our incremental borrowing rate. The right-of-use asset was also reduced for amounts recognized under the previous accounting requirements. The table below presents information regarding our leases as of September 30, 2020.

(Dollars in thousands)	September 30, 2020
Leases:
Right-of-use lease asset	$	2,691
Lease liability	$	3,014
Weighted Average Remaining Lease Term		4.48
Weighted Average Discount Rate		2.96	%

Lease expenses are recorded on a straight-line basis over the life of each lease. Lease expense and cash paid on leases are presented in the table below for the periods indicated.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2020		2019		2020		2019
Leases:
Operating lease expense	$	212	$	212	$	641	$	611
Cash paid for operating leases	$	234	$	229	$	714	$	661

The following table sets forth, as of September 30, 2020, the future minimum lease cash payments under non-cancelable operating leases and a reconciliation of the undiscounted cash flows to the operating lease liability.

(Amounts in thousands)	Amount
Due in:
2020	$	234
2021		953
2022		863
2023		327
2024		280
Thereafter		576
Total undiscounted future minimum lease cash payments		3,233
Present value adjustment		(219	)
Lease liability	$	3,014

Our election to utilize the practical expedients package did not result in the recognition of any additional leases, changes in lease terms, changes in classification or in the assessment of initial direct costs. ASC 842 was applied as a change in accounting principle and did not result in any adjustment to equity. The significant judgments made in applying the requirements in ASC Topic 842 are the determination of the incremental borrowing rate for the lease and determination of the length of the lease beyond non-cancellable periods. We used the borrowing rates available under our existing line of credit with the Federal Home Loan Bank of San Francisco for terms similar to the lease terms as our incremental borrowing rate. We recognize renewal periods beyond the non-cancellable term of the lease for periods when we are reasonably certain to exercise our option to extend the term of the lease.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 9. FAIR VALUES

The following tables present estimated fair values of our financial instruments as of September 30, 2020 and December 31, 2019, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets. The tables indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. Non-financial assets and non-financial liabilities defined by the FASB ASC 820, Fair Value Measurement, such as Bank premises and equipment, deferred taxes and other liabilities are excluded from the table. In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of FASB ASC 825, Financial Instruments, such as bank-owned life insurance policies.

	Carrying		Fair Value Measurements Using
(Amounts in thousands)	Amounts		Level 1		Level 2		Level 3
September 30, 2020
Financial assets
Cash and cash equivalents	$	127,883	$	127,883	$	—	$	—
Securities available-for-sale	$	337,032	$	—	$	337,032	$	—
Net loans	$	1,188,155	$	—	$	—	$	1,205,297
Federal Home Loan Bank of San Francisco stock	$	7,380	$	7,380	$	—	$	—
Financial liabilities
Deposits	$	1,518,131	$	—	$	1,519,635	$	—
Term debts	$	19,993	$	—	$	20,232	$	—
Junior subordinated debenture	$	10,310	$	—	$	9,783	$	—

	Carrying		Fair Value Measurements Using
(Amounts in thousands)	Amounts		Level 1		Level 2		Level 3
December 31, 2019
Financial assets
Cash and cash equivalents	$	80,604	$	80,604	$	—	$	—
Securities available-for-sale	$	286,950	$	—	$	286,950	$	—
Net loans	$	1,022,834	$	—	$	—	$	1,025,520
Federal Home Loan Bank of San Francisco stock	$	7,380	$	7,380	$	—	$	—
Financial liabilities
Deposits	$	1,267,171	$	—	$	1,267,153	$	—
Term debt	$	9,957	$	—	$	10,006	$	—
Junior subordinated debenture	$	10,310	$	—	$	13,471	$	—

Fair Value Hierarchy

Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.

Level 2 valuations utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 valuations include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 valuations are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following table presents the quantitative information used to fair value our net loans at September 30, 2020.

Quantitative Information about Level 3 Fair Value Measurements
Unobservable Inputs	Range (Weighted Average)
Probability of Default (PD)	0%	-	100%	-	(2.54%)
Loss Given Default (LGD)	0%	-	77.42%	-	(15.93%)
Prepayment Rate	0%	-	34.47%	-	(17.95%)
Discount Rate	1%	-	10.4%	-	(3.99%)

Recurring Items

Debt Securities – The available-for-sale securities amount in the recurring fair value table above represents securities that have been adjusted to their fair values. For these securities, we obtain fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things. We have determined that the source of these fair values falls within Level 2 of the fair value hierarchy.

The following tables present information about our assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of September 30, 2020 and December 31, 2019.

(Amounts in thousands)	Fair Value at September 30, 2020
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. government and agencies	$	31,811	$	—	$	31,811	$	—
Obligations of state and political subdivisions		91,863		—		91,863		—
Residential mortgage-backed securities and collateralized mortgage obligations		165,692		—		165,692		—
Commercial mortgage-backed securities		19,577		—		19,577		—
Other asset-backed securities		28,089		—		28,089		—
Total assets measured at fair value	$	337,032	$	—	$	337,032	$	—

(Amounts in thousands)	Fair Value at December 31, 2019
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. government and agencies	$	38,733	$	—	$	38,733	$	—
Obligations of state and political subdivisions		42,098		—		42,098		—
Residential mortgage-backed securities and collateralized mortgage obligations		180,835		—		180,835		—
Corporate securities		2,966		—		2,966		—
Commercial mortgage-backed securities		19,307		—		19,307		—
Other asset-backed securities		3,011		—		3,011		—
Total assets measured at fair value	$	286,950	$	—	$	286,950	$	—

Transfers Between Fair Value Hierarchy Levels

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2020 or the year ended December 31, 2019.

Nonrecurring items

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value generally result from the application of lower of cost or fair value accounting or write-downs of individual assets due to impairment.

Collateral Dependent Loans - The loan amounts below represent impaired, collateral dependent loans that have been adjusted to fair value during the respective reporting period. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL. When the fair value of the collateral is based on an appraisal or other estimate and there is no observable market price, we record the impaired loan as nonrecurring Level 3 fair value. Impaired loan valuations are adjusted for estimated selling costs ranging from 8% to 10% based off the adjusted fair value of the property.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

OREO - The OREO amounts below represent impaired real estate that has been adjusted to fair value during the respective reporting period. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The determination of fair value is based on recent appraisals of the foreclosed properties, which take into account recent sales prices adjusted for unobservable inputs, such as opinions provided by local real estate brokers and other real estate experts. OREO fair values are adjusted for estimated selling costs of 52% based off the adjusted fair value of the property. We record OREO as a nonrecurring Level 3 fair value.

The following tables present information about our assets at September 30, 2020 and December 31, 2019 measured at fair value on a nonrecurring basis for which a nonrecurring fair value adjustment has been recorded during the reporting period. The amounts disclosed below present the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair values as of the date reported upon.

	Fair Value at September 30, 2020
(Amounts in thousands)	Total		Level 1		Level 2		Level 3
Nonrecurring basis:
Collateral dependent impaired loans	$	3,817	$	—	$	—	$	3,817
Other real estate owned		8		—		—		8
Total assets measured at fair value	$	3,825	$	—	$	—	$	3,825

	Fair Value at December 31, 2019
(Amounts in thousands)	Total		Level 1		Level 2		Level 3
Nonrecurring basis:
Collateral dependent impaired loans	$	33	$	—	$	—	$	33
Other real estate owned		35		—		—		35
Total assets measured at fair value	$	68	$	—	$	—	$	68

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2020 and 2019 related to assets outstanding at September 30, 2020 and 2019.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2020		2019		2020		2019
Fair value adjustments:
Collateral dependent impaired loans	$	353	$	29	$	498	$	328
Other real estate owned		—		43		6		43
Total	$	353	$	72	$	504	$	371

During the nine months ended September 30, 2020, collateral dependent impaired loans with a carrying value of $4.3 million were written down to their estimated fair value of $3.8 million resulting in a $498 thousand adjustment to the ALLL.

During the nine months ended September 30, 2019, collateral dependent impaired loans with a carrying value of $10.5 million were written down to their estimated fair value of $10.2 million resulting in a $328 thousand adjustment to the ALLL.

During the nine months ended September 30, 2020, one loan with an aggregate carrying value of $14 thousand was written down to its estimated fair value of $8 thousand, resulting in a $6 thousand adjustment to the ALLL when the underlying property was transferred to OREO.

During the nine months ended September 30, 2019, two loans with an aggregate carrying value of $101 thousand were written down to their estimated fair value of $58 thousand, resulting in a $43 thousand adjustment to the ALLL when the underlying property was transferred to OREO.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and other information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time, our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Fair value estimates are based only on current on and off-balance sheet financial instruments. Our fair value estimates do not include any adjustment for anticipated future business. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

NOTE 10. ACQUISITION

On January 31, 2019, we completed the acquisition of Merchants Holding Company (“Merchants”), to extend our presence in the Sacramento marketplace. Merchants, headquartered in Sacramento, California, was the parent company of Merchants National Bank of Sacramento (“Merchants Bank”), a 97-year-old bank with approximately $211.7 million in assets as of January 31, 2019. Merchants operated one full service branch and one limited service branch in the Sacramento metropolitan area. In May of 2019, we successfully converted all of Merchant’s computer records onto our core system.

We paid $15.3 million in cash and issued 1,834,142 shares of common stock to Merchants shareholders who held, in the aggregate, approximately 10% of our outstanding common stock on January 31, 2019. One former member of the Merchants board now serves on our board of directors. The acquisition, after fair value adjustments added $190.2 million in deposits, $107.4 million in investment securities and $85.3 million in loans to our Bank as of January 31, 2019.

The acquisition of Merchants constituted a business combination and was accounted for using the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with ASC 805, Business Combinations. The Bank engaged third party specialists to assist in valuing certain assets, including investment securities, loans, real estate and the core deposit intangible that resulted from the acquisition. The acquisition was treated as a "reorganization" within the definition of section 368(a) of the Internal Revenue Code and is generally considered tax-free for U.S. federal income tax purposes.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The calculation of goodwill recorded during 2019 is detailed below.

	As Recorded by			Fair Value
	Merchants			And Other Acquisition			As Recorded by
(Amounts in thousands)	Holding Company			Related Adjustments			the Company
Consideration paid:
Cash							$	15,300
Stock 1,834,142 shares at $10.69 per share								19,607
Total consideration							$	34,907

Assets acquired:
Cash and fed funds sold	$	12,425		$	—		$	12,425
Investment securities		107,931			(551	)		107,380
Loans, gross		87,570			(2,292	)		85,278
Allowance for loan and lease losses		(1,286	)		1,286			—
Interest receivable		688			—			688
Premises and equipment, net		378			1,856			2,234
Deferred tax assets, net		1,374			(1,352	)		22
Federal Home Loan Bank of San Francisco stock		1,454			—			1,454
Life insurance		755			—			755
Other assets		371			95			466
Core deposit intangible		—			4,353			4,353
Total assets acquired	$	211,660		$	3,395		$	215,055

Liabilities assumed:
Demand, money market and savings	$	152,213		$	—		$	152,213
Certificates of deposit		38,003			—			38,003
Total deposits		190,216			—			190,216
Other liabilities		916			22			938
Total liabilities assumed	$	191,132		$	22		$	191,154
Net identifiable assets acquired over liabilities assumed	$	20,528		$	3,373		$	23,901
Goodwill							$	11,006

Goodwill

As a result of the Merchants acquisition, we recorded goodwill totaling $11.0 million. Goodwill reflects the expected value of Merchants reputation in the community, stable customer base and expected synergies created through the combined operations with our Company and was calculated as the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed.

The following is a description of the methods used to determine the fair values of significant assets and liabilities whose fair values are different from their carrying amounts on Merchants' books at acquisition date presented above.

