Quarterly Report (10-q)

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 March 31, 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	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 April 30, 2020: 16,738,685

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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	34
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	59
	Item 4. Controls and Procedures	59

Part II. OTHER INFORMATION
	Item 1. Legal Proceedings	60
	Item 1A. Risk Factors	60
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60
	Item 3. Defaults Upon Senior Securities	60
	Item 4. Mine Safety Disclosures	60
	Item 5. Other Information	60
	Item 6. Exhibits	61

SIGNATURES		62

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

	March 31,			December 31,
(Amounts in thousands, except share information)	2020			2019
Assets:
Cash and due from banks	$	21,127		$	21,338
Interest-bearing deposits in other banks		22,813			59,266
Total cash and cash equivalents		43,940			80,604

Securities available-for-sale, at fair value		285,077			286,950

Loans, net of deferred fees and costs		1,054,374			1,035,065
Allowance for loan and lease losses		(15,067	)		(12,231	)
Net loans		1,039,307			1,022,834

Premises and equipment, net		15,452			15,906
Other real estate owned		8			35
Life insurance		23,824			23,701
Deferred tax asset, net		3,149			4,553
Goodwill		11,671			11,671
Other intangible assets, net		4,618			4,809
Other assets		28,834			28,553
Total assets	$	1,455,880		$	1,479,616

Liabilities and shareholders' equity:
Liabilities:
Demand - noninterest-bearing	$	419,315		$	432,680
Demand - interest-bearing		231,276			239,258
Money market		314,687			307,559
Savings		133,552			135,888
Certificates of deposit		143,557			151,786
Total deposits		1,242,387			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		(31	)		(43	)
Net term debt		19,969			9,957

Junior subordinated debentures		10,310			10,310
Other liabilities		17,556			17,700
Total liabilities		1,290,222			1,305,138

Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 16,796,262 as of March 31, 2020 and 18,137,167 as of December 31, 2019		59,067			71,311
Retained earnings		100,644			100,566
Accumulated other comprehensive income, net of tax		5,947			2,601
Total shareholders' equity		165,658			174,478
Total liabilities and shareholders' equity	$	1,455,880		$	1,479,616

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

	For the Three Months Ended
	March 31,
(Amounts in thousands, except per share information)	2020			2019
Interest income:
Interest and fees on loans	$	12,338		$	12,031
Interest on taxable securities		1,582			1,764
Interest on tax-exempt securities		271			387
Interest on interest-bearing deposits in other banks		154			245
Total interest income		14,345			14,427
Interest expense:
Interest on demand - interest-bearing		100			126
Interest on money market		403			289
Interest on savings		118			111
Interest on certificates of deposit		464			490
Interest on Federal Home Loan Bank of San Francisco borrowings		—			55
Interest on other borrowings		184			239
Interest on junior subordinated debentures		90			113
Total interest expense		1,359			1,423
Net interest income		12,986			13,004
Provision for loan and lease losses		2,850			—
Net interest income after provision for loan and lease losses		10,136			13,004
Noninterest income:
Service charges on deposit accounts		169			169
ATM and point of sale fees		268			265
Payroll and benefit processing fees		170			171
Life insurance		123			129
Gain on sale of investment securities, net		84			92
Federal Home Loan Bank of San Francisco dividends		130			121
(Loss) gain on sale of OREO		(23	)		23
Other (loss) income		(29	)		87
Total noninterest income		892			1,057
Noninterest expense:
Salaries and related benefits		5,887			5,729
Premises and equipment		854			975
Federal Deposit Insurance Corporation insurance premium		36			100
Data processing		531			576
Professional services		334			303
Telecommunications		171			173
Acquisition and merger		—			1,930
Other expenses		1,970			1,137
Total noninterest expense		9,783			10,923
Income before provision for income taxes		1,245			3,138
Provision for income taxes		329			832
Net income	$	916		$	2,306

Earnings per share - basic	$	0.05		$	0.13
Weighted average shares - basic		17,695			17,489
Earnings per share - diluted	$	0.05		$	0.13
Weighted average shares - diluted		17,747			17,552

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2020			2019
Net income	$	916		$	2,306

Available-for-sale securities:
Changes in unrealized gains arising during the period		4,833			3,661
Income taxes		(1,429	)		(1,082	)
Change in unrealized gains , net of tax		3,404			2,579

Reclassification adjustment for realized gains included in net income		(84	)		(92	)
Income taxes		26			27
Realized gains, net of tax		(58	)		(65	)
Net change in unrealized gains on available-for-sale securities		3,346			2,514
Other comprehensive income		3,346			2,514
Comprehensive income – Bank of Commerce Holdings	$	4,262		$	4,820

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 January 1, 2019		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

										Accumulated Other
				Common						Comprehensive
	Common			Stock			Retained			Income
(Amounts in thousands except per share information)	Shares			Amount			Earnings			Net of Tax		Total
Balance at January 1, 2020		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

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2020			2019
Cash flows from operating activities:
Net income	$	916		$	2,306
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		2,850			—
Provision for unfunded commitments		—			(100	)
Provision for depreciation and amortization		303			417
Amortization of core deposit intangible		191			146
Amortization of debt issuance costs		12			12
Compensation expense associated with restricted stock		106			72
Tax benefits from vesting of restricted stock		3			(4	)
Net gain on sale or call of securities		(84	)		(92	)
Amortization of investment premiums and accretion of discounts, net		320			343
Amortization of premiums and accretion of discounts on acquired loans, net		(332	)		(299	)
Loss on disposal of fixed assets		232			—
Loss (gain) on sale of OREO		23			(23	)
Increase in cash surrender value of life insurance		(123	)		(129	)
Deferred compensation and salary continuation plan payments		(271	)		(219	)
Increase in deferred compensation and salary continuation plans		214			238
Decrease (increase) in deferred loan fees and costs		33			(54	)
(Increase) decrease in other assets		(1,602	)		595
Increase in other liabilities		976			53
Net cash provided by operating activities		3,767			3,262

Cash flows from investing activities:
Proceeds from maturities and payments of available-for-sale securities		17,410			11,101
Proceeds from sale of available-for-sale securities		29,339			67,402
Purchases of available-for-sale securities		(40,038	)		(5,204	)
Loan originations, net of principal repayments		(24,900	)		(14,973	)
Net repayment on loan pools		5,868			12,100
Purchase of premises and equipment		(85	)		(460	)
Proceeds from the sale of OREO		12			54
Acquisition of Merchants Holding Company, net of cash paid		—			(2,875	)
Net cash (used) provided by investing activities		(12,394	)		67,145

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 Three Months Ended
	March 31,
(Amounts in thousands)	2020			2019
Cash flows from financing activities:
Net decrease in demand, money market and savings	$	(16,555	)	$	(53,469	)
Net decrease in certificates of deposit		(8,229	)		(20,169	)
Advances on term debt		10,000			130,000
Repayment of term debt		—			(110,900	)
Proceeds from stock options exercised		—			40
Repurchase of common stock		(12,230	)		—
Cash paid for shares surrendered for tax-withholding purposes		(120	)		(94	)
Cash dividends paid on common stock		(903	)		(651	)
Net cash used by financing activities		(28,037	)		(55,243	)

Net (decrease) increase in cash and cash equivalents		(36,664	)		15,164
Cash and cash equivalents at beginning of year		80,604			47,365
Cash and cash equivalents at end of period	$	43,940		$	62,529

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2020			2019
Supplemental disclosures of cash flow activity:
Cash paid during the period for:
Income taxes	$	350		$	1,040
Interest	$	1,167		$	1,232
Operating leases	$	246		$	215
Supplemental disclosures of non cash investing activities:
Transfer of loans to other real estate owned	$	8		$	34
Investment in qualified affordable housing partnership	$	1,000		$	—

Unrealized gain on investment securities available-for-sale, net of gains included in net income	$	4,749		$	3,569
Changes in net deferred tax asset related to changes in net unrealized gain on investment securities available-for-sale		(1,403	)		(1,055	)
Changes in accumulated other comprehensive income due to net unrealized gain on investment securities available-for-sale	$	3,346		$	2,514


Supplemental disclosures of non cash financing activities:
Stock issued under employee plans	$	—		$	58
Cash dividend declared on common shares and payable after period-end	$	838		$	725
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
Transactions related to the acquisition of Merchants Holding Company:
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 March 31, 2020 and December 31, 2019 are derived from the unaudited interim consolidated financial statements, 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 March 31, 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 the borrowing rates for terms similar to the lease terms available under our existing line of credit with the Federal Home Loan Bank of San Francisco as our incremental borrowing rate in determining the present value of future 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 months ended March 31, 2020 and 2019.

	For the Three Months Ended
(Amounts in thousands, except per share information)	March 31,
Earnings Per Share	2020		2019
Numerators:
Net income	$	916	$	2,306
Denominators:
Weighted average number of common shares outstanding - basic⁽¹⁾		17,695		17,489
Effect of potentially dilutive common shares ⁽²⁾		52		63
Weighted average number of common shares outstanding - diluted		17,747		17,552
Earnings per common share:
Basic	$	0.05	$	0.13
Diluted	$	0.05	$	0.13
Anti-dilutive options not included in diluted earnings per share calculation		—		—
Anti-dilutive restricted shares not included in diluted earnings per share calculation		—		—

⁽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.

On September 18, 2019, we announced that our Board of Directors had authorized a stock repurchase program. The program was effective immediately and authorized the Company to purchase up to 1.0 million shares of common stock over a period ending March 31, 2020. On February 21, 2020, we announced that our Board of Directors increased the number of shares that may be purchased from 1.0 million to 1.5 million shares of common stock, and extended the program by one year to March 31, 2021. During the first quarter of 2020 and the fourth quarter of 2019, we repurchased 1,351,922 and 90,501 shares of common stock, respectively. The remaining 57,577 shares under the program were repurchased during the first week of 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 March 31, 2020, and December 31, 2019.

	As of March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(Amounts in thousands)	Costs		Gains		Losses			Fair Values
Available-for-sale securities:
U.S. government & agencies	$	35,487	$	575	$	(19	)	$	36,043
Obligations of state and political subdivisions		60,828		2,488		(53	)		63,263
Residential mortgage-backed securities and collateralized mortgage obligations		155,252		5,728		(541	)		160,439
Corporate securities		3,001		3		(21	)		2,983
Commercial mortgage-backed securities		16,891		543		(6	)		17,428
Other asset-backed securities		5,176		—		(255	)		4,921
Total	$	276,635	$	9,337	$	(895	)	$	285,077

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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 expected maturities of investment securities at March 31, 2020.

