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 ~~June~~September 30, 2019

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 ☒

~~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~~

Outstanding shares of Common Stock, no par value, as of ~~July 24,~~October 22, 2019 ~~18,213,886:~~18,156,568:

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q

Part I. FINANCIAL INFORMATION
	Item 1. Financial Statements	3
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	3533
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	6258
	Item 4. Controls and Procedures	6258

Part II. OTHER INFORMATION
	Item 1. Legal Proceedings	6359
	Item 1a. Risk Factors	6359
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	6359
	Item 3. Defaults Upon Senior Securities	6359
	Item 4. Mine Safety Disclosures	6359
	Item 5. Other Information	6359
	Item 6. Exhibits	6359

SIGNATURES		6460

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

~~June~~September 30, 2019 and December 31, 2018

	June 30,			December 31,			September 30,			December 31,
(Amounts in thousands, except share information)	2019			2018			2019			2018
Assets:
Cash and due from banks	$	21,306		$	23,692		$	32,505		$	23,692
Interest-bearing deposits in other banks		19,319			23,673			56,099			23,673
Total cash and cash equivalents		40,625			47,365			88,604			47,365

Securities available-for-sale, at fair value		285,819			256,928			272,341			256,928

Loans, net of deferred fees and costs		1,038,729			948,178			1,035,062			948,178
Allowance for loan and lease losses		(12,445	)		(12,292	)		(12,285	)		(12,292	)
Net loans		1,026,284			935,886			1,022,777			935,886

Premises and equipment, net		15,836			13,119			16,084			13,119
Other real estate owned		—			31			58			31
Life insurance		23,449			22,410			23,576			22,410
Deferred tax asset, net		4,791			7,039			4,818			7,039
Goodwill and core deposit intangible, net		16,900			1,841			16,672			1,841
Other assets		28,282			22,485			27,497			22,485
Total assets	$	1,441,986		$	1,307,104		$	1,472,427		$	1,307,104

Liabilities and shareholders' equity:
Liabilities:
Demand - noninterest-bearing	$	397,349		$	347,199		$	412,410		$	347,199
Demand - interest-bearing		238,175			252,202			239,547			252,202
Money market		300,847			265,093			317,120			265,093
Savings		138,591			114,840			137,441			114,840
Certificates of deposit		160,556			152,382			155,621			152,382
Total deposits		1,235,518			1,131,716			1,262,139			1,131,716

Term debt:
Other borrowings		10,000			13,496			10,000			13,496
Less unamortized debt issuance costs		(67	)		(91	)		(55	)		(91	)
Net term debt		9,933			13,405			9,945			13,405

Junior subordinated debentures		10,310			10,310			10,310			10,310
Other liabilities		18,372			13,352			18,396			13,352
Total liabilities		1,274,133			1,168,783			1,300,790			1,168,783

Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 18,213,886 as of June 30, 2019 and 16,333,502 as of December 31, 2018		72,087			52,284
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 18,211,568 as of September 30, 2019 and 16,333,502 as of December 31, 2018								72,200			52,284
Retained earnings		93,363			89,045			97,100			89,045
Accumulated other comprehensive income (loss), net of tax		2,403			(3,008	)		2,337			(3,008	)
Total shareholders' equity		167,853			138,321			171,637			138,321
Total liabilities and shareholders' equity	$	1,441,986		$	1,307,104		$	1,472,427		$	1,307,104

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

For the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018

	For the Three Months Ended				For the Six Months Ended				For the Three Months Ended						For the Nine Months Ended
	June 30,				June 30,				September 30,						September 30,
(Amounts in thousands, except per share information)	2019		2018		2019		2018		2019			2018			2019		2018
Interest income:
Interest and fees on loans	$	12,847	$	11,164	$	24,878	$	21,893	$	13,013		$	11,568		$	37,891	$	33,461
Interest on taxable securities		1,733		1,278		3,497		2,487		1,609			1,209			5,106		3,696
Interest on tax-exempt securities		328		413		715		876		271			400			986		1,276
Interest on interest-bearing deposits in other banks		219		135		464		264		308			254			772		518
Total interest income		15,127		12,990		29,554		25,520		15,201			13,431			44,755		38,951
Interest expense:
Interest on demand - interest-bearing		129		80		255		169		117			104			372		273
Interest on money market		380		135		669		267		451			172			1,120		439
Interest on savings		123		64		234		123		131			73			365		196
Interest on certificates of deposit		497		488		987		983		491			465			1,478		1,448
Interest on Federal Home Loan Bank of San Francisco borrowings		192		267		247		314		—			121			247		435
Interest on other borrowings		201		279		440		560		183			265			623		825
Interest on junior subordinated debentures		110		97		223		179		106			104			329		283
Total interest expense		1,632		1,410		3,055		2,595		1,479			1,304			4,534		3,899
Net interest income		13,495		11,580		26,499		22,925		13,722			12,127			40,221		35,052
Provision for loan and lease losses		—		—		—		—		—			—			—		—
Net interest income after provision for loan and lease losses		13,495		11,580		26,499		22,925		13,722			12,127			40,221		35,052
Noninterest income:
Service charges on deposit accounts		187		175		355		351		177			170			532		521
ATM and point of sale fees		318		300		583		566		293			282			876		848
Fees on payroll and benefit processing		157		146		328		315
Payroll and benefit processing fees										158			159			486		474
Life insurance		155		127		284		256		126			128			410		384
Gain on sale of investment securities, net		33		4		125		40		12			1			137		41
Federal Home Loan Bank of San Francisco dividends		124		95		245		175		131			104			376		279
Gain on sale of OREO		18		—		41		16
(Loss) Gain on sale of OREO										—			(7	)		41		9
Other income		108		115		196		225		109			106			305		331
Total noninterest income		1,100		962		2,157		1,944		1,006			943			3,163		2,887
Noninterest expense:
Salaries and related benefits		5,146		4,513		10,875		9,368		5,005			4,529			15,880		13,897
Premises and equipment		945		1,016		1,937		2,087		950			1,017			2,887		3,104
Federal Deposit Insurance Corporation insurance premium		95		93		195		189		(104	)		94			91		283
Data processing fees		621		471		1,180		903
Professional service fees		535		314		838		659
Data processing										565			518			1,745		1,421
Professional services										392			336			1,230		995
Telecommunications		180		178		353		394		194			55			547		449
Acquisition costs		376		—		2,306		—
Acquisition and merger										(113	)		42			2,193		42
Other expenses		1,713		1,086		2,850		2,104		1,411			1,043			4,261		3,147
Total noninterest expense		9,611		7,671		20,534		15,704		8,300			7,634			28,834		23,338
Income before provision for income taxes		4,984		4,871		8,122		9,165		6,428			5,436			14,550		14,601
Provision for income taxes		1,340		1,253		2,172		2,306		1,786			1,404			3,958		3,710
Net income	$	3,644	$	3,618	$	5,950	$	6,859	$	4,642		$	4,032		$	10,592	$	10,891

Earnings per share - basic	$	0.20	$	0.22	$	0.33	$	0.42	$	0.26		$	0.25		$	0.59	$	0.67
Weighted average shares - basic		18,134		16,245		17,816		16,237		18,130			16,252			17,918		16,242
Earnings per share - diluted	$	0.20	$	0.22	$	0.33	$	0.42	$	0.26		$	0.25		$	0.59	$	0.67
Weighted average shares - diluted		18,194		16,325		17,878		16,319		18,196			16,342			17,981		16,327

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 and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018

	For the Three Months Ended						For the Six Months Ended						For the Three Months Ended						For the Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
(Amounts in thousands)	2019			2018			2019			2018			2019			2018			2019			2018
Net income	$	3,644		$	3,618		$	5,950		$	6,859		$	4,642		$	4,032		$	10,592		$	10,891

Available-for-sale securities:
Unrealized gains (losses) arising during the period		4,145			(984	)		7,806			(4,391	)
Unrealized (losses) gains arising during the period														(81	)		(906	)		7,725			(5,297	)
Income taxes		(1,225	)		291			(2,307	)		1,298			23			268			(2,284	)		1,566
Change in unrealized gains (losses), net of tax		2,920			(693	)		5,499			(3,093	)
Change in unrealized (losses) gains, net of tax														(58	)		(638	)		5,441			(3,731	)

Reclassification adjustment for realized gains included in net income		(33	)		(4	)		(125	)		(40	)		(12	)		(1	)		(137	)		(41	)
Income taxes		10			1			37			11			4			—			41			11
Realized gains, net of tax		(23	)		(3	)		(88	)		(29	)		(8	)		(1	)		(96	)		(30	)
Net increase (decrease) in unrealized gains (losses) on available-for-sale securities		2,897			(696	)		5,411			(3,122	)
Net (decrease) increase in unrealized gains (losses) on available-for-sale securities														(66	)		(639	)		5,345			(3,761	)
Other comprehensive income (loss)		2,897			(696	)		5,411			(3,122	)		(66	)		(639	)		5,345			(3,761	)
Comprehensive income – Bank of Commerce Holdings	$	6,541		$	2,922		$	11,361		$	3,737		$	4,576		$	3,393		$	15,937		$	7,130

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

For the twelve months ended December 31, 2018 and ~~six~~nine months ended ~~June~~September 30, 2019 (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, 2018		16,272	$	51,830		$	75,700		$	(266	)	$	127,264
Net income		—		—			3,241			—			3,241
Reclassification of accumulated other comprehensive income due to tax rate change		—		—			52			(52	)		—
Other comprehensive loss, net of tax		—		—			—			(2,426	)		(2,426	)
Comprehensive income		—		—			—			—			815
Dividend declared on common stock ($0.03 per share)		—		—			(486	)		—			(486	)
Stock compensation grants		5		45			—			—			45
Restricted stock granted, net		20		—			—			—			—
Stock options exercised		19		113			—			—			113
Compensation expense associated with stock options		—		3			—			—			3
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—		(32	)		—			—			(32	)
Balance at March 31, 2018		16,316	$	51,959		$	78,507		$	(2,744	)	$	127,722
Net income		—		—			3,618			—			3,618
Other comprehensive loss, net of tax		—		—			—			(696	)		(696	)
Comprehensive income		—		—			—			—			2,922
Dividend declared on common stock ($0.04 per share)		—		—			(650	)		—			(650	)
Stock options exercised		2		10			—			—			10
Compensation expense associated with stock options		—		2			—			—			2
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—		72			—			—			72
Balance at June 30, 2018		16,318	$	52,043		$	81,475		$	(3,440	)	$	130,078
Net income		—		—			4,032			—			4,032
Other comprehensive loss, net of tax		—		—			—			(639	)		(639	)
Comprehensive income		—		—			—			—			3,393
Dividend declared on common stock ($0.04 per share)		—		—			(650	)		—			(650	)
Stock options exercised		12		74			—			—			74
Compensation expense associated with stock options		—		3			—			—			3
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—		71			—			—			71
Balance at September 30, 2018		16,330	$	52,191		$	84,857		$	(4,079	)	$	132,969
Net income		—		—			4,839			—			4,839
Other comprehensive income, net of tax		—		—			—			1,071			1,071
Comprehensive income		—		—			—			—			5,910
Dividend on common stock ($0.04 per share)		—		—			(651	)		—			(651	)
Stock options exercised		4		19			—			—			19
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—		74			—			—			74
Balance at December 31, 2018		16,334	$	52,284		$	89,045		$	(3,008	)	$	138,321