Investment Securities

Fair values for securities were obtained from an independent pricing service and were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates were based on observable inputs including quoted market prices for similar instruments, quoted market prices that were not in an active market, other inputs that were observable in the market or a discounted cash flow model.

Loans

We engaged a third party to assist us in determining the fair values for the loans acquired from Merchants based upon the present values of the expected cash flows and market-derived discount rates. There were no loans acquired with evidence of deterioration of credit quality since origination for which we believe it is probable that we will be unable to collect all contractually required payments receivable. A fair value discount of $2.3 million was recorded for loans acquired in conjunction with our acquisition of Merchants and is being accreted over the life of the loans as a yield adjustment. We recorded $233 thousand and $193 thousand in accretion of the discount for these loans during the three months ended September 30, 2020 and 2019, respectively. We recorded $612 thousand and $431 thousand in accretion of the discount for these loans during the nine months ended September 30, 2020 and 2019, respectively.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Premises and Equipment

We engaged an independent licensed appraiser to determine the fair value of the acquired branch located in Sacramento. The fair value of tangible personal property was not material.

Deferred Tax Assets

Deferred income tax assets were recorded to reflect the difference between the carrying values of the acquired assets and liabilities for financial reporting purposes and the basis for income tax purposes using the Company’s statutory federal and state income tax rates. During 2019, the final tax returns were completed for Merchants and the net deferred tax assets were adjusted to fair value.

Core Deposit Intangible

We engaged an independent third party to assist us in determining the core deposit intangible asset of $4.4 million associated with non-maturity deposits acquired from Merchants. The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related deposits. The value of the core deposit intangible asset was determined using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources. It was calculated as the present value of the difference in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source. The core deposit intangible is being amortized on a straight-line basis over an estimated eight-year life, and is evaluated annually for impairment. No impairment loss was recognized in 2020 or 2019. Core deposit intangible amortization from this acquisition is not deductible for tax purposes. We recorded amortization of the core deposit intangible totaling $136 thousand during the three months ended September 30, 2020 and 2019. We recorded amortization of the core deposit intangible totaling $408 thousand and $363 during the nine months ended September 30, 2020 and 2019, respectively. The future estimated amortization expense on the CDI from the Merchants acquisition at September 30, 2020 is as follows:

(Amounts in thousands)		2020				2021				2022				2023				2024				Thereafter				Total
Core deposit intangible amortization		$	136			$	544			$	544			$	544			$	544			$	1,134			$	3,446

Pro Forma Results of Operations

The following table presents pro forma information of the combined entity as if the acquisition occurred on January 1, 2019. The pro forma information does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the periods presented, nor is it indicative of the results of operations in future periods. Furthermore, cost savings and other business synergies related to the acquisition are not reflected in the pro forma amounts.

	For the Three Months Ended		For the Nine Months Ended
	September 30,		September 30,
(Amounts in thousands)	2019		2019
Pro forma revenue and earnings:
Net interest income	$	13,722	$	40,416
Net income ⁽¹⁾	$	4,642	$	10,555

⁽¹⁾Net income includes acquisition-related costs of ($113) thousand and $2.2 million of the three and nine months ended September 30, 2019, respectively.

It is impracticable to separately provide information regarding the amount of revenue and earnings from Merchants included in our Consolidated Statement of Income because the operations of Merchants were substantially comingled with the operations of the Company as of the acquisition date.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 11. GOODWILL AND OTHER INTANGIBLES

Goodwill and Other Intangibles, net consisted of the following at September 30, 2020 and December 31, 2019.

	September 30,			December 31,
(Amounts in thousands)	2020			2019
Goodwill and Other Intangibles:
Goodwill	$	11,671		$	11,671
Core deposit intangibles		6,125			6,125
Domain name		32			32
Accumulated amortization		(1,922	)		(1,348	)
Goodwill and other intangibles, net	$	15,906		$	16,480

Goodwill

Goodwill is a common byproduct of a business combination, and is calculated as the amount of consideration paid in excess of the fair value of the net assets acquired in a transaction. Goodwill is considered to have an indefinite life and is therefore not amortized. It is reviewed annually for impairment, or more frequently if required by circumstances known as triggering events. At September 30, 2020, goodwill totaled $11.7 million.

Events during 2020 have caused management to consider reviewing goodwill for impairment more frequently than on an annual basis. These events include deterioration in general economic conditions, decreased overall financial performance of the Company and a sustained decrease in the Company’s stock price.

The Company’s share price has traded below tangible book value for the entire second and third quarters of 2020 without interruption, a period we deemed to be sustained. We considered the sustained depressed price of our stock to be a triggering event that required us to evaluate if goodwill had been impaired on an interim basis.

After performing our qualitative assessment at September 30, 2020, we believe that it is more-likely-than-not that the fair value of our Bank (our only reporting unit) was more than the carrying amount and that a quantitative impairment test was unnecessary.

Core Deposit Intangibles

Acquired core deposits provide value as a source of below market rate funds and the realization of interest cost savings is a fundamental rationale for assuming these deposit liabilities. The cost savings is defined as the difference between the cost of funds on our new deposits (i.e., interest and net maintenance costs) and the cost of an equal amount of funds from an alternative source having a similar term as the new deposit base. Our core deposit intangibles were recorded at fair value which was derived using the income approach and represent the present value of the cost savings over the projected term of our new deposit base. The core deposit intangible is being amortized on a straight-line basis over an estimated eight-year life, and is evaluated annually for impairment.

The following table sets forth, as of September 30, 2020, the total estimated future amortization of intangible assets:

(Amounts in thousands)	Amount
Amortization:
2020	$	191
2021		766
2022		766
2023		766
2024		581
2025 and thereafter		1,133
Total	$	4,203

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Risk Factors

This report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (“Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current beliefs and assumptions, and on information available to management as of the date of this document. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements may also include statements in which words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “considers” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” and other comparable words or phrases of a future- or forward-looking nature, are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. Except as specifically noted herein all references to the “Company” refer to Bank of Commerce Holdings, a California corporation, and its consolidated subsidiaries.

The following factors, among others, could cause our actual results to differ materially from those expressed in such forward-looking statements:

●

The strength of the United States economy in general and the strength of the local economies in California in which we conduct operations;

●

The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve Board;

●

Developments and changes in Federal and state laws and regulations, such as the recently enacted Coronavirus Aid Relief and Economic Security Act (“CARES Act”) addressing the economic effects of the COVID-19 pandemic and increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the California Department of Financial Protection and Innovation;

●

The economic effects of COVID-19 or similar pandemic diseases could adversely affect our future results of operations or the market price of our stock;

●

The effects of the COVID-19 pandemic could adversely affect our customers’ future results of operations;

●

Our inability to successfully manage our growth or implement our growth strategy;

●

Volatility in the capital or credit markets;

●

Our inability to transition from LIBOR to a substitute index;

●

Changes in the financial performance and/or condition of our borrowers;

●

Our concentration in real estate lending;

●

Changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation and other third parties;

●

Changes in consumer spending, borrowing and savings habits;

●

Deterioration in the reputation of banks and the financial services industry could adversely affect the Company's ability to obtain and retain customers;

●

Changes in the level of our nonperforming assets and loan charge-offs;

●

Deterioration in values of real estate in California and the United States generally, both residential and commercial;

●

Possible other-than-temporary impairment of securities held by us;

●

Possible impairment of goodwill or core deposit intangibles;

●

Our inability to timely develop competitive new products and services and/or resistance to the acceptance of these products and services by new and existing customers;

●

The willingness of customers to substitute competitors’ products and services for our products and services;

●

Technological changes could expose us to new risks, including potential systems failures or fraud;

●

The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters;

●

The risks presented by public stock market volatility, which could adversely affect the market price of the Company's common stock and the ability to raise additional capital;

●

Our inability to attract deposits and other sources of liquidity at acceptable costs;

●

Changes in the competitive environment among financial and bank holding companies and other financial service providers, including Fintech companies;

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

●

Consolidation in the financial services industry resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape;

●

The loss of critical personnel and the challenge of hiring qualified personnel at acceptable compensation levels;

●

Natural disasters, such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic processes;

●

Natural disasters outside California, could negatively impact our purchased loan portfolio or our third party loan servicers;

●

Unauthorized computer access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems;

●

Geopolitical conditions, including acts or threats of war or terrorism, actions taken by the United States or other governments in response to acts or threats of war or terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

●

Our inability to manage the risks involved in the foregoing; and

●

The effects of any reputational damage to the Company resulting from any of the foregoing.

If our assumptions regarding one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this document and in the information incorporated by reference in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake any obligation to publicly correct, revise, or update any forward-looking statement if we later become aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws. Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties discussed in “RISK FACTORS” and in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors”. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following sections discuss significant changes and trends in the financial condition, capital resources and liquidity of the Company from December 31, 2019 to September 30, 2020. Also discussed are significant trends and changes in the Company’s results of operations for the three and nine months ended September 30, 2020, compared to the same periods in 2019. The consolidated financial statements and related notes appearing elsewhere in this report are unaudited. The following discussion and analysis is intended to provide greater detail of the Company's financial condition and results.

GENERAL

Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”) is a corporation organized under the laws of California and a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”) with its principal offices in Sacramento, California. The Holding Company’s principal business is to serve as a holding company for Merchants Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) and Bank of Commerce Mortgage (inactive). The Bank changed its name for all operations to Merchants Bank of Commerce effective May 20, 2019. We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II, which was organized in connection with our prior issuance of trust-preferred securities. Our common stock is traded on the NASDAQ Global Market under the symbol “BOCH.”

We commenced banking operations in 1982 and grew organically to four branches before purchasing five Bank of America branches in 2016. With our 2019 acquisition of Merchants Holding Company, we now operate ten full service facilities and one limited service facility in northern California. We also operate a “cyber office” as identified in our summary of deposits reporting filed with the FDIC. We provide a wide range of financial services and products for business and retail customers which are competitive with those traditionally offered by banks of similar size in California. As of September 30, 2020 and December 31, 2019, we operated under one primary business segment: Community Banking.

Our principal executive office is located at 555 Capitol Mall Suite 1255, Sacramento, California 95814 and the telephone number is (800) 421-2575.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Significant items for the first nine months of 2020:

●	$5.3 million provision for loan and lease losses.

●	$1.1 million in non-recurring costs associated with the termination of a technology management services contract and a previously disclosed severance agreement.

●	$163.5 million in loans funded through September 30, 2020 under the SBA’s Paycheck Protection Program (“PPP”) (606 loans).

●	1,409,499 shares of common stock repurchased.

●	COVID-19 loan deferrals totaled $38.6 million at September 30, 2020. Loans totaling $82.5 million with COVID-19 related payment deferrals at June 30, 2020 have resumed making payments.

Financial highlights for the third quarter of 2020 compared to the same quarter a year ago:

Performance

●	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 unchanged from 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 compared to no provision for the same period in the prior year.

●	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.

●	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.

Credit Quality

●

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.

●

Net loan charge-offs were $316 thousand in the third quarter of 2020 compared with net loan recoveries of $160 thousand for the same quarter 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.

Financial highlights for the first nine months of 2020 compared to the same period a year ago:

Performance

●

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 compared to no provision for the same period in the prior year.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$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%.

●	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.

Credit Quality

●

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. The increase in nonperforming assets results from four loans that were placed in nonaccrual status during the nine months ended September 30, 2020.

●	Net loan charge-offs were $608 thousand in the first nine months of 2020 compared with net loan charge-offs of $7 thousand for the same period in the prior year.

Impacts of COVID-19:

In response to challenges created by the COVID-19 pandemic, we are addressing those things which are within our control including the following.

●	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.

●	At September 30, 2020, our workforce totaled 211 employees of which 107 are working remotely.