	Available-For-Sale
(Amounts in thousands)	Amortized Costs		Fair Values
Amounts maturing in:
One year or less	$	6,119	$	6,127
One year through five years		113,504		117,594
Five years through ten years		88,844		91,394
After ten years		68,168		69,962
Total	$	276,635	$	285,077

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 March 31, 2020 and December 31, 2019, securities with a fair value of $84.7 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 months ended March 31, 2020 and 2019.

	Three Months Ended March 31,
(Amounts in thousands)	2020			2019
Proceeds from sales of investment securities	$	29,339		$	67,402

Gross realized gains on sales of investment securities:
U.S. government & agencies	$	—		$	33
Obligations of state and political subdivisions		48			181
Residential mortgage-backed securities and collateralized mortgage obligations		84			47
Commercial mortgage-backed securities		36			—
Total gross realized gains on sales of investment securities		168			261

Gross realized losses on sales of investment securities:
U.S. government & agencies		—			(4	)
Obligations of state and political subdivisions		(4	)		(77	)
Residential mortgage-backed securities and collateralized mortgage obligations		(80	)		(86	)
Commercial mortgage-backed securities		—			(2	)
Total gross realized losses on sales of investment securities		(84	)		(169	)
Gain on sales of investment securities, net	$	84		$	92

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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 March 31, 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 March 31, 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	$	4,061	$	(8	)	$	1,758	$	(11	)	$	5,819	$	(19	)
Obligations of state and political subdivisions		3,125		(53	)		—		—			3,125		(53	)
Residential mortgage-backed securities and collateralized mortgage obligations		17,165		(453	)		4,358		(88	)		21,523		(541	)
Corporate securities		—		—			979		(21	)		979		(21	)
Commercial mortgage-backed securities		—		—			4,432		(6	)		4,432		(6	)
Other asset-backed securities		4,921		(255	)		—		—			4,921		(255	)
Total temporarily impaired securities	$	29,272	$	(769	)	$	11,527	$	(126	)	$	40,799	$	(895	)

	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 March 31, 2020 and December 31, 2019, the number of securities that were in an unrealized loss position was 46 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, we have no plans to sell the securities before the recovery of their amortized cost, and the Bank has the ability to hold the securities to maturity these investments are not considered other-than-temporarily impaired.

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

		Characteristics of securities in unrealized loss positions at
Available-for-sale securities:		March 31, 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 secured by revenues from specific sources issued by municipalities and political subdivisions located within the U.S.
Residential mortgage-backed securities and collateralized mortgage obligations		Obligations of 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 March 31, 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 of 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 March 31, 2020 and December 31, 2019, 100% were issued or guaranteed by U.S. government sponsored entities.
Other asset-backed securities		Obligations secured by high quality loans with good credit enhancements issued by non-governmental issuers.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

NOTE 4. LOANS

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

(Amounts in thousands)	March 31,			December 31,
Loan Portfolio	2020			2019
Commercial	$	138,870		$	141,197
Commercial real estate:
Real estate - construction and land development		34,394			26,830
Real estate - commercial non-owner occupied		514,052			493,920
Real estate - commercial owner occupied		217,319			218,833
Residential real estate:
Real estate - residential - Individual Tax Identification Number (“ITIN”)		31,998			33,039
Real estate - residential - 1-4 family mortgage		62,533			63,661
Real estate - residential - equity lines		23,158			22,099
Consumer and other		29,921			33,324
Gross loans		1,052,245			1,032,903
Deferred fees and costs		2,129			2,162
Loans, net of deferred fees and costs		1,054,374			1,035,065
Allowance for loan and lease losses		(15,067	)		(12,231	)
Net loans	$	1,039,307		$	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 $549.0 million and $542.1 million at March 31, 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 March 31, 2020, and December 31, 2019. Gross loan balances in the table above include net purchase discounts of $1.3 million and $1.5 million as of March 31, 2020, and December 31, 2019, respectively.

Gross loan balances in the table above at March 31, 2020 include a fair value discount of $1.5 million for loans acquired from Merchants during the first quarter of 2019. We recorded $163 thousand and $48 thousand in accretion of the discount for these loans during the three months ended March 31, 2020 and 2019, respectively.

Past Due Loans

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

(Amounts in thousands) Past Due Loans at March 31, 2020	30-59 Days Past Due		60-89 Days Past Due		90 or Greater Days Past Due		Total Past Due		Current		Total		Recorded Investment > 90 Days and Accruing
Commercial	$	710	$	—	$	—	$	710	$	138,160	$	138,870	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		34,394		34,394		—
Real estate - commercial non-owner occupied		1,097		—		—		1,097		512,955		514,052		—
Real estate - commercial owner occupied		654		—		3,103		3,757		213,562		217,319		—
Residential real estate:
Real estate - residential - ITIN		513		57		119		689		31,309		31,998		—
Real estate - residential - 1-4 family mortgage		—		—		—		—		62,533		62,533		—
Real estate - residential - equity lines		61		29		—		90		23,068		23,158		—
Consumer and other		138		66		2		206		29,715		29,921		2
Total	$	3,173	$	152	$	3,224	$	6,549	$	1,045,696	$	1,052,245	$	2

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(Amounts in thousands) Past Due Loans at December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 or Greater Days Past Due		Total Past Due		Current		Total		Recorded Investment > 90 Days and Accruing
Commercial	$	71	$	—	$	—	$	71	$	141,126	$	141,197	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		26,830		26,830		—
Real estate - commercial non-owner occupied		—		—		—		—		493,920		493,920		—
Real estate - commercial owner occupied		655		—		3,103		3,758		215,075		218,833		—
Residential real estate:
Real estate - residential - ITIN		371		323		43		737		32,302		33,039		—
Real estate - residential - 1-4 family mortgage		—		—		—		—		63,661		63,661		—
Real estate - residential - 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	$	—

Nonaccrual Loans

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

(Amounts in thousands)	March 31,		December 31,
Nonaccrual Loans	2020		2019
Commercial	$	39	$	61
Commercial real estate:
Real estate - commercial owner occupied		3,103		3,103
Residential real estate:
Real estate - residential - ITIN		1,878		2,221
Real estate - residential - 1-4 family mortgage		184		191
Consumer and other		39		40
Total	$	5,243	$	5,616

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately $58 thousand and $158 thousand for the three months ended March 31, 2020 and 2019, respectively.

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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 March 31, 2020 and December 31, 2019.

	As of March 31, 2020
			Unpaid
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	71	$	231	$	—
Commercial real estate:
Real estate - commercial owner occupied		3,103		3,103		—
Residential real estate:
Real estate - residential - ITIN		5,233		6,899		—
Real estate - residential - 1-4 family mortgage		184		310		—
Total with no related allowance recorded	$	8,591	$	10,543	$	—

With an allowance recorded:
Commercial	$	560	$	561	$	160
Residential real estate:
Real estate - residential - ITIN		536		537		35
Real estate - residential - equity lines		226		226		113
Consumer and other		39		39		10
Total with an allowance recorded	$	1,361	$	1,363	$	318

By loan portfolio:
Commercial	$	631	$	792	$	160
Commercial real estate		3,103		3,103		—
Residential real estate		6,179		7,972		148
Consumer and other		39		39		10
Total impaired loans	$	9,952	$	11,906	$	318

	As of December 31, 2019
			Unpaid
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	94	$	251	$	—
Commercial real estate:
Real estate - commercial owner occupied		3,103		3,103		—
Residential real estate:
Real estate - residential - ITIN		5,723		7,386		—
Real estate - residential - 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:
Real estate - residential - ITIN		455		455		38
Real estate - residential - 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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes average recorded investment and interest income recognized on impaired loans by loan portfolio for the three months ended March 31, 2020 and 2019.

	Three Months Ended				Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Interest		Average		Interest
(Amounts in thousands)	Recorded		Income		Recorded		Income
Average Recorded Investment and Interest Income	Investment		Recognized		Investment		Recognized
Commercial	$	640	$	9	$	2,021	$	17
Commercial real estate:
Real estate - commercial non-owner occupied		—		—		8,412		11
Real estate - commercial owner occupied		3,103		—		—		—
Residential real estate:
Real estate - residential - ITIN		5,957		37		6,874		42
Real estate - residential - 1-4 family mortgage		186		—		184		—
Real estate - residential - equity lines		228		4		401		5
Consumer and other		39		—		23		—
Total	$	10,153	$	50	$	17,915	$	75

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

At March 31, 2020 and December 31, 2019, impaired loans of $4.7 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 March 31, 2020 and December 31, 2019, we had no obligations to lend additional funds on any troubled debt restructured loans.

As of March 31, 2020, we had $6.3 million in troubled debt restructurings compared to $6.5 million as of December 31, 2019. As of March 31, 2020, we had 97 loans that qualified as troubled debt restructurings, of which 93 were performing according to their restructured terms. Troubled debt restructurings represented 0.60% of gross loans as of March 31, 2020, compared to 0.63% at December 31, 2019. We do not have any new troubled debt restructurings for the three months ended March 31, 2020 and 2019. 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 months ended March 31, 2020.

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 March 31, 2020 and December 31, 2019.

(Amounts in thousands)	March 31, 2020
Performing and Nonperforming Loans	Performing		Nonperforming		Total
Commercial	$	138,831	$	39	$	138,870
Commercial real estate:
Real estate - construction and land development		34,394		—		34,394
Real estate - commercial non-owner occupied		514,052		—		514,052
Real estate - commercial owner occupied		214,216		3,103		217,319
Residential real estate:
Real estate - residential - ITIN		30,120		1,878		31,998
Real estate - residential - 1-4 family mortgage		62,349		184		62,533
Real estate - residential - equity lines		23,158		—		23,158
Consumer and other		29,880		41		29,921
Total	$	1,047,000	$	5,245	$	1,052,245

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

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

Short Term Loan Modifications

We are responding to the needs of our borrowers in accordance with the 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 3 to 6 months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19. As of April 24, 2020 we have received 124 requests for short term loan modifications totaling $82.9 million. Of those requests, we have approved 120 requests totaling $78.0 million.