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

									Accumulated															Accumulated
									Other															Other
			Common						Comprehensive									Common						Comprehensive
	Common		Stock			Retained			(Loss) Income						Common			Stock			Retained			(Loss) Income
(Amounts in thousands except per share information)	Shares		Amount			Earnings			Net of Tax			Total			Shares			Amount			Earnings			Net of Tax			Total
Balance at January 1, 2019		16,334	$	52,284		$	89,045		$	(3,008	)	$	138,321			16,334		$	52,284		$	89,045		$	(3,008	)	$	138,321
Net income		—		—			2,306			—			2,306			—			—			2,306			—			2,306
Other comprehensive income, net of tax		—		—			—			2,514			2,514			—			—			—			2,514			2,514
Comprehensive income		—		—			—			—			4,820			—			—			—			—			4,820
Dividend declared on common stock ($0.04 per share)		—		—			(725	)		—			(725	)		—			—			(725	)		—			(725	)
Stock issued for Merchants acquisition		1,834		19,606			—			—			19,606			1,834			19,606			—			—			19,606
Stock compensation grants		6		58			—			—			58			6			58			—			—			58
Restricted stock granted, net		31		—			—			—			—			31			—			—			—			—
Stock options exercised		8		40			—			—			40			8			40			—			—			40
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—		(22	)		—			—			(22	)		—			(22	)		—			—			(22	)
Balance at March 31, 2019		18,213	$	71,966		$	90,626		$	(494	)	$	162,098			18,213		$	71,966		$	90,626		$	(494	)	$	162,098
Net income		—		—			3,644			—			3,644			—			—			3,644			—			3,644
Other comprehensive income, net of tax		—		—			—			2,897			2,897			—			—			—			2,897			2,897
Comprehensive income		—		—			—			—			6,541			—			—			—			—			6,541
Dividend declared on common stock ($0.05 per share)		—		—			(907	)		—			(907	)		—			—			(907	)		—			(907	)
Restricted stock granted, net		1		—			—			—			—			1			—			—			—			—
Compensation expense associated with restricted stock, net of cash paid for shares surrendered for tax-withholding purposes		—		121			—			—			121			—			121			—			—			121
Balance at June 30, 2019		18,214	$	72,087		$	93,363		$	2,403		$	167,853			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 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

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

For the ~~six~~nine months ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018

	For the Six Months Ended						For the Nine Months Ended
	June 30,						September 30,
(Amounts in thousands)	2019			2018			2019			2018
Cash flows from operating activities:
Net income	$	5,950		$	6,859		$	10,592		$	10,891
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for unfunded commitments		(100	)		—
Provision for depreciation and amortization		741			945			1,055			1,361
Amortization of core deposit intangible		337			110			529			166
Amortization of debt issuance costs		24			23			36			35
Compensation expense associated with stock options		—			5			—			8
Compensation expense associated with restricted stock		193			143			306			214
Tax benefits from vesting of restricted stock		(6	)		(35	)		(6	)		(43	)
Net gain on sale or call of securities		(125	)		(40	)		(137	)		(41	)
Amortization of investment premiums and accretion of discounts, net		677			963			1,052			1,448
Amortization of premiums and accretion of discounts on acquired loans, net		(299	)		(343	)		(1,201	)		(372	)
Gain on disposal of fixed assets		—			(5	)		—			(5	)
Gain on sale of OREO		(41	)		(16	)
(Gain) on sale of OREO								(41	)		(9	)
Increase in cash surrender value of life insurance		(284	)		(256	)		(410	)		(384	)
Increase (decrease) in deferred compensation and salary continuation plans		19			(36	)
Deferred compensation, salary continuation and severance plan payments								(1,081	)		(732	)
Increase in deferred compensation, salary continuation and severance plans								1,604			732
Increase in deferred loan fees and costs		(78	)		(53	)		(53	)		(47	)
Decrease in other assets		884			386			1,516			668
Decrease in other liabilities		(28	)		(767	)
(Decrease) increase in other liabilities								(351	)		936
Net cash provided by operating activities		7,864			7,883			13,410			14,826

Cash flows from investing activities:
Proceeds from maturities and payments of available-for-sale securities		24,616			14,662			47,544			23,932
Proceeds from sale of available-for-sale securities		85,740			20,505			99,635			27,567
Purchases of available-for-sale securities		(24,778	)		(21,501	)		(48,648	)		(31,293	)
Investment in qualified affordable housing partnerships		—			(31	)		—			(32	)
Net purchase of Federal Home Loan Bank of San Francisco stock		(34	)		(1,355	)		(34	)		(1,355	)
Loan originations, net of principal repayments		(22,929	)		(61,096	)		(27,697	)		(53,642	)
Net repayment on loan pools		18,171			4,781			27,265			6,696
Purchase of premises and equipment		(1,262	)		(227	)		(1,823	)		(281	)
Proceeds from the sale of OREO		87			51			87			48
Acquisition of Merchants Holding Company, net of cash paid		(2,875	)		—			(2,875	)		—
Net cash provided (used) by investing activities		76,736			(44,211	)		93,454			(28,360	)

See accompanying notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Cash Flows (Unaudited) (Continued)

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2019			2018
Cash flows from financing activities:
Net (decrease) increase in demand, money market and savings	$	(25,029	)	$	69,980
Net decrease in certificates of deposit		(34,764	)		(27,951	)
Advances on term debt		180,160			230,160
Repayment of term debt		(183,656	)		(232,860	)
Proceeds from stock options exercised		40			197
Cash paid for shares surrendered for tax-withholding purposes		(94	)		(103	)
Cash dividends paid on common stock		(2,282	)		(1,623	)
Net cash (used) provided by financing activities		(65,625	)		37,800

Net increase in cash and cash equivalents		41,239			24,266
Cash and cash equivalents at beginning of year		47,365			66,970
Cash and cash equivalents at end of period	$	88,604		$	91,236

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2019			2018
Supplemental disclosures of cash flow activity:
Cash paid during the period for:
Income taxes	$	3,480		$	2,725
Interest	$	4,336		$	3,735
Operating leases	$	661		$	632
Supplemental disclosures of non cash investing activities:
Transfer of loans to other real estate owned	$	74		$	140

Unrealized gain (loss) on investment securities available-for-sale	$	7,588		$	(5,338	)
Changes in net deferred tax asset related to changes in unrealized (gain) loss on investment securities available-for-sale		(2,243	)		1,577
Changes in accumulated other comprehensive income due to unrealized gain (loss) on investment securities available-for-sale, net of tax	$	5,345		$	(3,761	)

Reclassification of accumulated other comprehensive income due to tax rate change	$	—		$	52

Supplemental disclosures of non cash financing activities:
Stock issued under employee plans	$	58		$	45
Cash dividend declared on common shares and payable after period-end	$	905		$	650
Right-of-use lease asset recorded on new leases	$	267		$	—
Right-of-use lease asset recorded on adoption of ASU No. 2016-02	$	3,998		$	—
Lease liability recorded on adoption of ASU No. 2016-02	$	4,363		$	—
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

~~Consolidated Statements of Cash Flows (Unaudited) (Continued)~~

For the Six Months Ended

June 30,

(Amounts in thousands)

2019

2018

Cash flows from financing activities:

Net decrease in demand, money market and savings
$ (56,585 ) $ (25,873 )
Net decrease in certificates of deposit
(29,829 ) (22,330 )
Advances on term debt
180,000 210,000
Repayment of term debt
(183,496 ) (151,800 )
Proceeds from stock options exercised
40 123
Cash paid for shares surrendered for tax-withholding purposes
(94 ) (103 )
Cash dividends paid on common stock
(1,376 ) (973 )
Net cash (used) provided by financing activities
(91,340 ) 9,044

Net decrease in cash and cash equivalents
(6,740 ) (27,284 )
Cash and cash equivalents at beginning of year
47,365 66,970
Cash and cash equivalents at end of period
$ 40,625 $ 39,686

~~See accompanying notes to consolidated financial statements.~~

~~Table of Contents~~

~~BANK OF COMMERCE HOLDINGS & SUBSIDIARIES~~

~~Consolidated Statements of Cash Flows (Unaudited) (Continued)~~

~~For the~~ ~~six months ended June 30, 2019 and June 30, 2018~~

For the Six Months Ended

June 30,

(Amounts in thousands)

2019

2018

Supplemental disclosures of cash flow activity:

Cash paid during the period for:

Income taxes
$ 2,562 $ 2,725
Interest
$ 3,033 $ 2,560
Operating leases
$ 432 $ 419
Supplemental disclosures of non cash investing activities:

Transfer of loans to other real estate owned
$ 15 $ 140

Unrealized gain (loss) on investment securities available-for-sale
$ 7,681 $ (4,431 )
Changes in net deferred tax asset related to changes in unrealized (gain) loss on investment securities available-for-sale
(2,270 ) 1,309
Changes in accumulated other comprehensive income due to unrealized gain (loss) on investment securities available-for-sale, net of tax
$ 5,411 $ (3,122 )

Reclassification of accumulated other comprehensive income due to tax rate change
$ — $ 52

Supplemental disclosures of non cash financing activities:

Stock issued under employee plans
$ 58 $ 45
Cash dividend declared on common shares and payable after period-end
$ 907 $ 650
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
$ 215,018 $ —
Goodwill
$ 11,043 $ —
Liabilities assumed - fair value
$ 191,154 $ —

~~See accompanying notes to consolidated financial statements~~.

~~Table of Contents~~

~~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). As previously announced, 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 ~~June~~September 30, 2019 and December 31, 2018 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 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 2018 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2019 interim period shown in this report is 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 ~~June~~September 30, 2019 and December 31, 2018, 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

ASU No. 2016-02

Description - In February of 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This Update was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements on a retrospective basis. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases.