●	Through September 30, 2020, we have funded 606 loans totaling $163.5 million for the PPP.

●

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 a significant increase in deposit balances as all PPP loan funds were deposited into customer accounts at our Bank and as a result of customer behavior which is focused on cash accumulation.

●	At September 30, 2020, we have approved short-term loan payment deferrals on 107 loans totaling $38.6 million. Most of these deferrals expire during the fourth quarter of 2020.

●	For the six-month period from April through September, the SBA has made principal and interest payments on all our SBA 7(a) loans. Borrowers will resume responsibility for their payments in October.

●	Organic loan growth has been slowed as we maintain credit underwriting discipline in light of the current economic environment.

●	After considering qualitative factors, management determined that the Company’s goodwill was not impaired at September 30, 2020.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY OF CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2019 filed with the SEC on March 6, 2020. Some of these significant accounting policies are considered critical and require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC’s definition.

Valuation and Impairment of Investment Securities

At the time of purchase, we designate a security as held-to-maturity or available-for-sale, based on our investment objectives, operational needs and intent to hold. We do not engage in trading activity. Securities designated as held-to-maturity are carried at amortized cost. We have the ability and intent to hold these securities to maturity. Securities designated as available-for-sale may be sold to implement our asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as part of accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Gains or losses on sale of securities are based on the specific identification method. The market value and credit rating of each security is monitored to identify changes in asset quality.

Security values may be adjusted to reflect changes in valuation as a result of other-than-temporary declines in value. Investments with fair values that are less than amortized costs are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or from changes in interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends.

When an investment is other-than-temporarily impaired, we assess whether we intend to sell the security, or it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If we intend to sell the security or if it is more-likely-than-not that we will be required to sell security before recovery of the amortized cost basis, the entire amount of other-than-temporary impairment is recognized in earnings.

For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the investment’s amortized cost basis and the present value of its expected future cash flows.

The remaining differences between the investment’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. Significant judgment is required in the determination of whether other-than-temporary impairment has occurred for an investment. We follow a consistent and systematic process for determining other-than-temporary impairment loss. We have designated the ALCO responsible for the other-than-temporary evaluation process.

The ALCO’s assessment of whether an other-than-temporary impairment loss should be recognized incorporates both quantitative and qualitative information including, but not limited to: (1) the length of time and the extent of which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, (4) whether the debtor is current on interest and principal payments, and (5) general market conditions and industry or sector specific outlook. See Note 3 Securities in the Notes to Consolidated Financial Statements in this document for further detail on other-than-temporary impairment and the securities portfolio.

Allowance for Loan and Lease Losses

The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan and lease portfolio. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In periodic evaluations of the adequacy of the allowance balance, management considers our past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors.

Management reviews the ALLL on a monthly basis and conducts a formal assessment of the adequacy of the ALLL on a quarterly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially graded when originated. Loans are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for unimpaired loan categories are based on analysis of historical losses adjusted for changing environmental factors applicable to each loan category. Allowances for changing environmental factors are management's best estimate of the probable impact these changes would have on the loan portfolio as a whole. See Note 4 Loans in the Notes to Consolidated Financial Statements in this document for further detail on the ALLL and the loan portfolio.

Income Taxes

Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach. We recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for the expected future tax consequences that have been recognized in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent it is more-likely-than-not that they will be realized. In evaluating our ability to recover the deferred tax assets, management considers all available positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operations.

In projecting future taxable income, management develops assumptions including the amount of future state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates being used to manage the underlying business. We file consolidated federal and state income tax returns.

ASC 740-10-55 Income Taxes requires a two-step process that separates recognition from measurement of tax positions. We recognize the financial statement effect of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. The measurement process is applied only after satisfying the recognition requirement and determines what amount of a tax position will be sustainable upon a potential examination or settlement. If upon measuring, the tax position produces a range of potential tax benefits, we may claim the highest tax benefit from that range as long as it is over 50% likely to be realized using a probability analysis.

We believe that all of the tax positions we have taken, meet the more-likely-than-not recognition threshold. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.

Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and liabilities, and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available-for-sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record certain assets at fair value on a nonrecurring basis, such as certain impaired loans held for investment, (“OREO”), core deposit intangible and goodwill. These nonrecurring fair value adjustments typically involve write-downs of individual assets due to application of lower of cost or market accounting.

We have established and documented a process for determining fair value. We maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there is no readily available market data, we use our best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements. Additional information on our use of fair value measurements and our related valuation methodologies is provided in Note 9 Fair Values in the Notes to Consolidated Financial Statements incorporated in this document.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT ACCOUNTING PRONOUNCEMENTS

ASU No. 2016-13

Description - In June of 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments are intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting guidance for credit losses on securities and purchased financial assets with credit deterioration.

Methods and timing of adoption – The FASB has voted to delay until January 2023 the implementation of the ASU No. 2016-13 for smaller reporting companies as defined by the SEC. We qualify as a smaller reporting company and in light of this delay, we have postponed the implementation of the ASU and have not determined when it will be implemented or the financial impact.

SOURCES OF INCOME

Net Interest Income

We derive our income primarily from net interest income, which is the difference between the interest income we receive on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income is impacted by many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. Aside from changes in market interest rates, the current net interest margin will be affected by the following:

	●	The majority of our loans are fixed rate loans or variable rate loans that are already at their floor rate. This has mitigated the impact of declining interest rates on loan yields during 2020. The yield on loans, exclusive of PPP loans, has declined only four basis points from 4.80% during the first quarter of 2020 to 4.76% during the third quarter.
	●	We have funded PPP loans totaling $163.5 million which bear an interest rate of 1.00%. The yield on PPP loans is highly dependent on fees earned over the 24-month duration of the loans. For the three and nine months ended September 30, 2020, the average yield for PPP loans was 2.31% and 2.38%, respectively, including $538 thousand and $1.0 million, respectively, in fees earned on loans. At September 30, 2020, $3.3 million in unamortized fee income remains to be earned over the remaining contractual term of the loans. If the PPP loans are forgiven and repaid before the end of the 24-month loan term, we will accelerate the recognition the unamortized loan fee, which will increase the average yield on PPP loans for the quarter of forgiveness.
	●	The impact of declining interest rates has been more immediate on our investment portfolio and out interest-bearing deposits in other banks. Much of our investment portfolio is collateralized by residential and commercial real estate mortgages. The rapid decline interest rates earlier in the year facilitated the refinance of many of these mortgages which accelerated bond repayments and accelerated amortization of bond premiums, lowering yields. Additionally, the cash flows from the investment portfolio were reinvested at substantially lower yields. Yield on taxable securities declined from 2.68% in the first quarter of 2020 to 2.24% in the third quarter of 2020.

●

During the first nine months of 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. Our average yield on interest bearing deposits in other banks decreased 195 basis points for the current quarter compared to the same quarter a year ago. We have also experienced significant increased deposit balances due to PPP loan program disbursements and changes in customer behavior. If we can invest this excess liquidity into loans or our investment portfolio, we will enhance our net interest margin and net interest income.

●

Cash flows from our loan and investment portfolio are being reinvested in the current market at significantly lower rates. Recent bond purchases have centered on longer duration investments such as longer maturity municipal bonds and lower coupon mortgage backed securities.

Net interest income reflects both the amount of earning assets we hold and our net interest margin, which is the difference between the yields we receive on our earning assets and the interest rates we pay to fund those assets. As a result, changes in either our net interest margin or the amount of earning assets we hold will affect our net interest income and earnings.

Increases or decreases in interest rates could adversely affect our net interest margin. Although our asset yields and funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, and cause our net interest margin to expand or contract. Many of our assets are tied to indexes, which adjust in response to changes in interest rates.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When market interest rates begin to increase in the future, we anticipate that our interest rate risk position will be neutral to moderately liability sensitive.

The low interest rate environment combined with excess liquidity from increased deposits that is being invested in lower yielding assets has contributed to reducing our net interest margin. Because many of our liabilities are already priced near historic lows with little room for further reductions, when interest rates decline, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. This is particularly true given the large inflow of deposits we have experienced requiring funds to be invested at lower yields, providing further downward pressure on our net interest margin. We assess our interest rate risk by estimating the effect of interest rate changes on our earnings under various simulated scenarios. The scenarios differ based on assumptions including the direction, magnitude and speed of interest rate changes, and the slope of the yield curve.

There is always the risk that changes in interest rates could reduce our net interest income and earnings in material amounts, especially if actual conditions turn out to be materially different than simulated scenarios. For example, if interest rates rise or fall faster than we assumed or the slope of the yield curve changes, we may incur significant losses on debt securities we hold as investments. To reduce our interest rate risk, we may rebalance our investment and loan portfolios, refinance our debt and take other strategic actions which may result in losses or expenses.

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

											Years 6
											Through		Beyond
(Amounts in thousands)	Year 1		Year 2		Year 3		Year 4		Year 5		Year 10		Year 10		Total
Rate Index:
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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

	At September 30, 2020
	Loans At		Loans Above
(Amounts in thousands)	Floor Rate		Floor Rate		Total
Variable rate loans with contractual floor rates:
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 contractual floor rates:
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

Non Interest Income

We also earn noninterest income. Sources of noninterest income include fees earned on deposit related services, ATM and point of sale fees, payroll and benefit processing fees, earnings on bank-owned life insurance, gains on sale of available-for-sale securities, and dividends on Federal Home Loan Bank of San Francisco stock. Most of these sources of income do not vary significantly from quarter to quarter. Possible exceptions include gains on sale of available-for-sale securities and death proceeds from bank-owned life insurance.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

Third Quarter of 2020 Compared With 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.

First Nine Months of 2020 Compared With First Nine Months of 2019

Net income for the first nine months of 2020 decreased $1.5 million compared to the first nine months of 2019. In the current year, net interest income was $678 thousand higher, noninterest expense was $2.4 million lower and income taxes were $808 thousand lower. These changes were partially offset by a provision for loan and leases losses that was $5.3 million higher and noninterest income that was $127 thousand lower.

Return on Average Assets and Return on Average Equity

The following table presents the return on average assets and return on average equity for the three and nine months ended September 30, 2020 and 2019. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the Consolidated Statements of Income incorporated in this document.

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Return on average assets		1.01	%		1.26	%		0.76	%		0.98	%
Return on average equity		10.05	%		10.86	%		7.14	%		8.74	%

NET INTEREST INCOME AND NET INTEREST MARGIN

During the 2020, in response to the economic effects of the COVID-19 pandemic, the Federal Reserve cut interest rates by 150 to 175 basis points which contributed to a decrease in our net interest margin.

For the three months ended September 30, 2020 compared to the same period a year ago, net interest income increased $408 thousand.

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 on the loan portfolio. 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.

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 decreased $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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine months ended September 30, 2020 compared to the same period a year ago, net interest income increased $678 thousand.

Interest income for the first nine months of 2020 decreased $195 thousand or less than 1% to $44.6 million.

●

Interest and fees on loans increased $1.1 million due to a $124.4 million increase in average loan balances partially offset by a 42 basis point decrease in the average yield on the loan portfolio. Much of the 42 basis point decrease was caused by PPP loans which yielded only 2.38%. The yield on loans exclusive of PPP loans declined 21 basis points.

●	Interest on investment securities decreased $746 thousand due to an $8.4 million decrease in average securities balances and a 27 basis point decrease in average yield on the securities portfolio.

●	Interest on interest-bearing deposits due from banks decreased $568 thousand, a $26.8 million increase in average interest-bearing deposit balances was offset by a 191 basis point decrease in average yield.

Interest expense for the first nine months of 2020 decreased $873 thousand or 19% to $3.7 million.

●

Interest expense on interest-bearing deposits decreased $432 thousand. Average interest-bearing demand and savings deposit balances increased $74.4 million, while average certificate of deposit balances decreased $19.7 million. The average rate paid on interest-bearing deposits decreased ten basis points.