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 March 31, 2020 and December 31, 2019.

	As of March 31, 2020
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	121,692	$	15,166	$	1,875	$	137	$	—	$	138,870
Commercial real estate:
Real estate - construction and land development		34,376		18		—		—		—		34,394
Real estate - commercial non-owner occupied		481,281		31,265		409		1,097		—		514,052
Real estate - commercial owner occupied		195,457		9,517		—		12,345		—		217,319
Residential real estate:
Real estate - residential - ITIN		27,955		—		—		4,043		—		31,998
Real estate - residential - 1-4 family mortgage		60,724		232		671		906		—		62,533
Real estate - residential - equity lines		23,072		—		—		86		—		23,158
Consumer and other		29,882		—		—		39		—		29,921
Total	$	974,439	$	56,198	$	2,955	$	18,653	$	—	$	1,052,245

	As of December 31, 2019
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	125,222	$	14,974	$	833	$	168	$	—	$	141,197
Commercial real estate:
Real estate - construction and land development		26,810		20		—		—		—		26,830
Real estate - commercial non-owner occupied		454,493		32,902		5,424		1,101		—		493,920
Real estate - commercial owner occupied		195,950		7,224		1,220		14,439		—		218,833
Residential real estate:
Real estate - residential - ITIN		28,609		—		—		4,430		—		33,039
Real estate - residential - 1-4 family mortgage		62,485		985		—		191		—		63,661
Real estate - residential - 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 $141 thousand and $100 thousand at March 31, 2020 and December 31, 2019, respectively.

Allowance for Loan and Lease Losses

The following tables summarize the ALLL by portfolio for the three months ended March 31, 2020 and 2019.

	For the Three Months Ended March 31, 2020
(Amounts in thousands)			Commercial		Residential
ALLL by Loan Portfolio	Commercial		Real Estate		Real Estate			Consumer			Unallocated		Total
Beginning balance	$	1,822	$	8,096	$	1,032		$	933		$	348	$	12,231
Charge-offs		—		—		(6	)		(163	)		—		(169	)
Recoveries		7		—		44			104			—		155
Provision		654		1,803		211			98			84		2,850
Ending balance	$	2,483	$	9,899	$	1,281		$	972		$	432	$	15,067

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

	For the Three Months Ended March 31, 2019
(Amounts in thousands)			Commercial			Residential
ALLL by Loan Portfolio	Commercial		Real Estate			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	2,205	$	7,116		$	1,173		$	1,356		$	442	$	12,292
Charge-offs		—		—			(68	)		(280	)		—		(348	)
Recoveries		153		—			82			63			—		298
Provision		121		(160	)		24			(83	)		98		—
Ending balance	$	2,479	$	6,956		$	1,211		$	1,056		$	540	$	12,242

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 March 31, 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 March 31, 2020 and December 31, 2019.

	As of March 31, 2020
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	160	$	—	$	148	$	10	$	—	$	318
Collectively evaluated for impairment		2,323		9,899		1,133		962		432		14,749
Total	$	2,483	$	9,899	$	1,281	$	972	$	432	$	15,067
Gross loans:
Individually evaluated for impairment	$	631	$	3,103	$	6,179	$	39	$	—	$	9,952
Collectively evaluated for impairment		138,239		762,662		111,510		29,882		—		1,042,293
Total gross loans	$	138,870	$	765,765	$	117,689	$	29,921	$	—	$	1,052,245

	As of December 31, 2019
			Commercial		Residential
(Amounts in thousands)	Commercial		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 $15.1 million or 1.43% of total gross loans at March 31, 2020 and $12.2 million or 1.18% at December 31, 2019. As of March 31, 2020 and December 31, 2019, we had commitments to extend credit of $276.3 million and $275.1 million, respectively. The reserve for unfunded commitments recorded in Other Liabilities in the Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 was $695 thousand.

We believe that the ALLL was adequate as of March 31, 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.

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.

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 and ASC Topic 310 Receivables.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

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 loan categories are based on analysis of local economic factors applicable to each loan category. 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.

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. We formally assess 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 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.

Management’s 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, Contingencies (“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; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“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.

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.

COVID‐19

The COVID‐19 Pandemic which suddenly unfolded in Q1 2020 is having a dramatic worldwide economic effect, with significant drop in GDP’s projected for 2020. This will inevitably result in 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 factor for “Changes in international, national, regional and local conditions,”

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.

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.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Concentrations of Credit Risk

As of March 31, 2020, approximately 84% of our gross loan portfolio 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 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.

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. None of the original investments will be repaid.

Our investments in Qualified Affordable Housing Partnerships totaled $3.4 million at March 31, 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. 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.

The following tables present our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at March 31, 2020 and 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 three months ended March 31, 2020 and 2019.

	At March 31, 2020						For the Three Months Ended March 31, 2020
(Amounts in thousands) Qualified Affordable Housing Partnerships	Original Investment Value		Current Recorded Investment		Unfunded Liability Obligation		Tax Credits and Benefits		Amortization of Investments		Net Income Tax Benefit (Expense)
Raymond James California Housing Opportunities Fund II	$	2,000	$	807	$	22	$	50	$	45	$	5
WNC Institutional Tax Credit Fund 38, L.P.		1,000		379		—		26		21		5
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,013		316		56		54		2
California Affordable Housing Fund		2,454		200		—		6		10		(4	)
Boston Capital		1,000		990		1,000		16		10		6
Total	$	8,954	$	3,389	$	1,338	$	154	$	140	$	14

	At December 31, 2019						For the Three Months Ended March 31, 2019
(Amounts in thousands) Qualified Affordable Housing Partnerships	Original Investment Value		Current Recorded Investment		Unfunded Liability Obligation		Tax Credits and Benefits		Amortization of Investments		Net Income Tax Benefit (Expense)
Raymond James California Housing Opportunities Fund II	$	2,000	$	852	$	22	$	50	$	45	$	5
WNC Institutional Tax Credit Fund 38, L.P.		1,000		400		—		27		23		4
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,067		316		56		55		1
California Affordable Housing Fund		2,454		210		—		6		9		(3	)
Total	$	7,954	$	2,529	$	338	$	139	$	132	$	7

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The following tables present our generated tax credits and tax benefits from investments in qualified affordable housing partnerships for the three months ended March 31, 2020 and 2019.

	For the Three Months Ended
	March 31, 2020				March 31, 2019
(Amounts in thousands)	Generated		Tax Benefits From		Generated		Tax Benefits from
Qualified Affordable Housing Partnerships	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
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		—		6		—		6
Boston Capital		11		5		—		—
Total	$	124	$	30	$	114	$	25

The following table reflects the anticipated net income tax benefit and (expense) at March 31, 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	$	14		$	19		$	19		$	18		$	16	$	86
WNC Institutional Tax Credit Fund 38, L.P.		12			16			14			13			14		69
Merritt Community Capital Corporation Fund XV, L.P.		3			3			3			3			4		16
California Affordable Housing Fund		(10	)		(14	)		(13	)		(35	)		—		(72	)
Boston Capital		11			23			24			23			171		252
Total income tax benefit, net	$	30		$	47		$	47		$	22		$	205	$	351

NOTE 6. TERM DEBT

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

(Amounts in thousands)	March 31, 2020			December 31, 2019
Federal Home Loan Bank of San Francisco borrowings	$	10,000		$	—
Subordinated Debt		10,000			10,000
Unamortized debt issuance costs		(31	)		(43	)
Net term debt	$	19,969		$	9,957

Future contractual maturities of term debt at March 31, 2020 are as follows.

(Amounts in thousands)	2020		2021		2022		2023		2024		Thereafter		Total
Federal Home Loan Bank of San Francisco borrowings	$	10,000	$	—	$	—	$	—	$	—	$	—	$	10,000
Subordinated Debt		—		—		—		—		—		10,000		10,000
Total future maturities	$	10,000	$	—	$	—	$	—	$	—	$	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 $412.4 million 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The Bank had $10.0 million in borrowings from the Federal Home Loan Bank of San Francisco at March 31, 2020. The borrowing had no stated maturity and an interest rate that resets daily. 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 three months ended March 31, 2020 and year ended December 31, 2019 was $220 thousand and $9.6 million, respectively. The maximum amount outstanding from the Federal Home Loan Bank of San Francisco at any month end during the three months ended March 31, 2020 and year ended December 31, 2019 was $10.0 million and $40.0 million, respectively. The weighted average interest rate on Federal Home Loan Bank of San Francisco borrowings at March 31, 2020 was 0.21%. As of March 31, 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.

We have pledged $529.2 million of our commercial real estate and residential real estate loans as collateral for the line of credit with the Federal Home Loan Bank of San Francisco. As of March 31, 2020, we also pledged $29.4 million in securities to the Federal Home Loan Bank of San Francisco.

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 for a five-year term, 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 $35.0 million at March 31, 2020 and had interest rates ranging from 0.50% to 1.18%. 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 March 31, 2020 and December 31, 2019, we had no outstanding federal funds purchased balances and no outstanding advances on any of the Bank’s lines of credit.

Federal Reserve Bank

We have an available line of credit with the Federal Reserve Bank totaling $12.7 million subject to collateral requirements, namely the amount of certain pledged loans. At March 31, 2020 and December 31, 2019, we had no outstanding advances on our line of credit with the Federal Reserve Bank. As of March 31, 2020, we have pledged $19.8 million of our commercial loans as collateral for the credit line with the Federal Reserve Bank.

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 Small Business Administration’s Paycheck Protection Program (“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. Participating institutions will receive preferential capital treatment for the loans that are funded with this borrowing facility.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

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.

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

(Amounts in thousands)	March 31, 2020		December 31, 2019
Commitments to extend credit	$	268,331	$	267,248
Standby letters of credit		4,537		4,406
Affordable housing grant sponsorships		3,338		3,338
Access to housing and economic assistance for development grant sponsorships		110		110
Total commitments and contingent liabilities	$	276,316	$	275,102

We were not required to perform on any financial guarantees during the three months ended March 31, 2020, or during the year ended December 31, 2019. At March 31, 2020, approximately $4.0 million of standby letters of credit will expire within one year, and $550 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.