Methods and timing of adoption – For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July of 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842). The standard contained improvements to ASU No. 2016-02 that permitted presentation on a prospective basis.

Financial statement impact – We implemented the new leasing standard on January 1, 2019 on a prospective basis and recorded a new lease asset and related lease liability of approximately $4.4 million related to our current operating leases. The right-of-use asset was also reduced by $458 thousand for amounts recognized previously as part of the single lease cost.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 2. COMMON STOCK OUTSTANDING AND EARNINGS PER SHARE

On January 31, 2019, we issued 1,834,142 shares of common stock, and paid $15.3 million in cash for our acquisition of Merchants Holding Company (“Merchants”) at which point Merchants shareholders held, in the aggregate, approximately 10% of our outstanding common stock. See Note 10 Acquisition in these Notes to Consolidated Financial Statements for additional information on the acquisition

~~Table of Contents~~

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

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

The following is a computation of basic and diluted earnings per share for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

	For the Three Months Ended				For the Six Months Ended				For the Three Months Ended				For the Nine Months Ended
(Amounts in thousands, except per share information)	June 30,				June 30,				September 30,				September 30,
Earnings Per Share	2019		2018		2019		2018		2019		2018		2019		2018
Numerators:
Net income	$	3,644	$	3,618	$	5,950	$	6,859	$	4,642	$	4,032	$	10,592	$	10,891
Denominators:
Weighted average number of common shares outstanding - basic⁽¹⁾		18,134		16,245		17,816		16,237		18,130		16,252		17,918		16,242
Effect of potentially dilutive common shares ⁽²⁾		60		80		62		82		66		90		63		85
Weighted average number of common shares outstanding - diluted		18,194		16,325		17,878		16,319		18,196		16,342		17,981		16,327
Earnings per common share:
Basic	$	0.20	$	0.22	$	0.33	$	0.42	$	0.26	$	0.25	$	0.59	$	0.67
Diluted	$	0.20	$	0.22	$	0.33	$	0.42	$	0.26	$	0.25	$	0.59	$	0.67
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 stock repurchase program authorizes the Company to purchase up to one million shares of its common stock over a period ending March 31, 2020 and is effective immediately. Purchases may be made in the open market, including in block trades, or through privately negotiated transactions, from time to time when management determines that market conditions and other factors warrant such purchases. There is no guarantee as to the exact number of shares to be purchased, and the stock repurchase program may be modified, suspended, or terminated without prior notice. There were no repurchases during the third quarter of 2019.

NOTE 3. SECURITIES

The following tables present the amortized costs, unrealized gains, unrealized losses and estimated fair values of our investment securities as of ~~June~~September 30, 2019, and December 31, 2018.

As of June 30, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Estimated

(Amounts in thousands)

Cost

Gain

Loss

Fair Value

Available-for-sale securities:

U.S. government & agencies
$ 44,334 $ 531 $ (28 ) $ 44,837
Obligations of state and political subdivisions
43,585 1,434 (16 ) 45,003
Residential mortgage-backed securities and collateralized mortgage obligations
166,683 2,068 (666 ) 168,085
Corporate securities
3,014 — (36 ) 2,978
Commercial mortgage-backed securities
24,744 260 (136 ) 24,868
Other asset-backed securities
48 — — 48
Total
$ 282,408 $ 4,293 $ (882 ) $ 285,819

	As of December 31, 2018									As of September 30, 2019
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated		Amortized		Unrealized		Unrealized			Estimated
(Amounts in thousands)	Cost		Gain		Loss			Fair Value		Cost		Gain		Loss			Fair Value
Available-for-sale securities:
U.S. government & agencies	$	40,215	$	202	$	(330	)	$	40,087	$	39,955	$	530	$	(18	)	$	40,467
Obligations of state and political subdivisions		50,037		1,082		(589	)		50,530		37,401		1,627		(24	)		39,004
Residential mortgage-backed securities and collateralized mortgage obligations		142,355		129		(3,981	)		138,503		164,975		1,883		(864	)		165,994
Corporate securities		3,022		—		(100	)		2,922		3,010		4		(22	)		2,992
Commercial mortgage-backed securities		25,446		17		(701	)		24,762		22,621		273		(72	)		22,822
Other asset-backed securities		123		1		—			124		1,061		1		—			1,062
Total	$	261,198	$	1,431	$	(5,701	)	$	256,928	$	269,023	$	4,318	$	(1,000	)	$	272,341

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(Amounts in thousands)	Cost		Gain		Loss			Fair Value
Available-for-sale securities:
U.S. government & agencies	$	40,215	$	202	$	(330	)	$	40,087
Obligations of state and political subdivisions		50,037		1,082		(589	)		50,530
Residential mortgage-backed securities and collateralized mortgage obligations		142,355		129		(3,981	)		138,503
Corporate securities		3,022		—		(100	)		2,922
Commercial mortgage-backed securities		25,446		17		(701	)		24,762
Other asset-backed securities		123		1		—			124
Total	$	261,198	$	1,431	$	(5,701	)	$	256,928

The following table presents the expected maturities of investment securities at ~~June~~September 30, 2019.

	Available-For-Sale				Available-For-Sale
(Amounts in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	3,894	$	3,895	$	7,404	$	7,391
After one year through five years		125,541		127,308		154,239		155,696
After five years through ten years		84,830		85,406		62,183		62,906
After ten years		68,143		69,210		45,197		46,348
Total	$	282,408	$	285,819	$	269,023	$	272,341

The amortized cost and fair value 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 ~~June~~September 30, 2019 and December 31, 2018 securities with a fair value of ~~$74.3~~$76.1 million and $68.8 million, respectively, were pledged as collateral to secure public fund deposits, Federal Home Loan Bank of San Francisco borrowings and for other purposes as required by law.

The following table presents the cash proceeds from sales of investment securities and the associated gross realized gains and gross realized losses that have been included in earnings for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

	Three Months Ended June 30,					Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2019			2018		2019			2018			2019			2018			2019			2018
Proceeds from sales of investment securities	$	18,338		$	1,107	$	85,740		$	20,505		$	13,895		$	7,062		$	99,635		$	27,567

Gross realized gains on sales of investment securities:
U.S. government & agencies	$	6		$	—	$	39		$	—		$	10		$	—		$	48		$	—
Obligations of state and political subdivisions		115			4		294			156			10			104			305			260
Residential mortgage-backed securities and collateralized mortgage obligations		16			—		64			—			22			—			86			—
Commercial mortgage-backed securities		2			—		2			—			5			—			7			—
Total gross realized gains on sales of investment securities		139			4		399			156			47			104			446			260

Gross realized losses on sales of investment securities:
U.S. government & agencies		—			—		(4	)		—			(9	)		(43	)		(13	)		(43	)
Obligations of state and political subdivisions		(12	)		—		(90	)		(71	)		(6	)		(1	)		(96	)		(72	)
Residential mortgage-backed securities and collateralized mortgage obligations		(64	)		—		(149	)		—			(9	)		(40	)		(157	)		(40	)
Commercial mortgage-backed securities		(30	)		—		(31	)		—			(11	)		(19	)		(43	)		(19	)
Other asset-backed securities		—			—		—			(45	)		—			—			—			(45	)
Total gross realized losses on sales of investment securities		(106	)		—		(274	)		(116	)		(35	)		(103	)		(309	)		(219	)
Gain on sales of investment securities, net	$	33		$	4	$	125		$	40		$	12		$	1		$	137		$	41

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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 ~~June~~September 30, 2019 and December 31, 2018 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.

	As of June 30, 2019															As of September 30, 2019
	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
Available-for-sale securities:
U.S. government & agencies	$	3,462	$	(22	)	$	1,958	$	(6	)	$	5,420	$	(28	)	$	4,233	$	(16	)	$	415	$	(2	)	$	4,648	$	(18	)
Obligations of states and political subdivisions		409		(1	)		2,070		(15	)		2,479		(16	)		1,728		(24	)		—		—			1,728		(24	)
Residential mortgage-backed securities and collateralized mortgage obligations		4,811		(11	)		56,087		(655	)		60,898		(666	)		47,359		(350	)		32,173		(514	)		79,532		(864	)
Corporate securities		—		—			2,978		(36	)		2,978		(36	)		—		—			978		(22	)		978		(22	)
Commercial mortgage-backed securities		—		—			8,812		(136	)		8,812		(136	)		2,462		(20	)		4,729		(52	)		7,191		(72	)
Total temporarily impaired securities	$	8,682	$	(34	)	$	71,905	$	(848	)	$	80,587	$	(882	)	$	55,782	$	(410	)	$	38,295	$	(590	)	$	94,077	$	(1,000	)

~~Table of Contents~~

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

	As of December 31, 2018
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Loss			Value		Loss			Value		Loss
Available-for-sale securities:
U.S. government & agencies	$	7,223	$	(39	)	$	12,274	$	(291	)	$	19,497	$	(330	)
Obligations of states and political subdivisions		5,545		(40	)		16,320		(549	)		21,865		(589	)
Residential mortgage-backed securities and collateralized mortgage obligations		21,791		(183	)		93,038		(3,798	)		114,829		(3,981	)
Corporate securities		—		—			2,922		(100	)		2,922		(100	)
Commercial mortgage-backed securities		1,548		(7	)		20,176		(694	)		21,724		(701	)
Total temporarily impaired securities	$	36,107	$	(269	)	$	144,730	$	(5,432	)	$	180,837	$	(5,701	)

At ~~June~~September 30, 2019 and December 31, 2018, the number of securities that were in an unrealized loss position was 6978 and 163, 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 ~~June~~September 30, 2019 and December 31, 2018.

		Characteristics of securities in unrealized loss positions at
Available-for-sale securities:		~~June~~September 30, 2019 and December 31, 2018
U.S. government & agencies		Direct obligations of the U.S. Government or obligations guaranteed by U.S. Government agencies.
Obligations of states 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 ~~June~~September 30, 2019 and December 31, 2018, ~~82%~~76% and 66% 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 ~~June~~September 30, 2019 and December 31, 2018, ~~95%~~100% and 90% were issued or guaranteed by U.S. government sponsored entities, respectively.
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 ~~June~~September 30, 2019, and December 31, 2018.