●

Interest expense on FHLB borrowings decreased $242 thousand. Average FHLB borrowings were $8.8 million for the first nine months of 2020 compared to $12.9 million for the same period a year ago. The average rate paid on FHLB borrowings decreased 248 basis points. The decrease in the average rate paid on FHLB borrowings is primarily due to borrowings in the current period that bear 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 decreased $71 thousand. During the second quarter of 2019, we completed the early repayment of our variable rate senior debt.

●	Interest expense on junior subordinated debentures decreased $128 thousand. The average rate paid on junior subordinated debentures decreased 166 basis points.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Average Balances, Interest Income/Expense and Yields/Rates Earned/Paid

The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended September 30, 2020							Three Months Ended September 30, 2019
	Average							Average
(Dollars in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾
Interest-earning assets:
Loans, net of PPP ⁽²⁾	$	1,046,187	$	12,499		4.75	%	$	1,029,534	$	13,013		5.01	%
PPP loans		163,090		949		2.31	%		—		—		—	%
Taxable securities		228,045		1,284		2.24	%		238,601		1,609		2.68	%
Tax-exempt securities ⁽³⁾		68,766		457		2.64	%		32,974		271		3.26	%
Interest-bearing deposits in other banks		95,348		29		0.12	%		58,897		308		2.07	%
Average interest-earning assets		1,601,436		15,218		3.78	%		1,360,006		15,201		4.43	%
Cash and due from banks		23,381							23,822
Premises and equipment, net		15,365							15,922
Goodwill		11,671							11,686
Other intangibles, net		4,318							5,083
Other assets		47,945							45,925
Average total assets	$	1,704,116						$	1,462,444

Interest-bearing liabilities:
Demand - interest-bearing	$	279,744		71		0.10	%	$	243,553		117		0.19	%
Money market		387,995		289		0.30	%		309,188		451		0.58	%
Savings		146,074		74		0.20	%		138,296		131		0.38	%
Certificates of deposit		139,757		420		1.20	%		157,620		491		1.24	%
Federal Home Loan Bank of San Francisco borrowings		10,000		—		—	%		—		—		—	%
Other borrowings		9,988		184		7.33	%		9,942		183		7.30	%
Junior subordinated debentures		10,310		50		1.93	%		10,310		106		4.08	%
Average interest-bearing liabilities		983,868		1,088		0.44	%		868,909		1,479		0.68	%
Noninterest-bearing demand		531,459							405,853
Other liabilities		17,356							18,074
Shareholders’ equity		171,433							169,608
Average liabilities and shareholders’ equity	$	1,704,116						$	1,462,444
Net interest income and net interest margin⁽⁴⁾			$	14,130		3.51	%			$	13,722		4.00	%

⁽¹⁾Interest income on loans includes deferred fees and costs of approximately $240 thousand and $161 thousand for the three months ended September 30, 2020 and 2019, respectively. Interest income on PPP loans includes $538 thousand of fee income for the three months ended September 30, 2020.

⁽²⁾ Loans, net of PPP includes average nonaccrual loans of $6.6 million and $13.2 million for the three 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 three months ended September 30, 2020 and 2019 included $233 thousand and $193 thousand, respectively, in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 7 basis points. PPP loans 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	Nine Months Ended September 30, 2020							Nine Months Ended September 30, 2019
	Average							Average
(Dollars in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ 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 intangibles, net		4,508							4,780
Other assets		48,418							43,253
Average total assets	$	1,595,386						$	1,446,476

Interest-bearing liabilities:
Demand - interest-bearing	$	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		2.27	%		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		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 included $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. PPP loans 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Analysis of Changes in Net Interest Income

The following tables set forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume variance) and changes in average rates (rate variance) for the three and nine months ended September 30, 2020 and 2019. Changes in interest income and expense, which are not specifically attributable specifically to either volume or rate, are allocated proportionately between both variances. Interest income and yields on tax-exempt securities are presented on a nominal basis; and not on a tax equivalent basis.

	Three Months Ended September 30, 2020 Over Three Months Ended September 30, 2019
(Amounts in thousands)	Volume			Rate			Net Change
Increase (decrease) in interest income:
Loans, net of PPP	$	441		$	(955	)	$	(514	)
PPP loans		949			—			949
Taxable securities		(69	)		(256	)		(325	)
Tax-exempt securities⁽¹⁾		226			(40	)		186
Interest-bearing deposits in other banks		532			(811	)		(279	)
Total increase (decrease)		2,079			(2,062	)		17

Increase (decrease) in interest expense:
Demand - interest-bearing		21			(67	)		(46	)
Money market		175			(337	)		(162	)
Savings		8			(65	)		(57	)
Certificates of deposit		(54	)		(17	)		(71	)
Other borrowings		1			—			1
Junior subordinated debentures		—			(56	)		(56	)
Total increase (decrease)		151			(542	)		(391	)
Net increase (decrease)	$	1,928		$	(1,520	)	$	408

⁽¹⁾ Interest income on tax-exempt securities is not presented on a tax equivalent basis.

	Nine Months Ended September 30, 2020 Over Nine Months Ended September 30, 2019
(Amounts in thousands)	Volume			Rate			Net Change
Increase (decrease) in interest income:
Loans, net of PPP	$	1,693		$	(2,336	)	$	(643	)
PPP loans		1,762			—			1,762
Taxable securities		(426	)		(485	)		(911	)
Tax-exempt securities⁽¹⁾		259			(94	)		165
Interest-bearing deposits in other banks		1,413			(1,981	)		(568	)
Total increase (decrease)		4,701			(4,896	)		(195	)

Increase (decrease) in interest expense:
Demand - interest-bearing		28			(144	)		(116	)
Money market		356			(467	)		(111	)
Savings		10			(88	)		(78	)
Certificates of deposit		(190	)		63			(127	)
Federal Home Loan Bank of San Francisco borrowings		(60	)		(182	)		(242	)
Other borrowings		(68	)		(3	)		(71	)
Junior subordinated debentures		—			(128	)		(128	)
Total increase (decrease)		76			(949	)		(873	)
Net increase (decrease)	$	4,625		$	(3,947	)	$	678

⁽¹⁾ Interest income on tax-exempt securities is not presented on a tax equivalent basis.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PROVISION FOR LOAN AND LEASE LOSSES

We recorded a provision for loan and lease losses of $5.3 million for the first nine months of 2020. There was no provision for loan and lease losses in the first nine months of 2019. A detailed discussion of our provision is provided later in this filing under the heading “Allowance for Loan and Lease Losses”. Also, see Note 4 Loans in the Notes to Consolidated Financial Statements for further information.

NONINTEREST INCOME

The following table presents the key components of noninterest income for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended September 30,				Change						Nine Months Ended September 30,					Change
(Dollars in thousands)	2020		2019		Amount			Percent			2020			2019		Amount			Percent
Noninterest income:
Service charges on deposit accounts	$	142	$	177	$	(35	)		(20	)%	$	463		$	532	$	(69	)		(13	)%
ATM and point of sale fees		297		293		4			1	%		828			876		(48	)		(5	)%
Payroll and benefit processing fees		152		158		(6	)		(4	)%		465			486		(21	)		(4	)%
Life insurance		125		126		(1	)		(1	)%		396			410		(14	)		(3	)%
Gain on sales of investment securities, net		258		12		246			2,050	%		482			137		345			252	%
Federal Home Loan Bank of San Francisco dividends		109		131		(22	)		(17	)%		275			376		(101	)		(27	)%
(Loss) gain on sale of OREO		—		—		—			—	%		(23	)		41		(64	)		(156	)%
Loss on disposal of equipment		—		—		—			—	%		(132	)		—		(132	)		(100	)%
Other		106		109		(3	)		(3	)%		282			305		(23	)		(8	)%
Total noninterest income	$	1,189	$	1,006	$	183			18	%	$	3,036		$	3,163	$	(127	)		(4	)%

Service charges and fee income have decreased for the three and nine months ended September 30, 2020 when compared to the same periods a year ago due to changes in customer behavior in response to the COVID-19 pandemic. Customers are maintaining higher deposit balances, avoiding service and overdraft charges, and are conducting fewer ATM and point of sale transactions.

The decrease in Federal Home Loan Bank of San Francisco dividends for the three and nine months ended September 30, 2020 is due to a reduction in the dividend rate paid compared to the same periods a year ago.

During the first quarter of 2020, we recorded a loss on disposal of ATM equipment from closure of two offsite locations.

NONINTEREST EXPENSE

The following table presents the key components of noninterest expense for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(Dollars in thousands)	2020			2019			Amount			Percent			2020			2019			Amount			Percent
Noninterest expense:
Salaries & related benefits	$	5,587		$	5,407		$	180			3	%	$	18,088		$	17,141		$	947			6	%
Loan origination costs		(461	)		(402	)		(59	)		(15	)%		(2,110	)		(1,261	)		(849	)		(67	)%
Premises & equipment		951			933			18			2	%		2,631			2,836			(205	)		(7	)%
FDIC insurance premium		101			(104	)		205			197	%		227			91			136			149	%
Data processing fees		581			582			(1	)		(0	)%		1,697			1,796			(99	)		(6	)%
Professional services		342			392			(50	)		(13	)%		1,145			1,230			(85	)		(7	)%
Telecommunications		157			194			(37	)		(19	)%		484			547			(63	)		(12	)%
Acquisition and merger		—			(113	)		113			100	%		—			2,193			(2,193	)		(100	)%
Other		1,132			1,411			(279	)		(20	)%		4,281			4,261			20			0	%
Total noninterest expense	$	8,390		$	8,300		$	90			1	%	$	26,443		$	28,834		$	(2,391	)		(8	)%

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter of 2020 Compared With The Third Quarter of 2019

Noninterest expense for the three months ended September 30, 2020 increased $90 thousand compared to the same period in the previous year. The increase in FDIC premiums was due to a $193 thousand Small Bank Assessments Credit from the FDIC recorded during the three months ended September 30, 2019 that did not recur in the current year. The decrease in other noninterest expense includes a $100 thousand provision for unfunded commitments during the third quarter of the prior year that did not recur in the current year.

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%.

First Nine Months of 2020 Compared With The First Nine Months of 2019

Noninterest expense for the nine months ended September 30, 2020 decreased $2.4 million compared to the same period in the previous year. Decreases in noninterest expense included the following items:

●	$849 thousand increase in deferred loan origination cost benefit for the nine months ended September 30, 2020 compared to the same period in the previous year, primarily from PPP loan originations.

●	$2.2 million in non-recurring costs recorded during the nine months ended September 30, 2019 associated with the acquisition of Merchants.

●	$501 thousand in non-recurring costs recorded during the nine months ended September 30, 2019 associated with the name change of our subsidiary bank.

The decreases in noninterest expense were partially offset by the following increases:

●	$414 thousand in non-recurring costs from a previously disclosed severance agreement during the nine months ended September 30, 2020.

●	$700 thousand in non-recurring costs related to the termination of a technology management services contract during the nine months ended September 30, 2020.

●	$175 thousand increase in vacation accrual costs for the nine months ended September 30, 2020 compared to the same period in the previous year. Our employees have used less of their vacation benefits in the current year due to travel restrictions imposed in response to the COVID-19 pandemic.

●	$143 thousand increase in health insurance premiums for the nine months ended September 30, 2020 compared to the same period in the previous year resulting from rate increases.

The Company’s efficiency ratio was 60.2% for the first nine months of 2020 (57.7% excluding $1.1 million of non-recurring costs). The ratio during the same period in 2019 was 66.5% (60.3% excluding $2.7 million of non-recurring costs).