Reserve For Unfunded Commitments

The reserve for unfunded commitments, which is included in Other Liabilities in the Consolidated Balance Sheets, was $695 thousand at March 31, 2020 and December 31, 2019. 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. When necessary, the provision expense is recorded in other noninterest expense in the Consolidated Statements of Income.

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 recipient. 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 84% and 83% of our gross loan portfolio at March 31, 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 March 31, 2020.

(Amounts in thousands)	March 31, 2020
Right-of-use lease asset	$	3,068
Lease liability	$	3,435
Weighted Average Remaining Lease Term		4.82
Weighted Average Discount Rate		2.94	%

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 March 31,
(Amounts in thousands)	2020		2019
Operating lease expense	$	217	$	199
Cash paid for operating leases	$	246	$	215

The following table sets forth, as of March 31, 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)
Due in:	Amount
2020	$	703
2021		953
2022		863
2023		327
2024		280
Thereafter		576
Total undiscounted future minimum lease cash payments		3,702
Present value adjustment		(267	)
Lease liability	$	3,435

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 judgment made in applying the requirements in ASC Topic 842 is the determination of the incremental borrowing rate for the lease. 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.

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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 March 31, 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.

(Amounts in thousands)	Carrying		Fair Value Measurements Using
March 31, 2020	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	43,940	$	43,940	$	—	$	—
Securities available-for-sale	$	285,077	$	—	$	285,077	$	—
Net loans	$	1,039,307	$	—	$	—	$	1,051,561
Federal Home Loan Bank of San Francisco stock	$	7,380	$	7,380	$	—	$	—
Financial liabilities
Deposits	$	1,242,387	$	—	$	1,244,030	$	—
Term debt	$	19,969	$	—	$	20,272	$	—
Junior subordinated debenture	$	10,310	$	—	$	11,614	$	—

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2019	Amounts		Level 1		Level 2		Level 3
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.

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 table below presents the range and weighted average of significant unobservable inputs used to calculate Level 3 fair value of our loan portfolio using a discounted cash flows at March 31, 2020.

Quantitative Information about Level 3 Fair Value Measurements
Unobservable Inputs	Range (Weighted Average)
Probability of Default (PD)		0.51%	-	100%	-	(1.72%)
Loss Given Default (LGD)		0%	-	77.42%		(18.72%)
Prepayment Rate		0%	-	34.47%	-	(20.79%)
Discount Rate		3.33%	-	9.08% -	-	(4.82%)

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

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 March 31, 2020 and December 31, 2019.

(Amounts in thousands)	Fair Value at March 31, 2020
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
U.S. government and agencies	$	36,043	$	—	$	36,043	$	—
Obligations of state and political subdivisions		63,263		—		63,263		—
Residential mortgage-backed securities and collateralized mortgage obligations		160,439		—		160,439		—
Corporate securities		2,983		—		2,983		—
Commercial mortgage-backed securities		17,428		—		17,428		—
Other asset-backed securities		4,921		—		4,921		—
Total assets measured at fair value	$	285,077	$	—	$	285,077	$	—

(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 months ended March 31, 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 - 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.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The following tables present information about our assets at March 31, 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.

(Amounts in thousands)	Fair Value at March 31, 2020
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Other real estate owned	$	8	$	—	$	—	$	8
Total assets measured at fair value	$	8	$	—	$	—	$	8

(Amounts in thousands)	Fair Value at December 31, 2019
Nonrecurring basis	Total		Level 1		Level 2		Level 3
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 months ended March 31, 2020 and 2019 related to assets outstanding at March 31, 2020 and 2019.

(Amounts in thousands)	Three Months Ended March 31,
Fair value adjustments	2020		2019
Other real estate owned	$	6	$	68
Total	$	6	$	68

During the three months ended March 31, 2020, one loan with an aggregate carrying value of $14 thousand was written down to its fair value of $8 thousand, resulting in a $6 thousand adjustment to the ALLL when the underlying property was transferred to OREO.

During the three months ended March 31, 2019, four loans with an aggregate carrying value of $102 thousand were written down to their fair value of $34 thousand, resulting in a $68 thousand adjustment to the ALLL when the underlying properties were transferred to OREO.

The loan amounts above 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.

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.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

The acquisition of Merchants constituted a business combination and has been 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.

The calculation of goodwill recorded during 2019 is detailed below.

(Amounts in thousands)	As Recorded by Merchants Holding Company			Fair Value And Other Acquisition Related Adjustments			As Recorded by 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

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 from Merchants and is being accreted over the life of the loans as a yield adjustment. We recorded $163 thousand and $48 thousand in accretion of the discount for these loans during the three months ended March 31, 2020 and 2019.

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 periodically 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 and $91 thousand during the three months ended March 31, 2020 and 2019. The future estimated amortization expense on the CDI from the Merchants acquisition at March 31, 2020 is as follows:

(Amounts in thousands)		2020				2021				2022				2023				2024				Thereafter				Total
Core deposit intangible amortization		$	408			$	544			$	544			$	544			$	544			$	1,633			$	4,217

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
Pro forma revenue and earnings	March 31,
(Amounts in thousands)	2019
Net interest income	$	13,199
Net income ⁽¹⁾	$	2,269

⁽¹⁾Net income for the three months ended March 31, 2019 includes acquisition-related costs of $1.9 million.

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.

NOTE 11. GOODWILL AND OTHER INTANGIBLES

At March 31, 2020, our only reporting unit, had goodwill totaling $11.7 million. Goodwill is a common byproduct of a business combination, and is calculated as the amount of cash paid in excess of the fair value of the net assets acquired in the transaction. Goodwill is considered to have an indefinite life and, therefore, is not amortized. It is however, subject to impairment testing at least annually, or more frequently if events and circumstances warrant (triggering events). Impairment of goodwill occurs when the carrying amount of a reporting unit that includes goodwill exceeds the fair value of that reporting unit.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Triggering Events

At March 31, 2020, the COVID-19 pandemic had essentially shutdown the United States economy to all but essential services and has resulted in uncertainty and extreme volatility in the financial markets. We experienced a sharp decline in our stock price during March, and lower than projected earnings for the month and the three months ended March 31, 2020. Events such as a deterioration in general economic conditions, decreased overall financial performance, or a sustained decrease in stock price are considered triggering events which require us to consider if goodwill has been impaired on an interim basis rather than waiting to perform our normal annual testing.

Review and Testing

We first made a qualitative assessment to determine whether it was more-likely-than-not (a likelihood of more than 50%) that the fair value of our reporting unit was less than the carrying value amount, including goodwill. If it was more-likely-than-not that the fair value was higher than the carrying amount, no further impairment testing would have been required. If it was more-likely-than-not that the fair value is lower than the carrying amount, we must then perform quantitative impairment testing. We believe after performing our qualitative assessment that it was not more-likely-than-not that the fair value of our Company (our only reporting unit) was less than the carrying amount and that the quantitative impairment test was unnecessary.

In mid-March of 2020, the rate of domestic COVID-19 infections began to increase exponentially which led to a government implemented stay-at-home order and the declaration of a national emergency on March 13, 2020. Our qualitative assessment and conclusion at March 31, 2020 was heavily dependent on the very short time period since the onset of the highly unusual negative circumstances associated with COVID-19 and its impact on valuations; the possibly irrational reaction, even panic within the equity markets during this initial period which colors reliability; and uncertainty about how the economy as a whole will respond to government stimulus and updated news about medical advances. Clarity on these and related issues will be forthcoming over the coming weeks and months. We will again perform a qualitative assessment at June 30, 2020 and there is no certainty that we will arrive at the same conclusion. It is possible that quantitative testing will be necessary and that it may support an impairment charge to earnings for the second quarter.

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 by using the income approach and represent the present value of the cost savings over the projected term of our new deposit base.

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

(Amounts in thousands)	March 31,			December 31,
Goodwill and Other Intangibles	2020			2019
Goodwill	$	11,671		$	11,671
Core deposit intangibles		6,125			6,125
Domain name		32			32
Accumulated amortization		(1,539	)		(1,348	)
Goodwill and other intangibles, net	$	16,289		$	16,480

The following table sets forth, as of March 31, 2020, the total estimated future amortization of intangible assets:

(Amounts in thousands)
	Amount
2020	$	575
2021		766
2022		766
2023		766
2024		580
2025 and thereafter		1,133
Total	$	4,586

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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;
	●	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 Business Oversight;
	●	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 and/or the market price of our stock;
	●	Our failure to realize all of the anticipated benefits of our acquisition of Merchants Holding Company;
	●	Our inability to successfully manage our growth or implement our growth strategy;
	●	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;
	●	Volatility in the capital or credit markets;
	●	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;
	●	The timely development of competitive new products and services and 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;
	●	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;
	●	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;

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	●	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 March 31, 2020. Also discussed are significant trends and changes in the Company’s results of operations for the three months ended March 31, 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 March 31, 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Significant Items for the first quarter of 2020:

●	$2.9 million provision for loan and lease losses.
●	$1.1 million in non-recurring costs.
●	1,351,922 shares of common stock repurchased.
●	Initial impact of COVID-19.

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

Performance

●

Net income of $916 thousand was a decrease of $1.4 million (60%) from $2.3 million earned during the same period in the prior year. Earnings of $0.05 per share – diluted was a decrease of $0.08 (62%) from $0.13 per share – diluted earned during the same period in the prior year and reflects the impact of the following:

	o	$2.9 million provision for loan and lease losses for the current quarter attributable to our assessment of increased risk of loss in our loan portfolio due to the COVID-19 pandemic.
	o	$1.1 million in non-recurring costs for the current quarter associated with the termination of a technology management services contract and a previously disclosed severance agreement.
	o	$1.9 million in non-recurring costs recorded during the same period a year ago associated with our January 31, 2019 acquisition of Merchants Holding Company in Sacramento (“Merchants”).

●	Net interest income decreased $18 thousand (less than 1%) to $13.0 million compared to $13.0 million for the same period in the prior year.
●	Net interest margin declined to 3.86% compared to 3.94% for the same period in the prior year.
●	Return on average assets decreased to 0.25% compared to 0.66% for the same period in the prior year.
●	Return on average equity decreased to 2.14% compared to 6.12% for the same period in the prior year.
●	Average loans totaled $1.034 billion, an increase of $40 million (4%) compared to average loans for the same period in the prior year.
●	Average earning assets totaled $1.353 billion, an increase of $16 million (1%) compared to average earning assets for the same period in the prior year.
●	Average deposits totaled $1.245 billion, an increase of $21 million (2%) compared to average deposits for the same period in the prior year.

	o	Average non-maturing deposits totaled $1.097 billion, an increase of $41 million (4%) compared to the same period in the prior year.
	o	Average certificates of deposit totaled $147.2 million, a decrease of $20.2 million (12%) compared to same period in the prior year.