(Amounts in thousands)	June 30,			December 31,			September 30,			December 31,
Loan Portfolio	2019			2018			2019			2018
Commercial	$	152,303		$	135,543		$	152,195		$	135,543
Commercial real estate:
Real estate - construction and land development		37,685			22,563			35,606			22,563
Real estate - commercial non-owner occupied		468,706			433,708			475,678			433,708
Real estate - commercial owner occupied		210,711			204,622			210,767			204,622
Residential real estate:
Real estate - residential - Individual Tax Identification Number (“ITIN”)		35,162			37,446			34,036			37,446
Real estate - residential - 1-4 family mortgage		67,092			34,366			64,747			34,366
Real estate - residential - equity lines		23,656			26,958			22,729			26,958
Consumer and other		41,409			51,045			37,324			51,045
Gross loans		1,036,724			946,251			1,033,082			946,251
Deferred fees and costs		2,005			1,927			1,980			1,927
Loans, net of deferred fees and costs		1,038,729			948,178			1,035,062			948,178
Allowance for loan and lease losses		(12,445	)		(12,292	)		(12,285	)		(12,292	)
Net loans	$	1,026,284		$	935,886		$	1,022,777		$	935,886

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 ~~$517.6~~$527.5 million and $490.2 million at ~~June~~September 30, 2019 and December 31, 2018, 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 ~~June~~September 30, 2019, and December 31, 2018. Gross loan balances in the table above include net purchase discounts of ~~$1.9~~$1.7 million and $2.5 million as of ~~June~~September 30, 2019, and December 31, ~~2018.~~2018, respectively

Gross loan balances in the table above at ~~June~~September 30, 2019 include a fair value discount of ~~$2.0~~$1.9 million for loans acquired from Merchants during the first quarter of 2019. We recorded ~~$195~~$193 thousand and ~~$243~~$431 thousand in accretion of the discount for these loans during the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively.

Past Due Loans

Past due loans (gross), segregated by loan portfolio were as follows, as of ~~June~~September 30, 2019, and December 31, 2018.

													Recorded						90 or								Recorded
(Amounts in thousands)	30-59		60-89		90 or Greater								Investment >		30-59		60-89		Greater								Investment >
Past Due Loans at	Days Past		Days Past		Days Past		Total Past						90 Days and		Days Past		Days Past		Days Past		Total Past						90 Days and
June 30, 2019	Due		Due		Due		Due		Current		Total		Accruing
September 30, 2019															Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	31	$	56	$	—	$	87	$	152,216	$	152,303	$	—	$	19	$	2	$	36	$	57	$	152,138	$	152,195	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		37,685		37,685		—		—		—		—		—		35,606		35,606		—
Real estate - commercial non-owner occupied		10,315		374		—		10,689		458,017		468,706		—		—		—		—		—		475,678		475,678		—
Real estate - commercial owner occupied		—		—		—		—		210,711		210,711		—		—		—		—		—		210,767		210,767		—
Residential real estate:
Real estate - residential - ITIN		200		181		213		594		34,568		35,162		—		142		—		174		316		33,720		34,036		—
Real estate - residential - 1-4 family mortgage		—		—		—		—		67,092		67,092		—		—		—		—		—		64,747		64,747		—
Real estate - residential - equity lines		165		—		—		165		23,491		23,656		—		163		—		—		163		22,566		22,729		—
Consumer and other		164		41		—		205		41,204		41,409		—		99		101		—		200		37,124		37,324		—
Total	$	10,875	$	652	$	213	$	11,740	$	1,024,984	$	1,036,724	$	—	$	423	$	103	$	210	$	736	$	1,032,346	$	1,033,082	$	—

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Notes to Consolidated Financial Statements (Unaudited)

													Recorded						90 or								Recorded
(Amounts in thousands)	30-59		60-89		90 or Greater								Investment >		30-59		60-89		Greater								Investment >
Past Due Loans at	Days Past		Days Past		Days Past		Total Past						90 Days and		Days Past		Days Past		Days Past		Total Past						90 Days and
December 31, 2018	Due		Due		Due		Due		Current		Total		Accruing		Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	—	$	—	$	—	$	—	$	135,543	$	135,543	$	—	$	—	$	—	$	—	$	—	$	135,543	$	135,543	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		22,563		22,563		—		—		—		—		—		22,563		22,563		—
Real estate - commercial non-owner occupied		10,878		—		548		11,426		422,282		433,708		—		10,878		—		548		11,426		422,282		433,708		—
Real estate - commercial owner occupied		688		—		—		688		203,934		204,622		—		688		—		—		688		203,934		204,622		—
Residential real estate:
Real estate - residential - ITIN		184		279		259		722		36,724		37,446		—		184		279		259		722		36,724		37,446		—
Real estate - residential - 1-4 family mortgage		—		—		185		185		34,181		34,366		—		—		—		185		185		34,181		34,366		—
Real estate - residential - equity lines		90		—		—		90		26,868		26,958		—		90		—		—		90		26,868		26,958		—
Consumer and other		534		263		—		797		50,248		51,045		—		534		263		—		797		50,248		51,045		—
Total	$	12,374	$	542	$	992	$	13,908	$	932,343	$	946,251	$	—	$	12,374	$	542	$	992	$	13,908	$	932,343	$	946,251	$	—

Nonaccrual Loans

Nonaccrual loans, segregated by loan portfolio, were as follows as of ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)	June 30,		December 31,		September 30,		December 31,
Nonaccrual Loans	2019		2018		2019		2018
Commercial	$	194	$	959	$	139	$	959
Commercial real estate:
Real estate - commercial non-owner occupied		10,690		548		10,099		548
Residential real estate:
Real estate - residential - ITIN		2,389		2,388		2,339		2,388
Real estate - residential - 1-4 family mortgage		217		185		198		185
Real estate - residential - equity lines		—		43		—		43
Consumer and other		22		23		21		23
Total	$	13,512	$	4,146	$	12,796	$	4,146

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately ~~$229~~$115 thousand and ~~$43~~$40 thousand for the three months ended ~~June~~September 30, 2019 and 2018, respectively. We would have recognized additional interest income, net of tax, of approximately ~~$376~~$484 thousand and ~~$84~~$121 thousand for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

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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 ~~June~~September 30, 2019 and December 31, 2018.

	As of June 30, 2019						As of September 30, 2019
			Unpaid						Unpaid
(Amounts in thousands)	Recorded		Principal		Related		Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	227	$	522	$	—	$	172	$	375	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		10,690		11,136		—		10,099		10,697		—
Residential real estate:
Real estate - residential - ITIN		6,227		7,917		—		5,953		7,636		—
Real estate - residential - 1-4 family mortgage		217		324		—		198		316		—
Total with no related allowance recorded	$	17,361	$	19,899	$	—	$	16,422	$	19,024	$	—

With an allowance recorded:
Commercial	$	1,059	$	1,060	$	385	$	596	$	598	$	170
Commercial real estate:
Real estate - commercial non-owner occupied		791		791		169
Residential real estate:
Real estate - residential - ITIN		462		462		45		458		458		41
Real estate - residential - equity lines		242		242		121		236		236		118
Consumer and other		22		22		7		21		21		6
Total with an allowance recorded	$	2,576	$	2,577	$	727	$	1,311	$	1,313	$	335

By loan portfolio:
Commercial	$	1,286	$	1,582	$	385	$	768	$	973	$	170
Commercial real estate		11,481		11,927		169		10,099		10,697		—
Residential real estate		7,148		8,945		166		6,845		8,646		159
Consumer and other		22		22		7		21		21		6
Total impaired loans	$	19,937	$	22,476	$	727	$	17,733	$	20,337	$	335

							As of December 31, 2018
	As of December 31, 2018								Unpaid
(Amounts in thousands)	Recorded		Principal		Related		Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	51	$	69	$	—	$	51	$	69	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		548		548		—		548		548		—
Residential real estate:
Real estate - residential - ITIN		6,138		7,676		—		6,138		7,676		—
Real estate - residential - 1-4 family mortgage		185		223		—		185		223		—
Real estate - residential - equity lines		43		48		—		43		48		—
Total with no related allowance recorded	$	6,965	$	8,564	$	—	$	6,965	$	8,564	$	—

With an allowance recorded:
Commercial	$	2,132	$	2,256	$	748	$	2,132	$	2,256	$	748
Commercial real estate:
Real estate - commercial non-owner occupied		795		795		209		795		795		209
Residential real estate:
Real estate - residential - ITIN		734		772		91		734		772		91
Real estate - residential - equity lines		363		363		182		363		363		182
Consumer and other		23		23		7		23		23		7
Total with an allowance recorded	$	4,047	$	4,209	$	1,237	$	4,047	$	4,209	$	1,237

By loan portfolio:
Commercial	$	2,183	$	2,325	$	748	$	2,183	$	2,325	$	748
Commercial real estate		1,343		1,343		209		1,343		1,343		209
Residential real estate		7,463		9,082		273		7,463		9,082		273
Consumer and other		23		23		7		23		23		7
Total impaired loans	$	11,012	$	12,773	$	1,237	$	11,012	$	12,773	$	1,237

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Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize average recorded investment and interest income recognized on impaired loans by loan portfolio for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

	Three Months Ended				Three Months Ended				Three Months Ended				Three Months Ended
	June 30, 2019				June 30, 2018				September 30, 2019				September 30, 2018
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
(Amounts in thousands)	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
Average Recorded Investment and Interest Income	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Commercial	$	1,304	$	16	$	2,681	$	20	$	807	$	10	$	2,254	$	19
Commercial real estate:
Real estate - commercial non-owner occupied		11,622		11		799		12		10,887		7		798		11
Residential real estate:
Real estate - residential - ITIN		6,719		41		7,237		42		6,490		40		7,154		43
Real estate - residential - 1-4 family mortgage		192		—		185		—		204		—		181		—
Real estate - residential - equity lines		277		5		418		5		238		4		412		5
Consumer and other		22		—		34		—		21		—		30		—
Total	$	20,136	$	73	$	11,354	$	79	$	18,647	$	61	$	10,829	$	78

	Six Months Ended				Six Months Ended				Nine Months Ended				Nine Months Ended
	June 30, 2019				June 30, 2018				September 30, 2019				September 30, 2018
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
(Amounts in thousands)	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
Average Recorded Investment and Interest Income	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Commercial	$	1,662	$	32	$	2,635	$	41	$	1,377	$	42	$	2,508	$	60
Commercial real estate:
Real estate - commercial non-owner occupied		10,017		23		801		23		10,307		30		799		35
Residential real estate:
Real estate - residential - ITIN		6,797		83		7,331		83		6,694		123		7,272		126
Real estate - residential - 1-4 family mortgage		188		—		255		—		194		—		231		—
Real estate - residential - equity lines		340		10		420		10		306		14		418		15
Consumer and other		22		—		34		—		22		—		33		—
Total	$	19,026	$	148	$	11,476	$	157	$	18,900	$	209	$	11,261	$	236

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 ~~June~~September 30, 2019 and December 31, 2018, impaired loans of ~~$6.4~~$4.9 million and $6.9 million, respectively, were classified as performing restructured loans.