INCOME TAXES

Our provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to our income before taxes. The following table reflects our tax provision and the related effective tax rate for the periods indicated. The higher effective tax rates in 2019 reflect the non-deductibility of certain acquisition-related expenses.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Dollars in thousands)	2020			2019			2020			2019
Income Taxes:
Income before provision for income taxes	$	5,829		$	6,428		$	12,242		$	14,550
Provision for income taxes	$	1,500		$	1,786		$	3,150		$	3,958
Effective tax rate		25.7	%		27.8	%		25.7	%		27.2	%

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

CONSOLIDATED BALANCE SHEETS

As of September 30, 2020, we 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.

We maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $22.9 million and we also held interest-bearing deposits in the amount of $105.0 million.

Available-for-sale investment securities totaled $337.0 million at September 30, 2020, compared to $287.0 million at December 31, 2019. During the first nine months of 2020, we purchased securities with a par value of $154.3 million. During the first nine months of 2020, we sold securities with a par value of $54.2 million resulting in $482 thousand in net realized gains. During the nine months ended September 30, 2020, we also received $61.1 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.

At September 30, 2020, our net unrealized gains on available-for-sale investment securities were $10.4 million compared to net unrealized gains of $3.7 million at December 31, 2019. The change in net unrealized gains during the nine months ended September 30, 2020 was driven by significant declines in market interest rates.

We recorded gross loan balances of $1.206 billion at September 30, 2020, compared to $1.033 billion at December 31, 2019, an increase of $173 million. The increase in gross loans occurred primarily from loans originated from the PPP.

Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, increased by $2.5 million to $8.1 million, or 0.67% of gross loans (0.78% of gross loans excluding PPP loans), as of September 30, 2020, compared to $5.6 million, or 0.54% of gross loans as of December 31, 2019. The increase was due to two commercial loans totaling $1.4 million and two commercial real estate loans totaling $1.7 million that were placed in nonaccrual status during the nine months ended September 30, 2020.

Past due loans as of September 30, 2020 decreased $542 thousand to $4.4 million, compared to $4.9 million as of December 31, 2019. We believe that credit grading for past due loans appropriately reflects the risk associated with those loans.

The ALLL at September 30, 2020 increased $4.7 million to $16.9 million compared to $12.2 million at December 31, 2019. At September 30, 2020, relying on our ALLL methodology, which uses criteria such as credit grading and historical loss rates, and qualitative factors we believe the ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could result in additional charges to the provision for loan and lease losses. A detailed discussion of the ALLL is provided later in this document under the heading “Allowance for Loan and Lease Losses”. Also, see Note 4 Loans in the Notes to Consolidated Financial Statements for further information on the ALLL and the loan portfolio.

Premises and equipment totaled $15.2 million at September 30, 2020, a decrease of $696 thousand compared to $15.9 million at December 31, 2019.

Our OREO balance at September 30, 2020 was $8 thousand compared to $35 thousand in OREO properties at December 31, 2019. For the nine months ended September 30, 2020, we transferred into OREO one foreclosed property in the amount of $8 thousand and sold one property out of OREO with a balance of $35 thousand for a net loss of $23 thousand.

Bank-owned life insurance increased $385 thousand during the nine months ended September 30, 2020 to $24.1 million compared to $23.7 million at December 31, 2019.

Goodwill and other intangible assets, net totaled $15.9 million at September 30, 2020, a decrease of $574 thousand compared to $16.5 million at December 31, 2019 due to amortization of core deposit intangibles. After considering qualitative factors, management determined that the Company’s goodwill was not impaired at September 30, 2020. A detailed discussion of our impairment analysis is presented below under the heading “Goodwill and Other Intangible Assets”.

Other assets, which include the Bank’s investment qualified zone academy bonds, Federal Home Loan Bank of San Francisco stock, right-of-use lease asset and low-income housing tax credit partnerships totaled $29.0 million at September 30, 2020 compared to $28.6 million at December 31, 2019. The increase included one new $1.0 million low income housing tax credit investment.

Total deposits at September 30, 2020, increased $251 million or 26% annualized to $1.518 billion compared to $1.267 billion at December 31, 2019.

●

Total non-maturing deposits increased $261.8 million or 31% annualized compared to December 31, 2019. The increase in non-maturing deposits was due to PPP loan program disbursements and changes in customer behavior, which is focused on cash accumulation.

●

Certificates of deposit decreased $10.9 million or 10% annualized compared to December 31, 2019. The decrease in certificates of deposits reflects our decision to reduce our reliance on public deposits and depositor’s reaction to the recent substantial decline in interest rates.

Other liabilities, which include the Bank’s supplemental executive retirement plan, deferred director compensation, operating leases and the funding obligation for investments in qualified affordable housing partnerships, increased $404 thousand to $18.1 million as of September 30, 2020 compared to $17.7 million at December 31, 2019.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Investment Securities

The composition of our investment securities portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income.

The investment securities portfolio also:

●

Partially mitigates interest rate risk;

●

Diversifies the credit risk inherent in the loan portfolio;

●

Provides a vehicle for the investment of excess liquidity;

●

Provides a source of liquidity when pledged as collateral for lines of credit;

●

Is used as collateral for certain public funds.

The carrying value of our available-for-sale investment securities totaled $337.0 million at September 30, 2020, compared to $287.0 million at December 31, 2019. 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 nine months ended September 30, 2020, we purchased securities with a par value of $154.3 million and weighted average yield of 2.01% (2.47% tax equivalent) and sold securities with a par value of $54.2 million and weighted average yield of 2.21% (2.32% tax equivalent).

The following table presents the available-for-sale investment securities portfolio at fair value by classification and major type as of September 30, 2020 and December 31, 2019.

	September 30,		December 31,
(Amounts in thousands)	2020		2019
Available-for-sale securities:
U.S. government & agencies	$	31,811	$	38,733
Obligations of state and political subdivisions		91,863		42,098
Residential mortgage-backed securities and collateralized mortgage obligations		165,692		180,835
Corporate securities		—		2,966
Commercial mortgage-backed securities		19,577		19,307
Other asset-backed securities		28,089		3,011
Total	$	337,032	$	286,950

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents information regarding the amortized cost, and maturity structure of the investment portfolio at September 30, 2020.

						Maturities					Maturities
	Maturities					Over One Through					Over Five Through					Maturities
	Within One Year					Five Years					Ten Years					Over Ten Years					Total
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale securities:⁽¹⁾
U.S. government & agencies	$	40		2.88	%	$	331		2.43	%	$	18,076		2.31	%	$	12,495		2.33	%	$	30,942		2.32	%
Obligations of state and political subdivisions		453		3.29	%		8,991		3.78	%		12,183		2.73	%		66,001		2.49	%		87,628		2.66	%
Residential mortgage-backed securities and collateralized mortgage obligations		21,764		1.65	%		99,594		2.53	%		15,821		1.87	%		24,166		1.73	%		161,345		2.23	%
Commercial mortgage-backed securities		—		—	%		1,746		2.48	%		4,007		2.57	%		13,167		2.22	%		18,920		2.32	%
Other asset-backed securities		—		—	%		—		—	%		—		—	%		27,799		1.74	%		27,799		1.74	%
Total	$	22,257		1.68	%	$	110,662		2.63	%	$	50,087		2.29	%	$	143,628		2.18	%	$	326,634		2.31	%

⁽¹⁾ The maturities for the collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.

Loan Portfolio

Historically, we have concentrated our loan origination activities primarily within El Dorado, Placer, Sacramento, and Shasta counties in California. In recent years, our loan origination activity has expanded to include other portions of California and northern Nevada. We manage our credit risk through various diversifications of our loan portfolio, the application of sound underwriting policies and procedures, and ongoing credit monitoring practices. Generally, the loans are secured by real estate or other assets located in California. Repayment is expected from the borrower’s cash flows or cash flows from real estate investments.

The following table presents the composition of the loan portfolio as of September 30, 2020 and December 31, 2019.

	September 30, 2020						December 31, 2019
(Dollars in thousands)	Amount			%			Amount			%
Loan Portfolio:
Commercial	$	121,025			10	%	$	141,197			14	%
Paycheck protection program		163,493			14			—			—
Commercial real estate:
Construction and land development		40,289			3			26,830			3
Non-owner occupied		538,079			45			493,920			48
Owner occupied		210,455			17			218,833			21
Residential real estate:
ITIN		30,071			2			33,039			3
1-4 family mortgage		57,867			5			63,661			6
Equity lines		20,296			2			22,099			2
Consumer and other		24,490			2			33,324			3
Gross loans		1,206,065			100	%		1,032,903			100	%
Deferred loan (fees) and costs		(1,037	)					2,162
Loans, net of deferred fees and costs		1,205,028						1,035,065
Allowance for loan and lease losses		(16,873	)					(12,231	)
Net loans	$	1,188,155					$	1,022,834

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth the maturity and distribution of our loan portfolio as of September 30, 2020.

			After One
	Within One		Through		After Five
(Amounts in thousands)	Year		Five Years		Years		Total
Loan Portfolio:
Commercial	$	41,697	$	72,948	$	7,261	$	121,906
Paycheck protection program		100,211		59,951		—		160,162
Commercial real estate:
Construction and land development		6,275		15,402		18,569		40,246
Non-owner occupied		42,661		213,694		281,236		537,591
Owner occupied		21,808		86,915		103,268		211,991
Residential real estate:
ITIN		3,337		13,188		13,546		30,071
1-4 family mortgage		4,470		19,089		34,395		57,954
Equity lines		1,180		809		18,604		20,593
Consumer and other		1,129		2,087		21,298		24,514
Loans, net of deferred fees and costs	$	222,768	$	484,083	$	498,177	$	1,205,028
Loans with:
Fixed rates	$	151,140	$	252,674	$	186,398	$	590,212
Variable rates		71,628		231,409		311,779		614,816
Total	$	222,768	$	484,083	$	498,177	$	1,205,028

Loans with Unique Credit Characteristics

ITIN Loans

We own a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans are geographically disbursed throughout the United States and are made to legal United States residents who do not possess a social security number. The ITIN loan portfolio is serviced by a third party. The majority of the ITIN loans are variable rate loans and may have an increased default risk in a rising rate environment. Worsening economic conditions in the United States may cause us to suffer higher default rates on our ITIN loans and reduce the value of the assets that we hold as collateral. In addition, if we become responsible for servicing these loans, we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which would adversely affect our noninterest expense. As of September 30, 2020, we have granted 57 COVID-19 related deferrals for ITIN loans totaling $3.6 million.

SFC Loans

Between May of 2014 and December of 2018, we purchased unsecured retail installment home improvement loans that were originated by Service Finance Company, LLC (SFC). The loans were made through a network of over 8,000 approved home improvement dealers throughout the United States and Puerto Rico. Loans within the portfolio have a wide range of terms, interest rates and purchase discounts or premiums. The loans are serviced by a third party and have an average FICO credit score over 750 at origination. Principal repayments on these loans totaled $7.9 million for the nine months ended September 30, 2020. In addition, if we become responsible for servicing these loans, we may realize additional monitoring and servicing costs due to the geographic disbursement of the portfolio which would adversely affect our noninterest expense. As of September 30, 2020, we have granted 16 COVID-19 related deferrals for SFC loans totaling $135 thousand.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PPP Loans

Through September 30, 2020, we have funded 606 PPP loans totaling $163.5 million. Substantially all of the loans were made to existing customers and all 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 size at September 30, 2020.

	At September 30, 2020
(Dollars in thousands)	Number		Balance
Industry:
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

	At September 30, 2020
(Dollars in thousands)	Balance		Number		Average Loan Size
Loan Size:
$50,000 or less	$	5,142		205	$	25
$50,001 to $150,000		15,462		185		84
$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 the SBA then has 90 days to process it for forgiveness. The following table presents the progress of our loans in the forgiveness process.