●	The Company’s efficiency ratio was 70.5% compared to 77.7% during the same period in the prior year.

	o	The Company’s efficiency ratio of 70.5% for the first quarter of 2020 included $1.1 million in non-recurring costs. The efficiency ratio excluding these costs was 62.5%.
	o	The Company’s efficiency ratio of 77.7% for the first quarter of 2019 included $1.9 million in non-recurring acquisition costs. The efficiency ratio excluding these non-recurring costs was 64.0%

●	Book value per common share was $9.86 at March 31, 2020 compared to $8.90 at March 31, 2019.
●	Tangible book value per common share was $8.89 at March 31, 2020 compared to $7.96 at March 31, 2019.

Credit Quality

●	Nonperforming assets at March 31, 2020 totaled $5.3 million or 0.36% of total assets, a decrease of $9.3 million (64%) since March 31, 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 $14 thousand in the first quarter of 2020 compared with net loan charge-offs of $50 thousand for the same quarter a year ago.

Subsequent impacts of COVID-19:

We are addressing those things within our control as we deal with uncertainties created by the COVID-19 pandemic. We are considered an essential business and all our offices are open but many of our employees have been able to work safely from home. The economic downturn will result in increased credit risk as customers are unable to meet their obligations, as well as adversely impact our earnings. We believe our strong capital position will be important in dealing with the impact of the pandemic.

●	We are participating in the federal Paycheck Protection Program (“PPP”) administered through the Small Business Administration (“SBA”). We expect to utilize liquidity provided by the Federal Reserve to fund the program. Through April 13, 2020, we had received approximately 580 PPP loan applications for approximately $186 million and we have now stopped accepting applications. We do not expect that the growth in our assets resulting from the PPP will impact our regulatory capital ratios.
●	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 that provide secondary funding sources that totaled $460.1 million at March 31, 2020.
●	At March 31, 2020, our workforce totaled 216 employees of which 105 are working remotely.
●	All of our branch offices remain open, although they are operating under a reduced schedule.

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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 underlying rating of the security is monitored to identify changes in quality.

Securities 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, in the case of fixed rate investments, 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 the 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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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.

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.

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

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. The FASB affirmed that the one-time determination of whether an entity is eligible to be an smaller reporting company will be based on an entity’s most recent assessment in accordance with SEC regulations as of the date that a final update on effective dates is issued (for example, November 20, 2019). 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. The majority of our loans are fixed rate loans or variable rate loans that are already at their floor rate. This, combined with the composition of our investment portfolio, reliance on core deposits and our deposit pricing methodology, means we are neutral to moderately liability sensitive in an increasing rate environment.

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.

Changes in the slope of the yield curve, and the spread between short-term and long-term interest rates could also reduce our net interest margin. Normally, the yield curve is upward sloping, which means that short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, 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.

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 March 31, 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	$	49,987	$	52,031	$	58,887	$	53,363	$	28,366	$	171,005	$	38,479	$	452,118
Variable:
Prime		92,700		6,103		8,011		6,263		6,987		1,604		—		121,668
5 Year Treasury		30,691		62,962		79,234		72,404		92,052		50,407		—		387,750
7 Year Treasury		773		7,776		4,831		5,690		361		13,739		—		33,170
1 Year LIBOR		21,225		—		—		—		—		—		—		21,225
Other Indexes		4,088		2,924		1,799		1,737		9,913		12,067		672		33,200
Nonaccrual		572		514		498		479		456		1,850		874		5,243
Total	$	200,036	$	132,310	$	153,260	$	139,936	$	138,135	$	250,672	$	40,025	$	1,054,374

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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 March 31, 2020
	Loans At		Loans Above
	Floor Rate		Floor Rate		Total
Variable rate loans with floors:
Prime	$	63,481	$	5,280	$	68,761
5 year Treasury		302,583		50,386		352,969
7 Year Treasury		33,170		—		33,170
1 Year LIBOR		—		741		741
Other Indexes		14,299		1,287		15,586
	$	413,533	$	57,694		471,227

Variable rate loans without floors:
Prime						52,907
5 year Treasury						34,781
1 Year LIBOR						20,484
Other Indexes						17,614
						125,786
Total variable rate loans					$	597,013

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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RESULTS OF OPERATIONS

OVERVIEW

First Quarter of 2020 Compared With First Quarter of 2019

Net income for the first quarter of 2020 decreased $1.4 million compared to the first quarter of 2019. In the current quarter, net interest income was $18 thousand lower, provision for loan and lease losses was $2.9 million higher and noninterest income was $165 thousand lower. These decreases to pre-tax income were partially offset by noninterest expense that was $1.1 million lower and income taxes that were $503 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 months ended March 31, 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
	March 31, 2020			March 31, 2019
Return on average assets		0.25	%		0.66	%
Return on average equity		2.14	%		6.12	%

NET INTEREST INCOME AND NET INTEREST MARGIN

For the three months ended March 31, 2020 compared to the same period a year ago, net interest income decreased $18 thousand.

Interest income for the first quarter of 2020 decreased $82 thousand million or 1% to $14.3 million.

●	Interest and fees on loans increased $307 thousand due to a $40.4 million increase in average loan balances partially offset by an 11 basis point decrease in the average yield on the loan portfolio.
●	Interest on investment securities decreased $298 thousand due to a $31 thousand decrease in average securities balances and a 14 basis point decrease in average yield on the securities portfolio.
●	Interest on interest-bearing deposits due from banks decreased $91 thousand, a $6.9 million increase in average interest-bearing deposit balances was offset by a 116 basis point decrease in average yield.

Interest expense for the first quarter of 2020 decreased $64 thousand or 5% to $1.4 million.

●	Interest expense on interest-bearing deposits increased $69 thousand. Average interest-bearing demand and savings deposit balances increased $8.6 million, while average certificate of deposit balances decreased $20.2 million. The average rate paid on interest-bearing deposits decreased three basis points.
●	Interest expense on FHLB borrowings decreased $55 thousand. Average FHLB borrowings were $220 thousand in the current quarter compared to $8.8 million for the same period a year ago.
●	Interest expense on other term debt decreased $55 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 $23 thousand. The average rate paid on junior subordinated debentures decreased 93 basis points.

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

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

The following table presents 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 months ended March 31, 2020 and 2019.

	Three Months Ended March 31, 2020							Three Months Ended March 31, 2019
	Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾
Interest-earning assets:
Net loans ⁽²⁾	$	1,033,689	$	12,338		4.80	%	$	993,261	$	12,031		4.91	%
Taxable securities		237,405		1,582		2.68	%		253,068		1,764		2.83	%
Tax-exempt securities ⁽³⁾		34,869		271		3.13	%		50,454		387		3.11	%
Interest-bearing deposits in other banks		47,135		154		1.31	%		40,223		245		2.47	%
Average interest-earning assets		1,353,098		14,345		4.26	%		1,337,006		14,427		4.38	%
Cash and due from banks		21,987							21,392
Premises and equipment, net		15,753							14,581
Goodwill		11,671							7,902
Other intangibles, net		4,701							3,970
Other assets		46,809							41,009
Average total assets	$	1,454,019						$	1,425,860

Interest-bearing liabilities:
Demand - interest-bearing	$	233,375		100		0.17	%	$	243,376		126		0.21	%
Money market		307,587		403		0.53	%		293,396		289		0.40	%
Savings		135,504		118		0.35	%		131,081		111		0.34	%
Certificates of deposit		147,241		464		1.27	%		167,463		490		1.19	%
Federal Home Loan Bank of San Francisco borrowings		220		—		0.21	%		8,778		55		2.54	%
Other borrowings		9,963		184		7.43	%		12,889		239		7.52	%
Junior subordinated debentures		10,310		90		3.51	%		10,310		113		4.44	%
Average interest-bearing liabilities		844,200		1,359		0.65	%		867,293		1,423		0.67	%
Noninterest-bearing demand		420,847							388,410
Other liabilities		16,852							17,452
Shareholders’ equity		172,120							152,705
Average liabilities and shareholders’ equity	$	1,454,019						$	1,425,860
Net interest income and net interest margin⁽⁴⁾			$	12,986		3.86	%			$	13,004		3.94	%

⁽¹⁾ Interest income on loans includes deferred fees and costs of approximately $257 thousand and $181 thousand for the three months ended March 31, 2020 and 2019, respectively.

⁽²⁾Net loans includes average nonaccrual loans of $5.5 million and $8.5 million for the three months ended March 31, 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 March 31, 2020 and 2019 included $163 thousand and $48 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by 6 and 2 basis points, respectively.

⁽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 table sets 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 months ended March 31, 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 not presented on a taxable equivalent basis.

	Three Months Ended March 31, 2020 Over Three Months Ended March 31, 2019
(Amounts in thousands)	Volume			Rate			Net Change
Increase (decrease) in interest income:
Net loans	$	479		$	(172	)	$	307
Taxable securities		(106	)		(76	)		(182	)
Tax-exempt securities⁽¹⁾		(121	)		5			(116	)
Interest-bearing deposits in other banks		54			(145	)		(91	)
Total increase		306			(388	)		(82	)

Increase (decrease) in interest expense:
Demand - interest-bearing		(5	)		(21	)		(26	)
Money market		15			99			114
Savings		4			3			7
Certificates of deposit		(72	)		46			(26	)
Federal Home Loan Bank of San Francisco borrowings		(27	)		(28	)		(55	)
Other borrowings		(54	)		(1	)		(55	)
Junior subordinated debentures		—			(23	)		(23	)
Total (decrease) increase		(139	)		75			(64	)
Net increase	$	445		$	(463	)	$	(18	)
⁽¹⁾ Interest income on tax-exempt securities are not presented on a taxable equivalent basis.

PROVISION FOR LOAN AND LEASE LOSSES

We recorded a provision for loan and lease losses of $2.9 million for the first quarter of 2020. There was no provision for loan and lease losses in the first quarter 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 months ended March 31, 2020 and 2019.