For a 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 December 31, 2018, we had only one restructured commercial line of credit in nonaccrual status that had $313 thousand in available credit. As of ~~June~~September 30, 2019, we had no obligations to lend additional funds on any restructured loans.

As of ~~June~~September 30, 2019, we had ~~$8.2~~$6.7 million in troubled debt restructurings compared to $9.6 million as of December 31, 2018. As of ~~June~~September 30, 2019, we had ~~103~~99 loans that qualified as troubled debt restructurings, of which ~~101~~97 were performing according to their restructured terms. Troubled debt restructurings represented ~~0.80%~~0.65% of gross loans as of ~~June~~September 30, 2019, compared to 1.01% at December 31, 2018.

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

Maturity – A modification in which the maturity date, timing of payments or frequency of payments are changed.

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

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Notes to Consolidated Financial Statements (Unaudited)

The following table presents the period ended balances of newly restructured loans and the types of modifications that occurred during the three and ~~six~~nine months ended ~~June~~September 30, 2019. There were no new troubled debt restructurings during the three and ~~six~~nine months ended ~~June~~September 30, 2018.

	For the Three Months Ended June 30, 2019						For the Six Months Ended June 30, 2019						For the Three Months Ended September 30, 2019						For the Nine Months Ended September 30, 2019
(Amounts in thousands)
Troubled Debt Restructuring Modification Types	Maturity		Payment Deferral		Total		Maturity		Payment Deferral		Total		Maturity		Payment Deferral		Total		Maturity		Payment Deferral		Total
Commercial	$	86	$	—	$	86	$	86	$	—	$	86	$	—	$	—	$	—	$	66	$	—	$	66
Residential real estate:
Real estate - residential - equity lines		—		39		39		—		39		39
Total	$	86	$	39	$	125	$	86	$	39	$	125	$	—	$	—	$	—	$	66	$	—	$	66

For the three and ~~six~~nine month periods ended ~~June~~September 30, 2019, the table below provides information regarding the number of loans where the contractual terms have been restructured in a manner, which grants a concession to a borrower experiencing financial difficulties.

	For the Three Months Ended June 30, 2019						For the Six Months Ended June 30, 2019						For the Three Months Ended September 30, 2019						For the Nine Months Ended September 30, 2019
			Pre-		Post-				Pre-		Post-				Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification				Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding				Outstanding		Outstanding
(Amounts in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded		Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment		Contracts		Investment		Investment		Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		1	$	99	$	99		1	$	99	$	99		—	$	—	$	—		1	$	99	$	99
Residential real estate:
Real estate - residential - equity lines		1		39		39		1		39		39
Total		2	$	138	$	138		2	$	138	$	138		—	$	—	$	—		1	$	99	$	99

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

Performing and Nonperforming Loans

We define a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, or is 90 days past due and still accruing, or has been restructured and does not comply with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. Performing and nonperforming loans, segregated by loan portfolio, were as follows at ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)	June 30, 2019						September 30, 2019
Performing and Nonperforming Loans	Performing		Nonperforming		Total		Performing		Nonperforming		Total
Commercial	$	152,109	$	194	$	152,303	$	152,056	$	139	$	152,195
Commercial real estate:
Real estate - construction and land development		37,685		—		37,685		35,606		—		35,606
Real estate - commercial non-owner occupied		458,016		10,690		468,706		465,579		10,099		475,678
Real estate - commercial owner occupied		210,711		—		210,711		210,767		—		210,767
Residential real estate:
Real estate - residential - ITIN		32,773		2,389		35,162		31,697		2,339		34,036
Real estate - residential - 1-4 family mortgage		66,875		217		67,092		64,549		198		64,747
Real estate - residential - equity lines		23,656		—		23,656		22,729		—		22,729
Consumer and other		41,387		22		41,409		37,303		21		37,324
Total	$	1,023,212	$	13,512	$	1,036,724	$	1,020,286	$	12,796	$	1,033,082

(Amounts in thousands)	December 31, 2018
Performing and Nonperforming Loans	Performing		Nonperforming		Total
Commercial	$	134,584	$	959	$	135,543
Commercial real estate:
Real estate - construction and land development		22,563		—		22,563
Real estate - commercial non-owner occupied		433,160		548		433,708
Real estate - commercial owner occupied		204,622		—		204,622
Residential real estate:
Real estate - residential - ITIN		35,058		2,388		37,446
Real estate - residential - 1-4 family mortgage		34,181		185		34,366
Real estate - residential - equity lines		26,915		43		26,958
Consumer and other		51,022		23		51,045
Total	$	942,105	$	4,146	$	946,251

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Notes to Consolidated Financial Statements (Unaudited)

(Amounts in thousands)

December 31, 2018

Performing and Nonperforming Loans

Performing

Nonperforming

Total

Commercial
$ 134,584 $ 959 $ 135,543
Commercial real estate:

Real estate - construction and land development
22,563 — 22,563
Real estate - commercial non-owner occupied
433,160 548 433,708
Real estate - commercial owner occupied
204,622 — 204,622
Residential real estate:

Real estate - residential - ITIN
35,058 2,388 37,446
Real estate - residential - 1-4 family mortgage
34,181 185 34,366
Real estate - residential - equity lines
26,915 43 26,958
Consumer and other
51,022 23 51,045
Total
$ 942,105 $ 4,146 $ 946,251

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

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.

~~Table of Contents~~

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

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.

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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.

The following tables summarize loans by internal risk grades and by loan class as of ~~June~~September 30, 2019 and December 31, 2018.

	As of June 30, 2019												As of September 30, 2019
					Special												Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total		Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	142,317	$	7,889	$	502	$	1,595	$	—	$	152,303	$	140,664	$	10,688	$	125	$	718	$	—	$	152,195
Commercial real estate:
Real estate - construction and land development		37,663		22		—		—		—		37,685		35,585		21		—		—		—		35,606
Real estate - commercial non-owner occupied		434,340		9,354		12,416		12,596		—		468,706		440,880		18,149		5,442		11,207		—		475,678
Real estate - commercial owner occupied		194,406		5,217		—		11,088		—		210,711		195,137		5,187		—		10,443		—		210,767
Residential real estate:
Real estate - residential - ITIN		29,721		—		—		5,441		—		35,162		29,467		—		—		4,569		—		34,036
Real estate - residential - 1-4 family mortgage		65,352		1,050		473		217		—		67,092		63,531		1,018		—		198		—		64,747
Real estate - residential - equity lines		23,568		—		—		88		—		23,656		22,641		—		—		88		—		22,729
Consumer and other		41,383		—		—		26		—		41,409		37,300		—		—		24		—		37,324
Total	$	968,750	$	23,532	$	13,391	$	31,051	$	—	$	1,036,724	$	965,205	$	35,063	$	5,567	$	27,247	$	—	$	1,033,082

	As of December 31, 2018
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	118,643	$	15,247	$	—	$	1,653	$	—	$	135,543
Commercial real estate:
Real estate - construction and land development		22,539		24		—		—		—		22,563
Real estate - commercial non-owner occupied		409,157		21,698		—		2,853		—		433,708
Real estate - commercial owner occupied		179,154		14,075		—		11,393		—		204,622
Residential real estate:
Real estate - residential - ITIN		31,805		—		—		5,641		—		37,446
Real estate - residential - 1-4 family mortgage		33,388		793		—		185		—		34,366
Real estate - residential - equity lines		25,336		1,313		—		309		—		26,958
Consumer and other		51,016		—		—		29		—		51,045
Total	$	871,038	$	53,150	$	—	$	22,063	$	—	$	946,251

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

The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was ~~$229~~$250 thousand at ~~June~~September 30, 2019.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

The following tables summarize the ALLL by portfolio for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

	For the Three Months Ended June 30, 2019																	For the Three Months Ended September 30, 2019
(Amounts in thousands)				Commercial			Residential														Commercial		Residential
ALLL by Loan Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total			Commercial			Real Estate		Real Estate			Consumer			Unallocated			Total
Beginning balance	$	2,479		$	6,956		$	1,211		$	1,056		$	540	$	12,242		$	2,104		$	7,598	$	1,070		$	1,070		$	603		$	12,445
Charge-offs		(145	)		(233	)		(71	)		(210	)		—		(659	)		(81	)		—		(43	)		(195	)		—			(319	)
Recoveries		757			—			18			87			—		862			5			—		104			50			—			159
Provision		(987	)		875			(88	)		137			63		—			(84	)		120		(77	)		66			(25	)		—
Ending balance	$	2,104		$	7,598		$	1,070		$	1,070		$	603	$	12,445		$	1,944		$	7,718	$	1,054		$	991		$	578		$	12,285

	For the Three Months Ended September 30, 2018
(Amounts in thousands)				Commercial		Residential
ALLL by Loan Portfolio	Commercial			Real Estate		Real Estate		Consumer			Unallocated		Total
Beginning balance	$	2,442		$	7,091	$	1,111	$	1,317		$	427	$	12,388
Charge-offs		—			—		—		(198	)		—		(198	)
Recoveries		35			—		89		78			—		202
Provision		(248	)		116		12		90			30		—
Ending balance	$	2,229		$	7,207	$	1,212	$	1,287		$	457	$	12,392

	For the Three Months Ended June 30, 2018																	For the Nine Months Ended September 30, 2019
(Amounts in thousands)				Commercial		Residential															Commercial			Residential
ALLL by Loan Portfolio	Commercial			Real Estate		Real Estate			Consumer			Unallocated			Total			Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	2,298		$	6,898	$	1,149		$	1,473		$	477		$	12,295		$	2,205		$	7,116		$	1,173		$	1,356		$	442	$	12,292
Charge-offs		(133	)		—		(49	)		(200	)		—			(382	)		(227	)		(233	)		(181	)		(685	)		—		(1,326	)
Recoveries		350			—		47			78			—			475			916			—			204			199			—		1,319
Provision		(73	)		193		(36	)		(34	)		(50	)		—			(950	)		835			(142	)		121			136		—
Ending balance	$	2,442		$	7,091	$	1,111		$	1,317		$	427		$	12,388		$	1,944		$	7,718		$	1,054		$	991		$	578	$	12,285

	For the Six Months Ended June 30, 2019																	For the Nine Months Ended September 30, 2018
(Amounts in thousands)				Commercial			Residential														Commercial		Residential
ALLL by Loan Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total			Commercial			Real Estate		Real Estate			Consumer			Unallocated		Total
Beginning balance	$	2,205		$	7,116		$	1,173		$	1,356		$	442	$	12,292		$	2,397		$	6,514	$	1,169		$	1,435		$	410	$	11,925
Charge-offs		(145	)		(233	)		(139	)		(490	)		—		(1,007	)		(132	)		—		(164	)		(673	)		—		(969	)
Recoveries		911			—			100			149			—		1,160			838			—		382			216			—		1,436
Provision		(867	)		715			(64	)		55			161		—			(874	)		693		(175	)		309			47		—
Ending balance	$	2,104		$	7,598		$	1,070		$	1,070		$	603	$	12,445		$	2,229		$	7,207	$	1,212		$	1,287		$	457	$	12,392

For the Six Months Ended June 30, 2018

(Amounts in thousands)

Commercial

Residential

ALLL by Loan Portfolio

Commercial

Real Estate

Real Estate

Consumer

Unallocated

Total

Beginning balance
$ 2,397 $ 6,514 $ 1,169 $ 1,435 $ 410 $ 11,925
Charge-offs
(133 ) — (163 ) (475 ) — (771 )
Recoveries
803 — 293 138 — 1,234
Provision
(625 ) 577 (188 ) 219 17 —
Ending balance
$ 2,442 $ 7,091 $ 1,111 $ 1,317 $ 427 $ 12,388

The following tables summarize the ALLL and the recorded investment in loans and leases as of ~~June~~September 30, 2019 and December 31, 2018.