	At September 30, 2020
(Dollars in thousands)	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 submitted it to the bank		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 November 3, 2020, PPP loans totaling $11.5 million that were outstanding on September 30, 2020 have been forgiven and repaid by the SBA.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Purchased Loans

In addition to loans we have originated or loans we acquired in conjunction with our acquisition of Merchants, the loan portfolio includes purchased loan pools and purchased participations. Purchased loan pools and participations are recorded at their fair value at the acquisition date.

The following table presents the recorded investment in purchased loan pools and purchased participations at September 30, 2020 and December 31, 2019. The purchased loans presented in the table include the ITIN and SFC loans discussed under the heading “Loans with Unique Credit Characteristics”.

	September 30, 2020					December 31, 2019
(Dollars in thousands)	Balance		% of Gross Loan Portfolio			Balance		% of Gross Loan Portfolio
Loan Type:
Commercial real estate	$	17,707		1	%	$	19,506		2	%
Residential real estate		41,662		3	%		45,494		4	%
Consumer and other		20,579		2	%		28,579		3	%
Total purchased loans	$	79,948		6	%	$	93,579		9	%

Asset Quality

Nonperforming Assets

Our loan portfolio is heavily concentrated in real estate and a significant portion of our borrowers’ ability to repay their loans is dependent upon the professional services, commercial real estate market and the residential real estate development industry sectors. Loans secured by real estate or other assets primarily located in California are expected to be repaid from cash flows of the borrower or proceeds from the sale of collateral. As such, our dependence on real estate secured loans increases the risk of loss in our loan portfolio in a market of declining real estate values. Furthermore, declining real estate values would negatively impact holdings of OREO.

We manage asset quality and mitigate credit risk through the application of policies designed to promote sound underwriting and loan monitoring practices. Our Loan Committee is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for loan and lease losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to provide for probable losses inherent in the outstanding loan and lease portfolio. The amount of provision charge is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of loan portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of these factors is performed through an analysis of the adequacy of the ALLL. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the ALLL, and to determine the adequacy of the allowance, are conducted on a quarterly basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan portfolio, prevailing economic conditions and other factors.

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when we identify a loan as impaired, we measure the loan for potential impairment using discount cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of collateral, less selling costs. The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, external appraisals are updated every twelve months. We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (1) currently licensed in the state in which the property is located, (2) is experienced in the appraisal of properties similar to the property being appraised, (3) is actively engaged in the appraisal work, (4) has knowledge of current real estate market conditions and financing trends, (5) is reputable, and (6) is not on Freddie Mac’s nor our Exclusionary List of appraisers and brokers. In most cases, appraisals will be reviewed by another independent third party to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.

Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required. Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by our Chief Credit Officer. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Based on these processes, we do not believe there are significant time lapses for the recognition of additional provision for loan and lease losses or charge-offs from the date they become known.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loans are classified as nonaccrual when collection of principal or interest is doubtful; generally these are loans that are past due as to maturity or payment of principal or interest by 90 days or more, unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for nonaccrual status. Loans placed on nonaccrual will typically remain in nonaccrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear certain.

Upon acquisition of real estate collateral, typically through the foreclosure process, we promptly begin to market the property for sale. If we do not receive offers or indications of interest within a reasonable timeframe, we will review market conditions to assess the pricing level that would enable us to sell the property. At the time of foreclosure, OREO is recorded at fair value less costs to sell (“cost”), which becomes the property’s new basis. Unless a current appraisal is available, an appraisal will be ordered prior to a loan migrating to OREO. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALLL. After foreclosure, management periodically performs valuations and the property is carried at the lower of the cost or fair value less expected selling costs. We obtain updated appraisals on OREO property every six to twelve months. Valuation adjustments recorded in a period are primarily based on (1) updated appraisals received during the period, or (2) management’s authorization to reduce the selling price of the property during the period.

The following table summarizes our nonperforming assets as of September 30, 2020 and December 31, 2019.

	September 30,			December 31,
(Dollars in thousands)	2020			2019
Nonperforming Assets:
Commercial	$	1,549		$	61
Commercial real estate:
Non-owner occupied		1,062			—
Owner occupied		3,750			3,103
Total commercial real estate		4,812			3,103
Residential real estate:
ITIN		1,574			2,221
1-4 family mortgage		145			191
Total residential real estate		1,719			2,412
Consumer and other		18			40
Total nonaccrual loans		8,098			5,616
90 days past due and still accruing		—			—
Total nonperforming loans		8,098			5,616
Other real estate owned		8			35
Total nonperforming assets	$	8,106		$	5,651
Nonperforming loans to gross loans		0.67	%		0.54	%
Nonperforming loans to gross loans (excluding PPP)		0.78	%		0.54	%
Nonperforming assets to total assets		0.47	%		0.38	%

We regularly perform thorough reviews of the commercial real estate portfolio, including semi-annual stress testing. These reviews are performed on both our non-owner and owner occupied credits. These reviews are completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects. Stress testing is performed to determine the effect of rising cap rates, interest rates, and vacancy rates on the portfolio. Based on our analysis, we believe we are effectively managing the risks in this portfolio. There can be no assurance that declines in economic conditions, such as potential increases in retail or office vacancy rates, will not exceed the projected assumptions utilized in stress testing resulting in additional nonperforming loans in the future.

Loans are reported as troubled debt restructurings when we grant a concession(s) to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) significantly, or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, troubled debt restructured loans are impaired as we will not collect all amounts due, either principal or interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent troubled debt restructured loans are measured by comparing the present value of expected future cash flows of the restructured loans, discounted at the effective interest rate of the original loan agreement to the loans carrying value. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of September 30, 2020, we had $6.3 million in troubled debt restructurings compared to $6.5 million as of December 31, 2019. As of September 30, 2020, we had 92 restructured loans that qualified as troubled debt restructurings, of which 91 loans were performing according to their restructured terms. Troubled debt restructurings represented 0.52% of gross loans (0.61% of gross loans excluding PPP loans) as of September 30, 2020, compared to 0.63% at December 31, 2019. There was one new troubled debt restructuring on a $650 thousand commercial real estate loan during the nine months ended September 30, 2020.

Impaired loans of $4.3 million and $4.8 million were classified as accruing troubled debt restructurings at September 30, 2020 and December 31, 2019, respectively. For a troubled debt restructured loan to be on accrual status, the loan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. As of September 30, 2020 and December 31, 2019, we had no obligations to lend additional funds on any troubled debt restructured loans.

The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of September 30, 2020 and December 31, 2019.

	September 30,			December 31,
(Dollars in thousands)	2020			2019
Troubled Debt Restructurings:
Accruing troubled debt restructurings
Commercial	$	531		$	595
Residential real estate:
ITIN		3,597			3,957
Equity lines		131			231
Total accruing troubled debt restructurings	$	4,259		$	4,783

Nonaccruing troubled debt restructurings
Commercial	$	—		$	47
Commercial real estate:
Owner occupied		650			—
Residential real estate:
ITIN		1,395			1,593
Consumer and other		18			40
Total nonaccruing troubled debt restructurings	$	2,063		$	1,680

Total troubled debt restructurings
Commercial	$	531		$	642
Commercial real estate:
Owner occupied		650			—
Residential real estate:
ITIN		4,992			5,550
Equity lines		131			231
Consumer and other		18			40
Total troubled debt restructurings	$	6,322		$	6,463

Total troubled debt restructurings to gross loans outstanding at period end		0.52	%		0.63	%
Total troubled debt restructurings to gross loans outstanding at period end (excluding PPP)		0.61	%		0.63	%

Troubled Debt Restructuring Guidance

Financial institution regulators and the CARES Act have clarified 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 who 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents approved loan deferrals that are still in effect at September 30, 2020, none of which meet the definition of a troubled debt restructuring. For the remaining loans that were modified, nine borrowers also received a PPP loan through our U.S. Small Business Administration (“SBA”) department.

	At September 30, 2020
	Payments Scheduled to Resume in the Three Month Period Ended
	December 31, 2020				March 31, 2021
(Dollars in thousands)	#		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⁾		—		—		—		—		73		3,694
Total		30	$	32,407		4	$	2,517		107	$	38,618

⁽¹⁾ These loans are small residential mortgages and consumer home improvement loans, which are mostly deferred on a rolling one-month basis not to exceed six months. These loans are geographically disbursed throughout the United States and are serviced by a third party.

	At September 30, 2020
	Payments Scheduled to Resume in the Three Month Period Ended
	December 31, 2020				March 31, 2021
(Dollars in thousands)	#		Amount		#		Amount		#		Total
Industry:
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 by industry		30		32,407		4		2,517		34		34,924

Loans serviced by others⁽¹⁾		—		—		—		—		73		3,694
Total		30	$	32,407		4	$	2,517		107	$	38,618

SBA Loan Payments

As part of the SBA coronavirus debt relief efforts, the SBA made six months of principal and interest payments on all SBA 7(a) loans that were in regular servicing status at March 27, 2020 and for new SBA 7(a) loans originated between March 27, 2020 and September 27, 2020. At September 30, 2020, our loan portfolio included $32.3 million of SBA 7(a) loans (generally 75% guaranteed). Borrowers will resume responsibility for making their payments on these 7(a) loans in October 2020.

Allowance 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 potential losses related to a pandemic such as we are currently experiencing with COVID-19. As a result, we have placed a high reliance on qualitative factors (Q-Factors).

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During the nine months ended September 30, 2020, our review of the adequacy of our allowance for loan and lease losses (ALLL) focused on our Q-Factors for:

●

“Changes in international, national, regional and local conditions” and

●

“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 completing this work, we significantly increased our Q-Factors for “changes in the volume and severity of past due loans and other similar conditions” and “changes in international, national, regional and local conditions”.

Our ALLL methodology, adjusted for the revised Q-Factors 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 $5.3 million was recorded for the nine months ended September 30, 2020. There was no provision for loan and lease loss during the same period a year ago. Our ALLL as a percentage of gross loans was 1.40% as of September 30, 2020 compared to 1.18% as of December 31, 2019. Excluding PPP loans (on all of which we have no expectation of loss) our ALLL as a percentage of gross loans was 1.62% as of September 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.

The following table summarizes the ALLL roll forward for the nine months ended September 30, 2020, twelve months ended December 31, 2019 and the nine months ended September 30, 2019. This table also includes impaired loan information at September 30, 2020, December 31, 2019 and September 30, 2019.

	For The Nine Months Ended			For The Twelve Months Ended			For The Nine Months Ended
(Dollars in thousands)	September 30, 2020			December 31, 2019			September 30, 2019
ALLL:
Beginning balance ALLL	$	12,231		$	12,292		$	12,292
Provision for loan and lease loss charged to expense		5,250			—			—
Loans charged off		(1,027	)		(1,500	)		(1,326	)
Loan and lease loss recoveries		419			1,439			1,319
Ending balance ALLL	$	16,873		$	12,231		$	12,285

	At September 30, 2020			At December 31, 2019			At September 30, 2019
Nonaccrual loans:
Commercial	$	1,549		$	61		$	139
Commercial real estate:
Non-owner occupied		1,062			—			10,099
Owner occupied		3,750			3,103			—
Residential real estate:
ITIN		1,574			2,221			2,339
1-4 family mortgage		145			191			198
Consumer and other		18			40			21
Total nonaccrual loans		8,098			5,616			12,796
Accruing troubled debt restructured loans:
Commercial		531			595			629
Residential real estate:
ITIN		3,597			3,957			4,072
Equity lines		131			231			236
Total accruing troubled debt restructured loans		4,259			4,783			4,937

All other accruing impaired loans		—			—			—
Total impaired loans	$	12,357		$	10,399		$	17,733

Gross loans outstanding	$	1,206,065		$	1,032,903		$	1,033,082

Ratio of ALLL to gross loans outstanding		1.40	%		1.18	%		1.19	%
Ratio of ALLL to gross loans outstanding (excluding PPP)		1.62	%		1.18	%		1.19	%
Nonaccrual loans to gross loans outstanding		0.67	%		0.54	%		1.24	%
Nonaccrual loans to gross loans outstanding (excluding PPP)		0.78	%		0.54	%		1.24	%

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables summarizes the allowance, reserve and discount on loans for the nine months ended September 30, 2020, twelve months ended December 31, 2019 and the nine months ended September 30, 2019.