	Three Months Ended March 31,					Change
(Amounts in thousands)	2020			2019		Amount			Percent
Noninterest income:
Service charges on deposit accounts	$	169		$	169	$	—			—	%
ATM and point of sale fees		268			265		3			1	%
Payroll and benefit processing fees		170			171		(1	)		(1	%)
Life insurance		123			129		(6	)		(5	%)
Gain on sales of investment securities, net		84			92		(8	)		(9	%)
Federal Home Loan Bank of San Francisco dividends		130			121		9			7	%
(Loss) Gain on sale of OREO		(23	)		23		(46	)		(200	%)
Other		(29	)		87		(116	)		(133	%)
Total noninterest income	$	892		$	1,057	$	(165	)		(16	%)

Noninterest income for the three months ended March 31, 2020 decreased $165 thousand compared to the first quarter for 2019. The decrease was primarily due to a $132 thousand loss on disposal of ATM equipment which is included in “other noninterest income”.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NONINTEREST EXPENSE

The following table presents the key components of noninterest expense for the three months ended March 31, 2020 and 2019.

	Three Months Ended March 31,				Change
(Amounts in thousands)	2020		2019		Amount			Percent
Noninterest expense:
Salaries & related benefits	$	5,887	$	5,729	$	158			3	%
Premises & equipment		854		975		(121	)		(12	%)
Federal Deposit Insurance Corporation insurance premium		36		100		(64	)		(64	%)
Data processing fees		531		576		(45	)		(8	%)
Professional services		334		303		31			10	%
Telecommunications		171		173		(2	)		(1	%)
Acquisition and merger		—		1,930		(1,930	)		(100	%)
Other		1,970		1,137		833			73	%
Total noninterest expense	$	9,783	$	10,923	$	(1,140	)		(10	%)

Noninterest expense for the three months ended March 31, 2020 decreased $1.1 million compared to the same period a year previous. During the current quarter we recorded $700 thousand in non-recurring costs related to the termination of a technology management services contract and $414 thousand in non-recurring costs related to a severance agreement. The first quarter of 2019 included $1.9 million in non-recurring acquisition costs. Excluding the non-recurring costs in both periods, noninterest expense decreased $324 thousand for the three months ended March 31, 2020 compared to the same period a year previous. This decrease was primarily due to salary and benefit cost savings achieved through increased efficiency after combining the operations of Merchants Bank with our own.

The Company’s efficiency ratio was 70.5% for the first quarter of 2020 (62.5% excluding $1.1 million in non-recurring costs). The ratio during the same period in 2019 was 77.7% (64.0% excluding $1.9 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.

	For the Three Months Ended March 31,
(Amounts in thousands)	2020			2019
Income before provision for income taxes	$	1,245		$	3,138
Provision for income taxes	$	329		$	832
Effective tax rate		26.4	%		26.5	%

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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 March 31, 2020, we had total consolidated assets of $1.456 billion, gross loans of $1.052 billion, allowance for loan and lease losses (“ALLL”) of $15 million, total deposits of $1.242 billion, and shareholders’ equity of $166 million.

We maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $21.1 million and we also held interest-bearing deposits in the amount of $22.8 million.

Available-for-sale investment securities totaled $285.1 million at March 31, 2020, compared to $287.0 million at December 31, 2019. During the first three months of 2020, we purchased securities with a par value of $37.9 million. During the first three months of 2020, we sold securities with a par value of $28.6 million resulting in $84 thousand in net realized gains. During the three months ended March 31, 2020, we also received $17.4 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.

At March 31, 2020, our net unrealized gains on available-for-sale investment securities were $8.4 million compared to net unrealized gains of $3.7 million at December 31, 2019. The change in net unrealized gains during the three months ended March 31, 2020 was driven by significant changes in market interest rates.

We recorded gross loan balances of $1.052 billion at March 31, 2020, compared to $1.033 billion at December 31, 2019 an increase of $19 million. The increase in gross loans occurred primarily from new loans in the Bank’s Sacramento marketplace and is the result of past investments in our SBA division and in our expanded Sacramento commercial banking group.

The ALLL at March 31, 2020 increased $2.9 million to $15.1 million compared to $12.2 million at December 31, 2019. At March 31, 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.

Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, decreased by $371 thousand to $5.2 million, or 0.50% of gross loans, as of March 31, 2020, compared to $5.6 million, or 0.54% of gross loans as of December 31, 2019.

Past due loans as of March 31, 2020 increased $1.6 million to $6.5 million, compared to $4.9 million as of December 31, 2019. The increase in past due loans was primarily due to a commercial real estate loan totaling $1.1 million. We believe that credit grading for past due loans appropriately reflects the risk associated with those loans. See Note 4 Loans in the Notes to Consolidated Financial Statements in this document for further detail on the ALLL and the loan portfolio.

Premises and equipment totaled $15.5 million at March 31, 2020, a decreases of $454 thousand compared to $15.9 million at December 31, 2019.

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

Bank-owned life insurance increased $123 thousand during the three months ended March 31, 2020 to $23.8 million compared to $23.7 million at December 31, 2019.

Goodwill and other intangible assets, net totaled $16.3 million at March 31, 2020, a decrease of $191 thousand compared to $16.5 million at December 31, 2019 due to amortization of core deposit intangibles. 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 $28.8 million at March 31, 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 March 31, 2020, decreased $25 million or 8% annualized to $1.242 billion compared to $1.267 billion at December 31, 2019.

	●	Total non-maturing deposits decreased $16.6 million or 6% annualized compared to December 31, 2019. The decrease in non-maturing deposits for the three months ended March 31, 2020 was less than the seasonal declines we have experienced during the first quarter of recent years.
	●	Certificates of deposit decreased $8.2 million or 22% annualized compared to December 31, 2019. Due to the changing rate environment interest bearing demand accounts have become more attractive to depositors than certificates of deposits.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other liabilities, which include the Bank’s supplemental executive retirement plan, operating leases and the funding obligation for investments in qualified affordable housing partnerships, decreased only $144 thousand to $17.6 million as of March 31, 2020 compared to $17.7 million at December 31, 2019.

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 $285.1 million at March 31, 2020, compared to $287.0 million at December 31, 2019. During the first quarter of 2020, we repositioned a portion of the Bank’s investment securities portfolio to take advantage of widening credit spreads on municipal securities.

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

	March 31,		December 31,
(Amounts in thousands)	2020		2019
Available-for-sale securities:
U.S. government & agencies	$	36,043	$	38,733
Obligations of state and political subdivisions		63,263		42,098
Residential mortgage-backed securities and collateralized mortgage obligations		160,439		180,835
Corporate securities		2,983		2,966
Commercial mortgage-backed securities		17,428		19,307
Other asset-backed securities		4,921		3,011
Total	$	285,077	$	286,950

The following table presents information regarding the amortized cost, and maturity structure of the investment portfolio at March 31, 2020.

						Maturities					Maturities
	Maturities					Over One Through					Over Five Through					Maturities
	Within One Year					Five Years					Ten Years					Over Ten Years					Total
(Amounts in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale securities:⁽¹⁾
U.S. government & agencies	$	—		—	%	$	40		2.94	%	$	21,150		3.23	%	$	14,297		2.78	%	$	35,487		3.05	%
Obligations of state and political subdivisions		907		3.30	%		10,617		3.58	%		15,279		2.92	%		34,025		2.95	%		60,828		3.06	%
Residential mortgage-backed securities and collateralized mortgage obligations		3,211		2.16	%		100,829		2.95	%		46,527		2.85	%		4,685		2.98	%		155,252		2.91	%
Corporate securities		2,001		3.73	%		1,000		2.00	%		—		—	%		—		—	%		3,001		3.16	%
Commercial mortgage-backed securities		—		—	%		1,018		2.42	%		5,888		2.45	%		9,985		2.77	%		16,891		2.63	%
Other asset-backed securities		—		—	%		—		—	%		—		—	%		5,176		2.77	%		5,176		2.77	%
Total	$	6,119		2.84	%	$	113,504		3.00	%	$	88,844		2.93	%	$	68,168		2.88	%	$	276,635		2.94	%

⁽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.

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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 the composition of the loan portfolio as of March 31, 2020 and December 31, 2019.

(Amounts in thousands)	March 31, 2020						December 31, 2019
Loan Portfolio	Amount			%			Amount			%
Commercial	$	138,870			13	%	$	141,197			14	%
Commercial real estate:
Real estate - construction and land development		34,394			3			26,830			3
Real estate - commercial non-owner occupied		514,052			49			493,920			48
Real estate - commercial owner occupied		217,319			21			218,833			21
Residential real estate:
Real estate - residential - ITIN		31,998			3			33,039			3
Real estate - residential - 1-4 family mortgage		62,533			6			63,661			6
Real estate - residential - equity lines		23,158			2			22,099			2
Consumer and other		29,921			3			33,324			3
Gross loans		1,052,245			100	%		1,032,903			100	%
Deferred loan fees and costs		2,129						2,162
Loans, net of deferred fees and costs		1,054,374						1,035,065
Allowance for loan and lease losses		(15,067	)					(12,231	)
Net loans	$	1,039,307					$	1,022,834

The following table sets forth the maturity and distribution of our loan portfolio as of March 31, 2020.

			After One
	Within One		Through		After Five
(Amounts in thousands)	Year		Five Years		Years		Total
Commercial	$	51,647	$	76,739	$	11,325	$	139,711
Commercial real estate:
Real estate - construction and land development		4,365		15,164		14,772		34,301
Real estate - commercial non-owner occupied		39,390		207,987		266,189		513,566
Real estate - commercial owner occupied		23,290		86,218		109,252		218,760
Residential real estate:
Real estate - residential - ITIN		3,370		13,301		15,328		31,999
Real estate - residential - 1-4 family mortgage		6,317		20,242		36,066		62,625
Real estate - residential - equity lines		959		1,902		20,607		23,468
Consumer and other		1,139		2,266		26,539		29,944
Loans, net of deferred fees and costs	$	130,477	$	423,819	$	500,078	$	1,054,374
Loans with:
Fixed rates	$	49,987	$	192,647	$	209,484	$	452,118
Variable rates		80,490		231,172		290,594		602,256
Total	$	130,477	$	423,819	$	500,078	$	1,054,374

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 April 27, 2020 there have been 33 COVID-19 related deferral requests for ITIN loans totaling $2.2 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 $3.0 million for the quarter ended March 31, 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 April 26, 2020 there have been 44 COVID-19 related deferral requests for SFC loans totaling $388 thousand.