	As of June 30, 2019												As of September 30, 2019
			Commercial		Residential										Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total		Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	385	$	169	$	166	$	7	$	—	$	727	$	170	$	—	$	159	$	6	$	—	$	335
Collectively evaluated for impairment		1,719		7,429		904		1,063		603		11,718		1,774		7,718		895		985		578		11,950
Total	$	2,104	$	7,598	$	1,070	$	1,070	$	603	$	12,445	$	1,944	$	7,718	$	1,054	$	991	$	578	$	12,285
Gross loans:
Individually evaluated for impairment	$	1,286	$	11,481	$	7,148	$	22	$	—	$	19,937	$	768	$	10,099	$	6,845	$	21	$	—	$	17,733
Collectively evaluated for impairment		151,017		705,621		118,762		41,387		—		1,016,787		151,427		711,952		114,667		37,303		—		1,015,349
Total gross loans	$	152,303	$	717,102	$	125,910	$	41,409	$	—	$	1,036,724	$	152,195	$	722,051	$	121,512	$	37,324	$	—	$	1,033,082

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2018
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	748	$	209	$	273	$	7	$	—	$	1,237
Collectively evaluated for impairment		1,457		6,907		900		1,349		442		11,055
Total	$	2,205	$	7,116	$	1,173	$	1,356	$	442	$	12,292
Gross loans:
Individually evaluated for impairment	$	2,183	$	1,343	$	7,463	$	23	$	—	$	11,012
Collectively evaluated for impairment		133,360		659,550		91,307		51,022		—		935,239
Total gross loans	$	135,543	$	660,893	$	98,770	$	51,045	$	—	$	946,251

The ALLL totaled ~~$12.4~~$12.3 million or ~~1.20%~~1.19% of total gross loans at ~~June~~September 30, 2019 and $12.3 million or 1.30% at December 31, 2018. As of ~~June~~September 30, 2019 and December 31, 2018, we had commitments to extend credit of ~~$263.3~~$269.5 million and $235.8 million, respectively. The reserve for unfunded commitments recorded in Other Liabilities in the Consolidated Balance Sheets at ~~June~~September 30, 2019 and December 31, 2018 was ~~$595 thousand and~~ $695 ~~thousand, respectively. The decrease in the reserve was due to a reduction in our unfunded loan commitments.~~thousand.

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 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.

The allowance is increased by provisions charged to expense and adjusted for charge-offs or recoveries. 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 monthly 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. 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, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

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.

We believe that the ALLL was adequate as of ~~June~~September 30, 2019. 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.

As of ~~June~~September 30, 2019, approximately 81% 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.

Impaired loans are individually evaluated for impairment. 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.

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 ~~June~~September 30, 2019, the unallocated allowance amount represented 5% of the ALLL, compared to 4% at December 31, 2018.

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

Notes to Consolidated Financial Statements (Unaudited)

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 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.

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.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

NOTE 5. QUALIFIED AFFORDABLE HOUSING PARTNERSHIP INVESTMENTS

We have invested in four 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 18-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 3% and 5% over the life of the investment. None of the original investments will be repaid.

Our investments in Qualified Affordable Housing Partnerships totaled ~~$2.8~~$2.6 million at ~~June~~September 30, 2019. These investments are recorded in Other Assets with a corresponding funding obligation of $343 thousand 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.

The following tables present our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at ~~June~~September 30, 2019 and December 31, 2018. 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 ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

	At June 30, 2019						For the Six Months Ended June 30, 2019							At September 30, 2019						For the Nine Months Ended September 30, 2019
	Original		Current		Unfunded		Tax Credits		Amortization		Net			Original		Current		Unfunded		Tax Credits		Amortization		Net
(Amounts in thousands)	Investment		Recorded		Liability		and		of		Income Tax			Investment		Recorded		Liability		and		of		Income Tax
Qualified Affordable Housing Partnerships	Value		Investment		Obligation		Benefits		Investments		Benefit (Expense)			Value		Investment		Obligation		Benefits		Investments		Benefit (Expense)
Raymond James California Housing Opportunities Fund II	$	2,000	$	932	$	28	$	100	$	90	$	10		$	2,000	$	887	$	28	$	150	$	135	$	15
WNC Institutional Tax Credit Fund 38, L.P.		1,000		444		—		54		45		9			1,000		421		—		81		68		13
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,160		315		112		110		2			2,500		1,105		315		168		165		3
California Affordable Housing Fund		2,454		219		—		12		20		(8	)		2,454		210		—		18		29		(11	)
Total	$	7,954	$	2,755	$	343	$	278	$	265	$	13		$	7,954	$	2,623	$	343	$	417	$	397	$	20

	At December 31, 2018						For the Six Months Ended June 30, 2018							At December 31, 2018						For the Nine Months Ended September 30, 2018
	Original		Current		Unfunded		Tax Credits		Amortization		Net			Original		Current		Unfunded		Tax Credits		Amortization		Net
(Amounts in thousands)	Investment		Recorded		Liability		and		of		Income Tax			Investment		Recorded		Liability		and		of		Income Tax
Qualified Affordable Housing Partnerships	Value		Investment		Obligation		Benefits		Investments		Benefit (Expense)			Value		Investment		Obligation		Benefits		Investments		Benefit (Expense)
Raymond James California Housing Opportunities Fund II	$	2,000	$	1,022	$	28	$	100	$	89	$	11		$	2,000	$	1,022	$	28	$	150	$	133	$	17
WNC Institutional Tax Credit Fund 38, L.P.		1,000		489		—		63		53		10			1,000		489		—		95		79		16
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,270		315		113		111		2			2,500		1,270		315		170		167		3
California Affordable Housing Fund		2,454		239		—		15		24		(9	)		2,454		239		—		23		36		(13	)
Total	$	7,954	$	3,020	$	343	$	291	$	277	$	14		$	7,954	$	3,020	$	343	$	438	$	415	$	23

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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 and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

	For the Three Months Ended								For the Three Months Ended
	June 30, 2019				June 30, 2018				September 30, 2019				September 30, 2018
(Amounts in thousands)	Generated		Tax Benefits From		Generated		Tax Benefits from		Generated		Tax Benefits From		Generated		Tax Benefits from
Qualified Affordable Housing Partnerships	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses		Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
Raymond James California Housing Opportunities Fund II	$	43	$	7	$	43	$	8	$	43	$	7	$	43	$	8
WNC Institutional Tax Credit Fund 38, L.P.		23		4		28		4		23		4		28		4
Merritt Community Capital Corporation Fund XV, L.P.		48		8		48		8		48		8		48		8
California Affordable Housing Fund		—		6		1		6		—		6		1		6
Total	$	114	$	25	$	120	$	26	$	114	$	25	$	120	$	26

	For the Six Months Ended								For the Nine Months Ended
	June 30, 2019				June 30, 2018				September 30, 2019				September 30, 2018
(Amounts in thousands)	Generated		Tax Benefits From		Generated		Tax Benefits from		Generated		Tax Benefits From		Generated		Tax Benefits from
Qualified Affordable Housing Partnerships	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses		Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
Raymond James California Housing Opportunities Fund II	$	85	$	15	$	85	$	15	$	128	$	22	$	127	$	23
WNC Institutional Tax Credit Fund 38, L.P.		46		8		56		7		70		11		84		11
Merritt Community Capital Corporation Fund XV, L.P.		96		16		96		17		144		24		145		25
California Affordable Housing Fund		—		12		2		13		—		18		4		19
Total	$	227	$	51	$	239	$	52	$	342	$	75	$	360	$	78

The following table reflects the net income tax benefit and (expense) at ~~June~~September 30, 2019 that is expected to be recognized over the remaining lives of the investments and has been updated to reflect the lower tax rate in the Tax Cuts and Jobs Act enacted December 22, 2017.

(Amounts in thousands)
Qualified Affordable Housing Partnerships:	Raymond James		WNC Institutional		Merritt Community		California			Total Net		Raymond James		WNC Institutional		Merritt Community		California			Total Net
Anticipated net income tax benefit (expense)	California Housing		Tax Credit		Capital Corporation		Affordable			Income Tax		California Housing		Tax Credit		Capital Corporation		Affordable			Income Tax
less amortization of investments	Opportunities Fund II		Fund 38, L.P.		Fund XV, L.P		Housing Fund			Benefit		Opportunities Fund II		Fund 38, L.P.		Fund XV, L.P		Housing Fund			Benefit
2019	$	14	$	13	$	3	$	(10	)	$	20	$	15	$	13	$	3	$	(11	)	$	20
2020		19		17		4		(14	)		26		19		17		4		(14	)		26
2021		19		16		4		(14	)		25		19		16		4		(14	)		25
2022		19		14		3		(13	)		23		19		14		3		(13	)		23
2023 and thereafter		32		27		6		(32	)		33		32		27		7		(32	)		34
Total	$	103	$	87	$	20	$	(83	)	$	127	$	104	$	87	$	21	$	(84	)	$	128

NOTE 6. TERM DEBT

Term debt at ~~June~~September 30, 2019 and December 31, 2018 consisted of the following.