(Dollars in thousands)	At September 30, 2020			At December 31, 2019			At September 30, 2019
ALLL	$	16,873		$	12,231		$	12,285
Reserve for unfunded commitments		800			695			695
Discount on acquired loans ⁽¹⁾		1,060			1,672			1,860
Total allowances, reserve and discount	$	18,733		$	14,598		$	14,840

Gross loans	$	1,206,065		$	1,032,903		$	1,033,082
PPP loans		163,493			—			—
Total gross loans, net of PPP loans	$	1,042,572		$	1,032,903		$	1,033,082

Total allowance, reserves and discount as a percentage of total gross loans, net of PPP loans		1.80	%		1.41	%		1.44	%

⁽¹⁾ Discount on acquired loans includes fair value discount for loans acquired from Merchants in January 2019.

At September 30, 2020, impaired loans had a corresponding specific allowance of $204 thousand. The specific allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.

The following table sets forth the allocation of the ALLL as of September 30, 2020 and December 31, 2019.

	September 30, 2020					December 31, 2019
(Dollars in thousands)	Amount		% Loan Category			Amount		% Loan Category
ALLL:
Commercial	$	2,440		14	%	$	1,822		15	%
Commercial real estate:
Construction and land development		373		2			131		1
Non-owner occupied		8,606		52			5,907		47
Owner occupied		2,770		16			2,058		17
Residential real estate:
ITIN		620		4			569		5
1-4 family mortgage		376		2			185		2
Equity lines		326		2			278		2
Consumer and other		828		5			933		8
Unallocated		534		3			348		3
Total ALLL	$	16,873		100	%	$	12,231		100	%

The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the credit grading-based component, or in the specific reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2020 and December 31, 2019, the unallocated allowance amount represented 3% of the ALLL. While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ.

Reserve for Unfunded Commitments

The reserve for unfunded commitments, which is included in Other Liabilities in the Consolidated Balance Sheets, was $800 thousand and $695 thousand at September 30, 2020 and December 31, 2019, respectively. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis. Based upon changes in the amount of commitments, loss experience, and economic conditions we recorded $105 thousand of provision expense during the nine months ended September 30, 2020. When necessary, provision adjustments are recorded in Other Expenses in the Consolidated Statements of Income.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 of loss 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 of loss 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.

	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
(Dollars in thousands)	#		Amount			Amount			Amount			Amount		#		Amount			#		Amount
Loan Portfolio:
CRE and C&I
Industries highly impacted by COVID-19:
Retail trade		12	$	15,896		$	24,641		$	8,050		$	48,587		—	$	—			—	$	—
Health care and social assistance		46		14,148			12,847			17,701			44,696		6		3,608			1		954
Hotels, motels and bed-and-breakfast inns		17		34,635			—			1,402			36,037		3		9,986			—		—
Other services		7		6,014			18,318			2,967			27,299		1		2,032			1		231
Restaurants, bars and caterers		20		11,103			—			6,370			17,473		2		1,606			—		—
Educational services		3		7,348			303			2,693			10,344		—		—			—		—
Arts, entertainment and recreation		20		4,200			60			4,579			8,839		5		1,698			—		—
Other industries		22		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		—		—			75		3,714
Total		147	$	110,599		$	931,973		$	163,493		$	1,206,065		20	$	22,962			87	$	15,656

% of gross loans				9.17	%		77.27	%		13.56	%						1.90	%				1.30	%

Goodwill and Other Intangible Assets

Goodwill and other intangible assets, net totaled $15.9 million at September 30, 2020 and primarily consisted of goodwill and core deposit intangibles recorded as part of previous acquisitions. Goodwill is evaluated for impairment annually and any such impairment is recognized in the period identified. A more frequent assessment of possible goodwill impairment is performed whenever we identify certain triggering events or circumstances that would more likely than not indicate that the fair value of the Bank is less than the carrying amount of the Bank’s equity. The triggering events to be considered include a deterioration in general economic conditions, decreased overall financial performance of the Company, and a sustained decrease in the Company’s stock price.

The Company’s share price has traded below tangible book value for the entire second and third quarters of 2020 without interruption, a period we deemed to be sustained. We considered the sustained depressed price of our stock to be a triggering event that required us to evaluate if goodwill had been impaired on an interim basis.

We engaged a third party consultant to assist us in performing impairment testing at June 30, 2020 and determined that the indicated fair value of the Bank (our only reporting unit) exceeded the carrying amount of the Bank’s equity by approximately 3%. We believe that there have not been any significant changes in the Company’s financial performance or in the markets for which the Company’s stock is traded, that would change the results of the prior quantitative analysis. After performing our qualitative assessment at September 30, 2020, we believe that it is more-likely-than-not that the fair value of our Bank (our only reporting unit) was more than the carrying amount and that a quantitative impairment test was unnecessary.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our conclusion at September 30, 2020 is heavily dependent on the relatively short time-period since the onset of COVID-19 and its impact on corporate valuations and the economy as a whole. Uncertainties remain about how the economy will respond to government stimulus and updated news about medical advances. At December 31, 2020, we will again evaluate the possibility of goodwill impairment. There is no certainty that we will arrive at the same conclusion as we did at September 30, 2020.

Deposits

Total deposits as of September 30, 2020 were $1.518 billion compared to $1.267 billion at December 31, 2019, an increase of $251 million. The following table presents the deposit balances by major category as of September 30, 2020, and December 31, 2019. The increase in non-maturing deposits from December 31, 2019 to September 30, 2020 was due to PPP loan program disbursements and changes in customer behavior, which is focused on cash accumulation. The decrease in certificates of deposit from December 31, 2019 to September 30, 2020 reflects our decision to reduce reliance our on public deposits and depositor reaction to the recent substantial declines in interest rates.

	September 30, 2020					December 31, 2019
(Dollars in thousands)	Amount		%			Amount		%
Deposits:
Noninterest-bearing demand	$	542,060		36	%	$	432,680		34	%
Interest-bearing demand		280,370		18			239,258		19
Money market		403,785		27			307,559		24
Savings		151,016		10			135,888		11
Certificates of deposit, $100,000 or greater		109,801		7			120,282		10
Certificates of deposit, less than $100,000		31,099		2			31,504		2
Total	$	1,518,131		100	%	$	1,267,171		100	%

The following table sets forth the distribution of average deposits and their respective average rates for the periods indicated.

	For the Nine Months Ended September 30, 2020					For the Year Ended December 31, 2019
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Deposits:
Interest-bearing demand	$	258,420		0.13	%	$	242,516		0.20	%
Money market		353,775		0.38	%		304,340		0.53	%
Savings		140,048		2.27	%		136,733		0.36	%
Certificates of deposit		143,305		1.26	%		160,550		1.23	%
Interest-bearing deposits		895,548		0.43	%		844,139		0.54	%
Noninterest-bearing demand		483,490					400,588
Total deposits	$	1,379,038		0.28	%	$	1,244,727		0.37	%

We have an agreement with IntraFi Network (“IntraFi”), formally known as Promontory Interfinancial Network LLC (“Promontory”) which facilitates provision of FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. IntraFi’s Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) products use a deposit-matching program to exchange Bank deposits in excess of the current deposit insurance limits for excess balances at other participating banks, on a dollar-for-dollar basis (reciprocal arrangement). These products are designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers. CDARS and ICS deposits can also be arranged on a non-reciprocal basis.

Deposit Maturity Schedule

The following table sets forth the maturities of certificates of deposit in amounts of $100,000 or more as of September 30, 2020.

	September 30,
(Amounts in thousands)	2020
Maturing in:
Three months or less	$	15,515
Three through six months		18,946
Six through twelve months		36,616
Over twelve months		38,724
Total	$	109,801

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Borrowings

The following table sets forth year-to-date average balances for our borrowings and their respective average rates for the periods indicated.

	For the Nine Months Ended September 30, 2020					For the Year Ended December 31, 2019
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Borrowings:
Federal Home Loan Bank of San Francisco borrowings	$	8,759		0.08	%	$	9,644		2.56	%
Senior debt, net		—		—	%		960		7.60	%
Subordinated debt, net		9,976		7.39	%		9,935		7.38	%
Junior subordinated debentures		10,310		2.60	%		10,310		4.13	%
Total borrowings	$	29,045		3.49	%	$	30,849		4.80	%

Term Debt

At September 30, 2020, we had term debt outstanding with a carrying value of $20.0 million compared to $10.0 million at December 31, 2019. Term debt consisted of the following:

Federal Home Loan Bank of San Francisco Borrowings

As of September 30, 2020, the Bank had $10.0 million in Federal Home Loan Bank of San Francisco advances outstanding. There were no Federal Home Loan Bank of San Francisco advances outstanding at December 31, 2019. The advance under our FHLB line of credit for $10.0 million is interest free with $5.0 million due in November of 2020 and $5.0 million due in May of 2021. See Note 6 Term Debt in the Notes to Consolidated Financial Statements for information on our Federal Home Loan Bank of San Francisco borrowings.

Senior Debt

In December of 2015, we entered into a senior debt loan agreement to borrow $10.0 million. During the second quarter of 2019, we completed the early repayment and termination of this variable-rate debt agreement.

Subordinated Debt

In December of 2015, we issued $10.0 million of fixed to floating rate Subordinated Notes. The Subordinated Debt initially bears interest at 6.88% per annum through December 19, 2020. Thereafter, interest on the Subordinated Debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points resetting quarterly. At September 30, 2020, the Subordinated Debt had a balance of $10.0 million net of unamortized debt issuance costs. The notes are due in 2025.

Junior Subordinated Debentures

Bank of Commerce Holdings Trust II

During July of 2005, we participated in a $10.0 million private placement of fixed rate trust-preferred securities (the "Trust-Preferred Securities") through a wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). Trust II simultaneously issued $310 thousand common securities to the Holding Company. Rates paid on the Trust-Preferred Securities have transitioned from fixed to floating and are now paid on a quarterly basis at a rate equal to three month LIBOR plus 158 basis points (1.8% at September 30, 2020). The Trust-Preferred Securities mature on September 15, 2035, and the covenants allow for redemption of the securities at our option during any quarter prior to maturity.

The proceeds from the sale of the Trust-Preferred Securities were used by Trust II to purchase from the Holding Company the aggregate principal amount of $10.3 million of the Holding Company’s junior subordinate debentures (the "Notes"). The net proceeds to the Holding Company from the sale of the Notes to Trust II were partially distributed to the Bank. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.

LIQUIDITY AND CASH FLOW

Merchants Bank of Commerce

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 which is focused on cash accumulation. Through September 30, 2020, we have not experienced any unusual pressure on our deposit balances or on our liquidity position as a result of the COVID-19 pandemic. Should this change, in addition to our primary sources of liquidity, the Bank has credit arrangements as discussed below.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The principal objective of our liquidity management program is to maintain our ability to meet the day-to-day cash flow requirements of our customers who wish either to withdraw funds on deposit or to draw upon their credit facilities.

We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds is public deposits. We are required to collateralize the portion of public deposits that exceed FDIC insurance limitations. Public deposits represent 2% of our total deposits at September 30, 2020 and December 31, 2019.