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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 acquired through our acquisition of Merchants, the loan portfolio includes purchased loan pools and purchased participations. Purchased loans 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 March 31, 2020 and December 31, 2019.

(Amounts in thousands)	March 31, 2020					December 31, 2019
Loan Type	Balance		% of Gross Loan Portfolio			Balance		% of Gross Loan Portfolio
Commercial real estate	$	18,167		2	%	$	19,506		2	%
Residential real estate		43,970		4	%		45,494		4	%
Consumer and other		25,574		2	%		28,579		3	%
Total purchased loans	$	87,711		8	%	$	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 could increase 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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 March 31, 2020 and December 31, 2019.

(Amounts in thousands)	March 31,			December 31,
Nonperforming Assets	2020			2019
Commercial	$	39		$	61
Commercial real estate:
Real estate - commercial owner occupied		3,103			3,103
Total commercial real estate		3,103			3,103
Residential real estate:
Real estate - residential - ITIN		1,878			2,221
Real estate - residential - 1-4 family mortgage		184			191
Total residential real estate		2,062			2,412
Consumer and other		39			40
Total nonaccrual loans		5,243			5,616
90 days past due and still accruing		2			—
Total nonperforming loans		5,245			5,616
Other real estate owned		8			35
Total nonperforming assets	$	5,253		$	5,651
Nonperforming loans to gross loans		0.50	%		0.54	%
Nonperforming assets to total assets		0.36	%		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 March 31, 2020, we had $6.3 million in troubled debt restructurings compared to $6.5 million as of December 31, 2019. As of March 31, 2020, we had 97 restructured loans that qualified as troubled debt restructurings, of which 93 loans were performing according to their restructured terms. Troubled debt restructurings represented 0.60% of gross loans as of March 31, 2020, compared to 0.63% at December 31, 2019.

Impaired loans of $4.7 million and $4.8 million were classified as accruing troubled debt restructurings at March 31, 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 March 31, 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 March 31, 2020 and December 31, 2019.

(Amounts in thousands)	March 31,			December 31,
Troubled Debt Restructurings	2020			2019
Accruing troubled debt restructurings
Commercial	$	592		$	595
Residential real estate:
Real estate - residential - ITIN		3,891			3,957
Real estate - residential - equity lines		226			231
Total accruing troubled debt restructurings	$	4,709		$	4,783

Nonaccruing troubled debt restructurings
Commercial	$	26		$	47
Residential real estate:
Real estate - residential - ITIN		1,546			1,593
Consumer and other		39			40
Total nonaccruing troubled debt restructurings	$	1,611		$	1,680

Total troubled debt restructurings
Commercial	$	618		$	642
Residential real estate:
Real estate - residential - ITIN		5,437			5,550
Real estate - residential - equity lines		226			231
Consumer and other		39			40
Total troubled debt restructurings	$	6,320		$	6,463

Total troubled debt restructurings to gross loans outstanding at period end		0.60	%		0.63	%

Short-term loan modifications

On March 22, 2020, financial institution regulators released guidance in response to the COVID-19 pandemic, which provided clarification on the treatment of short-term loan modifications for borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. The guidance presented a change to the existing accounting for troubled debt restructurings (“TDR”) stating that short-term modifications made in response to COVID-19, to borrowers who are considered current, should not be considered a TDR. The guidance provided examples of short-term (six months or less) modifications including; payment deferrals, fee waivers and extensions of repayment terms. The guidance noted that institutions can presume that borrowers who were current on payments were not experiencing financial difficulties, and as such, the loans don’t meet the TDR classification criteria. The guidance also clarified that modification or deferral programs mandated by the federal or state government related to COVID-19 would not be within the scope of TDR accounting.

We are responding to the needs of our borrowers in accordance with the regulatory guidance to grant short-term COVID-19 related loan modifications. These modified loans are not considered past due or non-performing. We have granted deferrals ranging from 3 to 6 months determined on a case-by-case basis considering the nature of the business and the impact of COVID-19.

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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 modification and pending loan modification requests at April 24, 2020, none of which meet the definition of a TDR.

	At April 24, 2020
			Commercial		Residential
(dollars in thousands)	Commercial		Real Estate		Real Estate		Consumer		Total
In process	$	19	$	4,842	$	—	$	—	$	4,861
Approved		14,281		60,326		3,354		50		78,011
Total	$	14,300	$	65,168	$	3,354	$	50	$	82,872

Number of contracts in process		1		3		—		—		4
Number of contracts approved		45		64		8		3		120
Total		46		67		8		3		124

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 provide for probable losses inherent in the outstanding loan and lease portfolio. Our review of ALLL adequacy utilizes both quantitative and qualitative factors. The quantitative analysis relies on historical loss rates which, unfortunately, are not indicative of potential losses related to a pandemic such as we are currently experiencing with COVID-19. In response to quantitative data deficiencies, we have placed greater reliance on qualitative factors (Q-Factors).

At March 31, 2020, our review of the adequacy of our allowance for loan and lease losses (ALLL) focused on our Q-Factor for “changes in international, national, regional and local conditions”. We identified concentrations of credit in industries that are most likely to be significantly impacted by the effects of COVID-19. We evaluated our commercial portfolio by industry and our CRE portfolio by property type for concentrations of tenants in higher risk industries or for loans with higher LTVs. We also completed analyses on individual borrowers who may be higher risk and utilized the most current or projected economic indicators possible. After completing this work, we significantly increased our Q-Factor for “changes in international, national, regional and local conditions”.

Our ALLL methodology, adjusted for the revised Q-Factor discussed above necessitated an ALLL of $15.1 million at March 31, 2020, an increase of 23% compared to our ALLL of $12.2 million at December 31, 2019. A provision for loan and lease losses of $2.9 million was recorded during the quarter. There was no provision for loan and lease loss during the prior quarter or during the same quarter a year ago. Our ALLL as a percentage of gross loans was 1.43% as of March 31, 2020 compared to 1.18% as of December 31, 2019.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

	For The Three Months Ended			For The Twelve Months Ended			For The Three Months Ended
(Amounts in thousands)	March 31, 2020			December 31, 2019			March 31, 2019
Beginning balance ALLL	$	12,231		$	12,292		$	12,292
Provision for loan and lease loss charged to expense		2,850			—			—
Loans charged off		(169	)		(1,500	)		(348	)
Loan and lease loss recoveries		155			1,439			298
Ending balance ALLL	$	15,067		$	12,231		$	12,242

	At March 31, 2020			At December 31, 2019			At March 31, 2019
Nonaccrual loans:
Commercial	$	39		$	61		$	1,018
Real estate - commercial non-owner occupied		—			—			10,878
Real estate - commercial owner occupied		3,103			3,103			—
Real estate - residential - ITIN		1,878			2,221			2,392
Real estate - residential - 1-4 family mortgage		184			191			182
Real estate - residential - equity lines		—			—			42
Consumer and other		39			40			23
Total nonaccrual loans		5,243			5,616			14,535
Accruing troubled debt restructured loans:
Commercial		592			595			1,187
Real estate - commercial non-owner occupied		—			—			793
Real estate - residential - ITIN		3,891			3,957			4,342
Real estate - residential - equity lines		226			231			358
Total accruing troubled debt restructured loans		4,709			4,783			6,680

All other accruing impaired loans		—			—			—
Total impaired loans	$	9,952		$	10,399		$	21,215

Gross loans outstanding	$	1,052,245		$	1,032,903		$	1,034,606

Ratio of ALLL to gross loans outstanding		1.43	%		1.18	%		1.18	%
Nonaccrual loans to gross loans outstanding		0.50	%		0.54	%		1.40	%

At March 31, 2020, impaired loans had a corresponding specific allowance of $318 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 March 31, 2020 and December 31, 2019.

(Amounts in thousands)	March 31, 2020					December 31, 2019
ALLL	Amount		% Loan Category			Amount		% Loan Category
Commercial	$	2,483		16	%	$	1,822		15	%
Commercial real estate:
Real estate - construction and land development		237		2			131		1
Real estate - commercial non-owner occupied		7,235		48			5,907		47
Real estate - commercial owner occupied		2,427		17			2,058		17
Residential real estate:
Real estate - residential - ITIN		630		4			569		5
Real estate - residential - 1-4 family mortgage		287		2			185		2
Real estate - residential - equity lines		364		2			278		2
Consumer and other		972		6			933		8
Unallocated		432		3			348		3
Total ALLL	$	15,067		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 March 31, 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reserve for Unfunded Commitments

The reserve for unfunded commitments, which is included in Other Liabilities in the Consolidated Balance Sheets, was $695 thousand at March 31, 2020 and December 31, 2019. 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. Any provision adjustment is recorded in Other Expenses in the Consolidated Statements of Income.

COVID‐19 Supplemental Analysis

In response to the COVID-19 impact on the economy, we have reviewed our loan portfolio to identify those segments of the loan portfolio that are most at risk. We identified concentrations of credit risk for industries and property types that are more likely to be significantly impacted by the effects of COVID-19 in order to determine an adequate ALLL. Presented below is information regarding the portions of our loan portfolio most impacted by the COVID‐19 pandemic and the amount of those loans that have received a short term loan modification.

(Amounts in thousands)	At March 31, 2020
COVID-19 Impacted Loans	Modified Amount		Loan Balance		% of Gross Loan Portfolio
Real estate with retail tenants	$	15,124	$	82,936		8	%
Hotels and restaurants		23,181		48,623		5
Retail trade		7,867		40,757		4
Health care		13,139		28,293		3
Total	$	59,311	$	200,609		20	%

Goodwill and other intangible assets

Goodwill and other intangible assets, net totaled $16.3 million at March 31, 2020 and primarily consisted of goodwill and core deposit intangibles recorded as part of previous acquisitions.

We perform a goodwill impairment evaluation annually at year end and on an interim basis when events or circumstances indicate impairment potentially exists. We believe after performing our qualitative assessment that it is not more-likely-than-not that the fair value of our Company (our only reporting unit) is less than the carrying amount and that the quantitative impairment test is unnecessary.