(Amounts in thousands)	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Senior debt	$	—		$	3,496		$	—		$	3,496
Unamortized debt issuance costs		—			(2	)		—			(2	)
Subordinated Debt		10,000			10,000			10,000			10,000
Unamortized debt issuance costs		(67	)		(89	)		(55	)		(89	)
Net term debt	$	9,933		$	13,405		$	9,945		$	13,405

Future contractual maturities of term debt at ~~June~~September 30, 2019 are as follows.

(Amounts in thousands)	2019		2020		2021		2022		2023		Thereafter		Total		2019		2020		2021		2022		2023		Thereafter		Total
Subordinated Debt	$	—	$	—	$	—	$	—	$	—	$	10,000		10,000	$	—	$	—	$	—	$	—	$	—	$	10,000	$	10,000
Total future maturities	$	—	$	—	$	—	$	—	$	—	$	10,000	$	10,000	$	—	$	—	$	—	$	—	$	—	$	10,000	$	10,000

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 ~~$426.3~~$436.5 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.

The Bank had no outstanding borrowings from the Federal Home Loan Bank of San Francisco at ~~June~~September 30, 2019 or December 31, 2018. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the ~~six~~nine months ended ~~June~~September 30, 2019 and year ended December 31, 2018 was ~~$19.4~~$12.9 million and $22.5 million, respectively. The maximum amount outstanding from the Federal Home Loan Bank of San Francisco at any month end during the ~~six~~nine months ended ~~June~~September 30, 2019 and year ended December 31, 2018 was $40.0 million and $70.0 million, respectively. As of ~~June~~September 30, 2019, 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 ~~$488.3~~$494.9 million of our commercial real estate and residential real estate loans and ~~$30.0~~$26.5 million in securities as collateral for the line of credit with the Federal Home Loan Bank of San Francisco as of ~~June~~September 30, 2019.

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 debt agreement. The original loan terms required monthly principal installments of $83 thousand, plus accrued and unpaid interest, commencing on January 1, 2016, continuing to, and including December 10, 2020 and a final scheduled payment of $5.0 million due on the maturity date of December 10, 2020. The loan terms allowed for prepayment in whole or in part at any time without any prepayment penalty and for interest at a variable rate, resetting monthly that was equal to the sum of the current three-month LIBOR plus 400 basis points. In December of 2015, the Holding Company incurred senior debt issuance costs of $15 thousand, which were being amortized over the initial term of the loan as additional interest expense. The loan was secured by a pledge from the Holding Company of all of the outstanding stock of Merchants Bank of Commerce.

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 ~~June~~September 30, 2019 and had interest rates ranging from ~~2.64%~~2.00% to ~~3.38%~~2.86%. 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 ~~June~~September 30, 2019 and December 31, 2018, we had no outstanding advances on any of the Bank’s federal funds lines of credit.

Federal Reserve Bank

We have an available line of credit with the Federal Reserve Bank totaling ~~$20.4~~$24.9 million subject to collateral requirements, namely the amount of certain pledged loans. At ~~June~~September 30, 2019 and December 31, 2018, we had no outstanding advances on our line of credit with the Federal Reserve Bank. We have pledged ~~$29.3~~$32.6 million of our commercial loans as collateral for the line of credit with the Federal Reserve Bank as of ~~June~~September 30, 2019.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

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

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Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of our commitments and contingent liabilities at ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Commitments to extend credit	$	255,673	$	223,882	$	261,925	$	223,882
Standby letters of credit		4,241		8,548		4,241		8,548
Affordable housing grants		3,338		3,338		3,338		3,338
Access to Housing and Economic Assistance for Development grants						50		100
Total commitments and contingent liabilities	$	263,252	$	235,768	$	269,554	$	235,868

We were not required to perform on any financial guarantees during the ~~six~~nine months ended ~~June~~September 30, 2019, or during the year ended December 31, 2018. At ~~June~~September 30, 2019, approximately ~~$3.4~~$3.5 million of standby letters of credit will expire within one year, and ~~$856~~$744 thousand will expire thereafter.

Affordable Housing Grants

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 on the Consolidated Balance Sheets, was ~~$595 thousand and~~ $695 thousand at ~~June~~September 30, 2019 and December 31, ~~2018, respectively. The decrease in the reserve was due to a reduction in our unfunded loan commitments.~~2018. 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 adjustments are recorded in Other Expenses 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 81% of our gross loan portfolio at ~~June~~September 30, 2019 and December 31, 2018. 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 nine sites 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.

~~Table of Contents~~

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

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. On January 1, 2019, we recorded $4.4 million in Other Liabilities representing the present value of the remaining minimum lease payments and we recorded an offsetting right-of-use asset in Other Assets. The present value calculation uses a discount rate, which is based on our incremental borrowing rate. The right-of-use asset was also reduced by $458 thousand on January 1, 2019 for amounts recognized under the previous accounting requirements. During the third quarter of 2019, we recorded $267 thousand in Other Liabilities and an offsetting right-of-use asset in Other Assets for additional office space leased during the quarter. The table below presents information regarding our leases as of ~~June~~September 30, 2019.

(Amounts in thousands)	June 30, 2019			September 30, 2019
Right-of-use lease asset	$	3,569		$	3,654
Lease liability	$	3,994		$	4,062
Weighted Average Remaining Lease Term		6.05			5.72
Weighted Average Discount Rate		3.00	%		2.95	%

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 June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2019		2018		2019		2018		2019		2018		2019		2018
Operating lease expense	$	199	$	189	$	398	$	379	$	212	$	189	$	611	$	568
Cash paid for operating leases	$	215	$	213	$	432	$	419	$	229	$	213	$	661	$	632

The following table sets forth, as of ~~June~~September 30, 2019, 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)
Amounts due in:
2019	$	434		$	236
2020		884			961
2021		899			979
2022		807			888
2023		335			342
Thereafter		1,032			1,032
Total undiscounted future minimum lease cash payments		4,391			4,438
Present value adjustment		(397	)		(376	)
Lease liability	$	3,994		$	4,062

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 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.

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Notes to Consolidated Financial Statements (Unaudited)

NOTE 9. FAIR VALUES

The following tables present estimated fair values of our financial instruments as of ~~June~~September 30, 2019 and December 31, 2018, 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						Carrying		Fair Value Measurements Using
June 30, 2019	Amounts		Level 1		Level 2		Level 3
September 30, 2019									Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	40,625	$	40,625	$	—	$	—	$	88,604	$	88,604	$	—	$	—
Securities available-for-sale	$	285,819	$	—	$	285,819	$	—	$	272,341	$	—	$	272,341	$	—
Net loans	$	1,026,284	$	—	$	—	$	1,041,177	$	1,022,777	$	—	$	—	$	1,028,244
Federal Home Loan Bank of San Francisco stock	$	7,380	$	7,380	$	—	$	—	$	7,379	$	7,379	$	—	$	—
Financial liabilities
Deposits	$	1,235,518	$	—	$	1,234,981	$	—	$	1,262,139	$	—	$	1,264,011	$	—
Term debt	$	9,933	$	—	$	9,975	$	—	$	9,945	$	—	$	10,177	$	—
Junior subordinated debenture	$	10,310	$	—	$	13,887	$	—	$	10,310	$	—	$	13,518	$	—

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2018	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	47,365	$	47,365	$	—	$	—
Securities available-for-sale	$	256,928	$	—	$	256,928	$	—
Net loans	$	935,886	$	—	$	—	$	936,697
Federal Home Loan Bank of San Francisco stock	$	5,892	$	5,892	$	—	$	—
Financial liabilities
Deposits	$	1,131,716	$	—	$	1,129,795	$	—
Term debt	$	13,405	$	—	$	13,323	$	—
Junior subordinated debenture	$	10,310	$	—	$	14,183	$	—

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.

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.

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Notes to Consolidated Financial Statements (Unaudited)

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 ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)	Fair Value at June 30, 2019								Fair Value at September 30, 2019
Recurring Basis	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Available-for-sale securities
Available-for-sale securities:
U.S. government and agencies	$	44,837	$	—	$	44,837	$	—	$	40,467	$	—	$	40,467	$	—
Obligations of states and political subdivisions		45,003		—		45,003		—		39,004		—		39,004		—
Residential mortgage-backed securities and collateralized mortgage obligations		168,085		—		168,085		—		165,994		—		165,994		—
Corporate securities		2,978		—		2,978		—		2,992		—		2,992		—
Commercial mortgage-backed securities		24,868		—		24,868		—		22,822		—		22,822		—
Other asset-backed securities		48		—		48		—		1,062		—		1,062		—
Total assets measured at fair value	$	285,819	$	—	$	285,819	$	—	$	272,341	$	—	$	272,341	$	—

(Amounts in thousands)	Fair Value at December 31, 2018								Fair Value at December 31, 2018
Recurring Basis	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Available-for-sale securities
Available-for-sale securities:
U.S. government and agencies	$	40,087	$	—	$	40,087	$	—	$	40,087	$	—	$	40,087	$	—
Obligations of states and political subdivisions		50,530		—		50,530		—		50,530		—		50,530		—
Residential mortgage-backed securities and collateralized mortgage obligations		138,503		—		138,503		—		138,503		—		138,503		—
Corporate securities		2,922		—		2,922		—		2,922		—		2,922		—
Commercial mortgage-backed securities		24,762		—		24,762		—		24,762		—		24,762		—
Other investment securities		124		—		124		—		124		—		124		—
Total assets measured at fair value	$	256,928	$	—	$	256,928	$	—	$	256,928	$	—	$	256,928	$	—

Transfers Between Fair Value Hierarchy Levels

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three and ~~six~~nine months ended ~~June~~September 30, 2019 or the year ended December 31, 2018.

Nonrecurring ~~Items~~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.

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 that are based off the adjusted fair value are between 41% and 43%. We record OREO as a nonrecurring Level 3 fair value.

The following tables present information about our assets at ~~June~~September 30, 2019 and December 31, 2018 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 June 30, 2019								Fair Value at September 30, 2019
Nonrecurring basis	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	10,429	$	—	$	—	$	10,429	$	10,171	$	—	$	—	$	10,171
Other real estate owned										58		—		—		58
Total assets measured at fair value	$	10,429	$	—	$	—	$	10,429	$	10,229	$	—	$	—	$	10,229

(Amounts in thousands)	Fair Value at December 31, 2018
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Other real estate owned	$	31	$	—	$	—	$	31
Total assets measured at fair value	$	31	$	—	$	—	$	31

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Notes to Consolidated Financial Statements (Unaudited)

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 related to assets outstanding at ~~June~~September 30, 2019 and 2018.