In addition to liquidity provided by core deposits, loan repayments and cash flows from securities, the Bank can borrow on established conditional federal funds lines of credit, sell securities, borrow on a secured basis from the Federal Home Loan Bank of San Francisco, borrow on a secured basis from the Federal Reserve Bank, or issue subscription / brokered certificates of deposit.

At September 30, 2020, the Bank has the following credit arrangements:

●

We have an available line of credit with the Federal Home Loan Bank of San Francisco of $390.6 million; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities.

●

We have an available line of credit with the Federal Reserve Bank of $8.4 million subject to collateral requirements, namely the amount of pledged loans.

●

We have entered into nonbinding federal funds line of credit agreements with three financial institutions. The available credit on these lines totaled $75.0 million at September 30, 2020 and had interest rates ranging from 0.12% to 0.30%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions.

●

We have available credit from the Federal Reserve Bank Paycheck Protection Program Liquidity Facility (“PPPLF”). The credit facility provides term funding for loans made under the SBA’s PPP. Advances under the program will be collateralized with PPP loans, bear a fixed rate of interest at 0.35% and are to be repaid as the underlying loans are paid down, forgiven, or sold to SBA. We have not utilized any of the liquidity provided by the PPPLF.

Bank of Commerce Holdings

The Holding Company is a separate entity from the Bank and must provide for its own liquidity. At September 30, 2020, the Holding Company had cash balances of $4.3 million. Our principal source of cash is dividends received from the Bank. During the first nine months of 2020, the Bank paid dividends totaling $14.0 million to the Holding Company, most of which was used to repurchase common stock. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company in the future.

Consolidated Statements of Cash Flows

Net cash of $18.3 million was provided by operating activities during the nine months ended September 30, 2020. As disclosed in the Consolidated Statements of Cash Flows, the primary difference between net income and cash provided by operating activities was non-cash items including:

●

$5.3 million provision for loan and lease losses.

●

$3.2 million in deferred loan fees and costs.

●

$1.5 million in depreciation and amortization.

Net cash of $216.7 million was used by investing activities during the nine months ended September 30, 2020 consisted principally of:

●

$160.8 million in purchases of investment securities.

●

$186.3 million in net loan originations.

These uses of cash were partially offset by:

●

$56.0 million in proceeds from sale of investment securities.

●

$61.1 million in proceeds from maturities and payments of investment securities.

●

$13.6 million in repayments on purchased loan pools.

Net cash of $245.6 million was provided by financing activities during the nine months ended September 30, 2020 principally consisted of:

●

$261.8 million increase in non-maturing deposits.

●

$10.0 million in advances net of repayments from our line of credit with the Federal Home Loan Bank of San Francisco.

These sources were partially offset by:

●

$10.9 million decrease in certificates of deposit.

●

$12.7 million repurchase of common stock.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAPITAL RESOURCES

Equity capital is available to support organic and strategic growth, pay dividends and repurchase shares. The objective of effective capital management is to produce above market long-term returns for our shareholders. Our sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt or trust notes.

REGULATORY CAPITAL GUIDELINES

Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. The current rules (commonly known as Basel III) require the Bank and the Company to meet a capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. The capital conservation buffer of 2.50% is added to the minimum capital ratios.

The Basel III minimum capital requirements plus the conservation buffer exceed the prior regulatory “well-capitalized” capital thresholds by 0.5 percentage points. This 0.5 percentage-point cushion allows institutions to dip into a portion of their capital conservation buffer before reaching a status that is considered less than well capitalized for prompt corrective action purposes.

As of January 1, 2020 for certain qualifying institutions, the FDIC accepts compliance with a Community Bank Leverage Ratio in lieu of the Basel III capital requirements. We are a qualifying institution however, we have opted to continue reporting under the Basel III requirements. We can opt-in to use the Community Bank Leverage Ratio at any time in the future.

CAPITAL ADEQUACY

Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board of Directors on a monthly basis.

As of September 30, 2020, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for Prompt Corrective Action (“FDIC PCA”). There are no conditions or events since the notification that management believes have changed the Bank’s risk category. The Holding Company and the Bank’s capital amounts and ratios as of September 30, 2020, are presented in the following table.

	September 30, 2020
						FDIC PCA			BASEL III
						Well			Minimum			Capital			Minimum Capital
			Actual			Capitalized			Capital			Conservation			Ratio plus Capital
(Dollars in thousands)	Capital		Ratio			Requirement			Requirement			Buffer			Conservation Buffer
Holding Company:
Common equity tier 1 capital ratio	$	151,147		12.61	%		n/a			4.50	%		2.50	%		7.00	%
Tier 1 capital ratio	$	161,147		13.44	%		n/a			6.00	%		2.50	%		8.50	%
Total capital ratio	$	186,169		15.53	%		n/a			8.00	%		2.50	%		10.50	%
Tier 1 leverage ratio	$	161,147		9.60	%		n/a			4.00	%		n/a			4.00	%

Bank:
Common equity tier 1 capital ratio	$	167,804		14.01	%		6.50	%		4.50	%		2.50	%		7.00	%
Tier 1 capital ratio	$	167,804		14.01	%		8.00	%		6.00	%		2.50	%		8.50	%
Total capital ratio	$	182,813		15.26	%		10.00	%		8.00	%		2.50	%		10.50	%
Tier 1 leverage ratio	$	167,804		9.99	%		5.00	%		4.00	%		n/a			4.00	%

On December 10, 2015, the Holding Company issued $10.0 million in aggregate principal amount of Subordinated Notes to certain institutional investors. The Subordinated Notes qualify as Tier 2 Capital under the Final Rules. See Item 1A - Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019 for further detail on potential risks relating to the Subordinated Notes.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In 2019, we announced a stock repurchase program for 1.0 million shares of common stock that was increased to 1.5 million shares of common stock in February of 2020. Between October of 2019 and April 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.

We are participating in the PPP administered through the SBA. 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 PPPLF and its associated beneficial capital treatment. We have not utilized the PPPLF because we have sufficient liquidity provided by significant growth in deposit balances.

Cash Dividends and Payout Ratios per Common Share

The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three and nine months ended September 30, 2020 and 2019. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, capital preservation and expected growth. The dividend rate is reassessed periodically by the Board of Directors in accordance with the dividend policy. There is no assurance that future cash dividends on common shares will be declared or increased.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Dividends declared per common share	$	0.05		$	0.05		$	0.15		$	0.14
Dividend payout ratio		19	%		19	%		28	%		24	%

Tangible Book Value Per Share and Tangible Common Equity Ratio

We believe the tangible common equity ratio and tangible book value per share are meaningful measures that the Company and investors commonly use to assess the value and capital levels of the Company.

The following table provides a reconciliation of shareholders' equity (GAAP) to tangible common equity (non-GAAP), and total assets (GAAP) to tangible assets (non-GAAP) as of September 30, 2020 and December 31, 2019.

	September 30,			December 31,
(Dollars in thousands except ratio and per share data)	2020			2019
Tangible common shareholders' equity:
Total shareholders' equity (GAAP)	$	173,350		$	174,478
Subtract:
Goodwill (GAAP)		11,671			11,671
Other intangible assets, net (GAAP)		4,235			4,809
Tangible common shareholders' equity (non-GAAP)	$	157,444		$	157,998

Total assets (GAAP)	$	1,739,888		$	1,479,616
Subtract:
Goodwill (GAAP)		11,671			11,671
Other intangible assets, net (GAAP)		4,235			4,809
Tangible assets (non-GAAP)	$	1,723,982		$	1,463,136

Common equity ratio (GAAP)		9.96	%		11.79	%
Tangible common equity ratio (non-GAAP)		9.13	%		10.80	%
Book value per share (GAAP)	$	10.32		$	9.62
Tangible book value per share (non-GAAP)	$	9.38		$	8.71

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

Tangible common shareholders’ equity is calculated as total shareholders' equity less goodwill and other intangible assets, net. Tangible assets are total assets less goodwill and other intangible assets, net. The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. Tangible book value is calculated as tangible common shareholders’ equity divided by the number of shares outstanding. The tangible common equity, tangible common equity ratio and tangible book value are considered a non-GAAP financial measures and should be viewed in conjunction with the total shareholders' equity, total shareholders' equity ratio and book value per share.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OFF-BALANCE SHEET ARRANGEMENTS

Information regarding Off-Balance Sheet Arrangements is included in Note 7, Commitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.

CONCENTRATION OF CREDIT RISK

Information regarding Concentration of Credit Risk is included in Note 7, Commitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our assessment of market risk as of September 30, 2020 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2019.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective.

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.

Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and the Chief Financial Officer and implemented by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.

The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer (whom is also our Principal Accounting Officer) of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. As of September 30, 2020, our management, including our Chief Executive Officer, and Principal Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings.

Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that any such changes occurred in the first nine months of 2020 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various pending and threatened legal actions arising in the ordinary course of business and maintains reserves for losses from legal actions that are both probable and estimable. There are no legal proceedings adverse to the Company that will have a material effect on our consolidated financial position or results of operations.

Item 1A. Risk Factors

The risks described below, as well as the risk factors previously disclosed in our Form 10-K for the period ended December 31, 2019, filed with the SEC on March 6, 2020 should be carefully considered. The risks described may not be the only risks facing us. Additional risks and uncertainties not currently known to us or that are currently considered to not be material also may materially adversely affect our business, financial condition and/or operating results. Our risk factors regarding the COVID-19 pandemic have been updated to address the evolution of the pandemic.

The effects of the COVID-19 pandemic could adversely affect our customers’ future results of operations and/or the market price of our stock.

The COVID-19 pandemic continues to rapidly evolve, as do federal, state and local efforts to address it. Both the direct effects of the pandemic and the resulting United States governmental responses are of an unprecedented scope as it impacts both the health and the economy of our country and the world at large. No one can predict the extent or duration of the pandemic, or its effect on the markets that we serve. Further, the ongoing efforts and impact of the government in mitigating the health and the economic effects of the pandemic cannot currently be predicted, whether on our business or as to the economy as a whole. The pandemic has thus far resulted in significant volatility in international and United States markets, which could adversely affect the market price of our stock. To date, the pandemic has resulted in significant business disruption and volatility in the international and domestic markets, which has adversely affected the market price of our stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

COVID-19 Legislation and Regulation.

Coronavirus Aid, Relief, and Economic Security Act

Governments at the federal, state, and local levels continue to take steps to address the impact of the COVID-19 emergency. On March 27, 2020 the President signed into law the historic $2 trillion federal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which included $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program,” along with direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans. The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, which prompted Congress to negotiate additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care Enforcement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. Further, on July 3, 2020 the President extended the deadline for potential borrowers to apply for Paycheck Protection Program funds until August 8, 2020. The legislative and regulatory landscape surrounding COVID-19 is rapidly changing, and neither the Company nor the Bank can predict with certainty the impact it will have on our operations or business.

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Paycheck Protection Program

The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, leaving many pending loan applications in limbo as Congress negotiated additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. In part, the bill includes an additional $320 billion to make new loans under the Paycheck Protection Program, and set aside $30 billion of the loans for banks and credit unions with $10 billion to $50 billion in assets, and another $30 billion for even smaller institutions. The bill also includes $60 billion in loans and grants under the Economic Industry Disaster Loan program, and makes farms and ranches eligible for loans. The SBA resumed accepting applications under the Paycheck Protection Program on April 27, 2020.

Item 6. Exhibits


10.1	Employment Agreement amongst Bank of Commerce Holdings, Merchants Bank of Commerce, and Carl W. Rood, dated August 1, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2020 (file No. 000-25135)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.0	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	Inline XBRL Instance Document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	XBRL Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATURES

Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BANK OF COMMERCE HOLDINGS

(Registrant)

Date: November 6, 2020			/s/ James A. Sundquist
			James A. Sundquist
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)