Deposits

Total deposits as of March 31, 2020 were $1.242 billion compared to $1.267 billion at December 31, 2019, a decrease of $25 million. The following table presents the deposit balances by major category as of March 31, 2020, and December 31, 2019.

(Amounts in thousands)	March 31, 2020					December 31, 2019
Deposits	Amount		%			Amount		%
Noninterest-bearing demand	$	419,315		34	%	$	432,680		34	%
Interest-bearing demand		231,276		19			239,258		19
Money market		314,687		25			307,559		24
Savings		133,552		11			135,888		11
Certificates of deposit, $100,000 or greater		112,364		8			120,282		10
Certificates of deposit, less than $100,000		31,193		3			31,504		2
Total	$	1,242,387		100	%	$	1,267,171		100	%

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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 distribution of average deposits and their respective average rates for the periods indicated.

	For the Three Months Ended March 31, 2020					For the Year Ended December 31, 2019
(Amounts in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Interest-bearing demand	$	233,375		0.17	%	$	242,516		0.20	%
Money market		307,587		0.53	%		304,340		0.53	%
Savings		135,504		0.35	%		136,733		0.36	%
Certificates of deposit		147,241		1.27	%		160,550		1.23	%
Interest-bearing deposits		823,707		0.53	%		844,139		0.54	%
Noninterest-bearing demand		420,847					400,588
Total deposits	$	1,244,554		0.09	%	$	1,244,727		0.37	%

Deposit Maturity Schedule

The following table sets forth the maturities of certificates of deposit in amounts of $100,000 or more as of March 31, 2020.

(Amounts in thousands)	March 31,
Maturing in:	2020
Three months or less	$	24,117
Three through six months		21,421
Six through twelve months		24,246
Over twelve months		42,580
Total	$	112,364

We have an agreement with Promontory Interfinancial Network LLC (“Promontory”) which facilitates provision of FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. Promontory’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.

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 Three Months Ended March 31, 2020					For the Year Ended December 31, 2019
(Amounts in thousands)	Average Balance		Average Rate			Average Balance		Average Rate
Federal Home Loan Bank of San Francisco borrowings	$	220		0.21	%	$	9,644		2.56	%
Senior debt, net		—		—	%		960		7.60	%
Subordinated debt, net		9,963		7.43	%		9,935		7.38	%
Junior subordinated debentures		10,310		3.51	%		10,310		4.13	%
Total borrowings	$	20,493		5.38	%	$	30,849		4.80	%

Term Debt

At March 31, 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 March 31, 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 average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the three months ended March 31, 2020 and the year ended December 31, 2019 was $220 thousand and $9.6 million, respectively. 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 for a five-year term. 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 March 31, 2020, the Subordinated Debt had a balance of $10.0 million net of unamortized debt issuance costs. The notes are due in 2025.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 (2.3% at March 31, 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 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. We are participating in the PPP administered through the Small Business Administration (“SBA”). We expect to utilize liquidity provided by the Federal Reserve to fund the program.

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 either wish 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 includes public deposits. We may be required to collateralize a portion of public deposits that exceed FDIC insurance limitations based on the state of California’s risk assessment of the Bank. Public deposits represent 2% of our total deposits at March 31, 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 March 31, 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 $412.4 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 $12.7 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 $35.0 million at March 31, 2020 and had interest rates ranging from 0.50% to 1.18%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions.

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 Small Business Administration’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. Participating institutions will receive preferential capital treatment for the loans that are funded with this borrowing facility.

Bank of Commerce Holdings

The Holding Company is a separate entity from the Bank and must provide for its own liquidity. At March 31, 2020, the Holding Company had cash balances of $1.4 million. Our principal source of cash is dividends received from the Bank. During the first three months of 2020, the Bank paid a dividend of $8.0 million to the Holding Company. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company in the future.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Consolidated Statements of Cash Flows

Net cash of $3.8 million was provided by operating activities during the three months ended March 31, 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:

	●	$2.9 million provision for loan and lease losses.
	●	$506 thousand in depreciation, accretion and amortization.

Net cash of $12.4 million used by investing activities during the three months ended March 31, 2020 consisted principally of:

	●	$29.3 million in proceeds from sale of investment securities.
	●	$17.4 million in proceeds from maturities and payments of investment securities.
	●	$5.9 million in repayments on purchased loan pools.

These sources of cash were partially offset by:

	●	$40.0 million in purchases of investment securities.
	●	$24.9 million in net loan originations.

Net cash of $28.0 million used by financing activities during the three months ended March 31, 2020 principally consisted of:

	●	$16.6 million decrease in deposits.
	●	$8.2 million decrease in certificates.
	●	$12.2 million repurchase of common stock.

These uses were partially offset by:

●

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

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.

For certain qualifying institutions, the FDIC has substituted a Community Bank Leverage Ratio in lieu of the Basel III capital requirements. We qualify under the new reporting rules however, we have opted to continue reporting under the Basel III requirements and we can opt-in to the new reporting rules at any time.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of March 31, 2020, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. 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 March 31, 2020, are presented in the following table.

	March 31, 2020
(Amounts in thousands)	Capital		Actual Ratio			Well Capitalized Requirement			Minimum Capital Requirement			Capital Conservation Buffer			Minimum Capital Ratio plus Capital Conservation Buffer
Holding Company:
Common equity tier 1 capital ratio	$	144,576		12.02	%		n/a			4.50	%		2.50	%		7.00	%
Tier 1 capital ratio	$	154,576		12.85	%		n/a			6.00	%		2.50	%		8.50	%
Total capital ratio	$	179,620		14.93	%		n/a			8.00	%		2.50	%		10.50	%
Tier 1 leverage ratio	$	154,476		10.78	%		n/a			4.00	%		n/a			4.00	%

Bank:
Common equity tier 1 capital ratio	$	164,132		13.66	%		6.50	%		4.50	%		2.50	%		7.00	%
Tier 1 capital ratio	$	164,132		13.66	%		8.00	%		6.00	%		2.50	%		8.50	%
Total capital ratio	$	179,165		14.91	%		10.00	%		8.00	%		2.50	%		10.50	%
Tier 1 leverage ratio	$	164,132		11.45	%		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.

Goodwill and other intangible assets, net totaled $16.3 million at March 31, 2020 and primarily consisted of goodwill and core deposit intangibles recorded as part of previous acquisitions. When calculating capital ratios, goodwill and other intangible assets, net are deducted from Tier 1 capital. Under the Basel III risk based capital rules, the deduction for core deposit intangibles was initially subject to a phase in period which has now expired.

On September 18, 2019, we announced that our Board of Directors had authorized a stock purchase program. The stock purchase program authorized the Company to purchase up to 1.0 million shares of its common stock over a period ending March 31, 2020. On February 21, 2020, we announced that our Board of Directors increased the number of shares that may be purchased from 1.0 million to 1.5 million shares of common stock, and extended the program by one year to March 31, 2021. During the first quarter of 2020 and the fourth quarter of 2019 we repurchased 1,351,922 and 90,501 shares of common stock, respectively. The remaining 57,577 shares under the program were repurchased during the first week of 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 Small Business Administration (“SBA”). We expect to utilize liquidity provided by the Federal Reserve to fund the program. We do not expect that the growth in our assets resulting from the PPP will impact our regulatory capital ratios due to preferential treatment for PPP loans funded by the PPPLF.

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 months ended March 31, 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 will be 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 March 31,
	2020			2019
Dividends declared per common share	$	0.05		$	0.04
Dividend payout ratio		100	%		31	%

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 March 31, 2020 and December 31, 2019:

	March 31,			December 31,
(Amounts in thousands except ratio and per share data)	2020			2019
Total shareholders' equity	$	165,658		$	174,478
Subtract:
Goodwill		11,671			11,671
Other intangible assets, net		4,618			4,809
Tangible common shareholders' equity	$	149,369		$	157,998

Total assets	$	1,455,880		$	1,479,616
Subtract:
Goodwill		11,671			11,671
Other intangible assets, net		4,618			4,809
Tangible assets	$	1,439,591		$	1,463,136

Tangible common equity ratio		10.38	%		10.80	%
Book value per share	$	9.86		$	9.62
Tangible book value per share	$	8.89		$	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.

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 March 31, 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 March 31, 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 three 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 and stocks in general.

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

Not Applicable

The following table provides information about repurchases of common stock by the Company during the three months ended March 31, 2020:

Period	Total number of Common Shares Purchased		Average Price Paid Per Common Share ¹		Total Number of Shares Purchased As Part of Publicly Announced Plan		Maximum Number of Shares That May Yet Be Purchased Under The Plan
1/1/20 - 1/31/20		36,810	$	11.16		127,311		1,372,689
2/1/20 - 2/29/20		378,700	$	11.25		506,011		993,989
3/1/20 - 3/31/20		936,412	$	8.07		1,442,423		57,577
Total for quarter		1,351,922	$	9.05		1,442,423

1 - Average price paid per common share includes commissions.

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 all levels are rapidly taking steps to address and remediate 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 includes many provisions that will impact us and our customers. For example, the CARES Act includes $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program” of the U.S. Small Business Administration and an additional $500 billion for the U.S. Department of Treasury to make loans to distressed American businesses. The various banking agencies have strongly encouraged banks to work with borrowers impacted by the COVID-19 pandemic, and the CARES Act authorizes banks to elect to suspend GAAP for certain loan modifications that would otherwise be classified as a troubled debt restructure (which, in part, allows banks to provide immediate relief to their impacted borrowers). To ease the financial impacts of the COVID-19 pandemic, these agencies have further encouraged banks to consider offering responsible small-dollar loans to their consumers and small businesses affected by the pandemic.

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The CARES Act also provides for direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans, subject to certain income thresholds. These economic impact payments will typically range from $1,200 to $3,400 and are designed to provide a level of financial relief to those most impacted by the COVID-19 pandemic. We anticipate that many of our customers will receive these economic impact payments, which the IRS intends to distribute via direct deposit to their accounts or by mailing paper checks. Overall, the legislative and regulatory landscape surrounding the COVID-19 pandemic is rapidly changing, and we cannot predict with certainty the impact it will have on our operations or business.

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

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	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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: May 8, 2020	/s/ James A. Sundquist
	James A. Sundquist
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)