(Amounts in thousands)	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
Fair value adjustments	2019		2018		2019		2018		2019		2018		2019		2018
Collateral dependent impaired loans	$	425	$	—	$	467	$	—	$	29	$	—	$	328	$	—
Other real estate owned		—		66		—		162		43		—		43		138
Total	$	425	$	66	$	467	$	162	$	72	$	—	$	371	$	138

During the ~~six~~nine months ended ~~June~~September 30, 2019, collateral dependent impaired loans with a carrying value of ~~$10.9~~$10.5 million were written down to their fair value of ~~$10.4~~$10.2 million resulting in a ~~$467~~$328 thousand adjustment to the ALLL.

During the nine months ended September 30, 2019, two OREO properties with an aggregate carrying value of $101 thousand outstanding at period end were written down to their fair value of $58 thousand, resulting in a $43 thousand adjustment to 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 ~~$85.3 million in loans,~~ $190.2 million in deposits, ~~and~~ $107.4 million in investment securities and $85.3 million in loans to our ~~bank~~Bank as of January 31, 2019.

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 fair values of deferred tax assets, other assets and other liabilities are preliminary and subject to refinement as additional information regarding the closing date fair values becomes available.~~ The Bank engaged third party specialists to assist in valuing certain assets, including investment securities, loans, real estate and the core deposit intangible that resulted from the acquisition. The acquisition was treated as a "reorganization" within the definition of section 368(a) of the Internal Revenue Code and is generally considered tax-free for U.S. federal income tax purposes.

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Notes to Consolidated Financial Statements (Unaudited)

The ~~preliminary~~ calculation of goodwill recorded during ~~the first quarter of~~ 2019 is detailed below.

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

Assets acquired:
Cash and fed funds sold	$	12,425		$	—		$	12,425	$	12,425		$	—		$	12,425
Investment securities		107,931			(551	)		107,380		107,931			(551	)		107,380
Loans, gross		87,570			(2,292	)		85,278		87,570			(2,292	)		85,278
Allowance for loan and lease losses		(1,286	)		1,286			—		(1,286	)		1,286			—
Interest receivable		688			—			688		688			—			688
Premises and equipment, net		378			1,856			2,234		378			1,856			2,234
Deferred tax assets, net		1,374			(1,352	)		22		1,374			(1,352	)		22
Federal Home Loan Bank of San Francisco stock		1,454			—			1,454		1,454			—			1,454
Life insurance		755			—			755		755			—			755
Other assets		371			58			429		371			95			466
Core deposit intangible		—			4,353			4,353		—			4,353			4,353
Total assets acquired	$	211,660		$	3,358		$	215,018	$	211,660		$	3,395		$	215,055

Liabilities assumed:
Demand, money market and savings	$	152,213		$	—		$	152,213	$	152,213		$	—		$	152,213
Certificates of deposit		38,003			—			38,003		38,003			—			38,003
Total deposits		190,216			—			190,216		190,216			—			190,216
Other liabilities		916			22			938		916			22			938
Total liabilities assumed	$	191,132		$	22		$	191,154	$	191,132		$	22		$	191,154
Net identifiable assets acquired over liabilities assumed	$	20,528		$	3,336		$	23,864	$	20,528		$	3,373		$	23,901
Goodwill							$	11,043							$	11,006

Goodwill

As a result of the Merchants acquisition, we have recorded ~~a provisional amount of~~ goodwill totaling $11.0 ~~million, which represents~~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 goodwill recorded is preliminary and subject to refinement as additional information regarding the closing date fair values becomes available. We are in the process of completing the final federal and state income tax returns for Merchants. We also expect that there may be additional fair value adjustments to the ~~Other Assets~~ ~~and~~ ~~Other Liabilities~~ as work to finalize the entries to record the transaction is completed. During the six months ended June 30, 2019 we recorded a preliminary adjustment to the deferred tax asset, other assets and other liabilities that resulted in the recognition of $4 thousand of additional goodwill. Goodwill and core deposit intangible amortization from this acquisition is not deductible for tax purposes.

~~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.~~

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 are 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 are not in an active market, other inputs that are observable in the market or a discounted cash flow model.

Loans

We engaged a third party to assist us in determining the fair values for the loans acquired from Merchants based upon the present values of the expected cash flows and market-derived discount rates. There were no loans acquired with evidence of deterioration of credit quality since origination for which we believe it is probable that we will be unable to collect all contractually required payments receivable. ~~An initial~~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 ~~$195~~$193 thousand and ~~$243~~$431 thousand in accretion of the discount for these loans during the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively.

~~Table of Contents~~

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

Premises and Equipment

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Deferred Tax Assets

~~The deferred~~Deferred income tax assets ~~are~~were recorded to reflect the ~~differences in~~difference between the carrying values of the acquired assets and liabilities for financial reporting purposes and the basis for ~~federal~~ income tax purposes atusing the Company’s statutory federal and state income tax rate. The amounts recognized for deferred tax assets have been determined only provisionally, and will not be finalized until the 2018 and 2019 tax returns for Merchants have been completed which we expect in the third quarter of 2019.rates.

Core Deposit Intangible

We ~~recorded a~~engaged an independent third party to assist us in determining the core deposit intangible asset of $4.4 million for the deposits acquired in the Merchants acquisition during the first quarter of 2019. 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 (nonmaturity 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 2019. We recorded amortization of the core deposit intangible totaling $136 thousand and ~~$227~~$363 thousand during the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively. The future estimated amortization expense on the CDI from the Merchants acquisition at ~~June~~September 30, 2019 is as follows:

(Amounts in thousands)		2019				2020				2021				2022				2023				Thereafter				Total				2019				2020				2021				2022				2023				Thereafter				Total
Core deposit intangible amortization		$	272			$	544			$	544			$	544			$	544			$	1,678			$	4,126			$	136			$	544			$	544			$	544			$	544			$	1,678			$	3,990

~~Pro~~Pro Forma Results of Operations

The following table presents pro forma information of the combined entity as if the acquisition occurred on January 1, 2018. The pro forma information does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the periods presented, nor is it indicative of the results of operations in future periods. Furthermore, cost savings and other business synergies related to the acquisition are not reflected in the pro forma amounts.

	For the Three Months Ended				For the Six Months Ended				For the Three Months Ended				For the Nine Months Ended
Pro forma revenue and earnings	June 30,				June 30,				September 30,				September 30,
(Amounts in thousands)	2019		2018		2019		2018		2019		2018		2019		2018
Net interest income	$	13,495	$	12,929	$	26,694	$	25,603	$	13,722	$	13,492	$	40,416	$	39,095
Net income ⁽¹⁾	$	3,644	$	4,011	$	5,913	$	7,603	$	4,642	$	4,371	$	10,555	$	11,974

⁽¹⁾Net income includes acquisition-related costs of ~~$376~~($113) thousand and ~~$2.3~~$2.2 million for the three and ~~six~~nine months ended ~~June~~September 30, ~~2019, respectively.~~2019.

From the January 31, 2019 acquisition date to June 30, 2019 we recorded net interest income related to Merchants of approximately $1.2 million and $2.2 million for the three and five months ended June 30, 2019, respectively in our ~~Consolidated Statement of Income~~. It is impracticable to separately provide information regarding the amount of ~~net income~~revenue and earnings from Merchants included in our Consolidated ~~Statem~~~~ent~~Statement of In~~come~~Income because the operations of Merchants were substantially comingled with the operations of the Company as of the acquisition date.

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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;
	●	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;
	●	Developments and changes in laws and regulations, 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;
	●	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;

~~Table of Contents~~

~~BANK OF COMMERCE HOLDINGS & SUBSIDIARIES~~

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

	●	The loss of critical personnel and the challenge of hiring qualified personnel at acceptable compensation levels;
	●	Natural disasters, such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic
	●	processes;
	●	Natural disasters outside California could negatively impact our purchased loan portfolio or our third party loan servicers;
	●	Unauthorized computer access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems;
	●	Geopolitical conditions, including acts or threats of war or terrorism, actions taken by the United States or other governments in response to acts or threats of war or terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
	●	Our inability to manage the risks involved in the foregoing; and
	●	The effects of any reputational damage to the Company resulting from any of the foregoing.

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

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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, 2018 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, 2018 to ~~June~~September 30, 2019. Also discussed are significant trends and changes in the Company’s results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2019, compared to the same periods in 2018. 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). As previously announced, 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, 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 recent 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 ~~June~~September 30, 2019 and December 31, 2018, we operated under one primary business segment: Community Banking.

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. See Note 10 Acquisition in the Notes to Consolidated Financial Statements.

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

Financial highlights for the ~~second~~third quarter of 2019 compared to the same quarter a year ago:

Performance

	●	Net income of ~~$3.6~~$4.6 million was an increase of ~~$26~~$610 thousand ~~(1%~~(15%) from ~~$3.6~~$4.0 million earned during the same period in the prior year. Earnings of ~~$0.20~~$0.26 per share – diluted was ~~a decrease~~an increase of ~~$0.02 (9%~~$0.01 (4%) from ~~$0.22~~$0.25 per share – diluted earned during the same period in the prior year and reflects the impact of 1,834,142 shares of common stock issued during the first quarter of 2019 as part of our acquisition of Merchants.
	●	~~Acquisition costs associated with our acquisition of Merchants totaled $376 thousand. Costs related to the name change of our subsidiary bank totaled $464 thousand.~~

●

Net interest income increased ~~$1.9~~$1.6 million ~~(17%~~(13%) to ~~$13.5~~$13.7 million compared to ~~$11.6~~$12.1 million for the same period in the prior year.

●

Net interest margin improved to 4.00% compared to 3.91% for the same period in the prior year

●

Return on average assets ~~decreased~~increased to ~~1.01%~~1.26% compared to ~~1.14%~~1.23% for the same period in the prior year.

●

Return on average equity decreased to ~~8.93%~~10.86% compared to ~~11.32%~~12.16% for the same period in the prior year.

●

Average loans totaled ~~$1.028~~$1.030 billion, an increase of ~~$106~~$99 million (11%) compared to average loans for the same period in the prior year.

●

Average earning assets totaled ~~$1.353~~$1.360 billion, an increase of ~~$145~~$130 million ~~(12%~~(11%) compared to average earning assets for the same period in the prior year.

●

Average deposits totaled ~~$1.218~~$1.255 billion, an increase of ~~$163~~$145 million ~~(15%~~(13%) compared to average deposits for the same period in the prior year.

●o

Average non-maturing deposits totaled ~~$1.054~~$1.097 billion, an increase of ~~$170~~$151 million ~~(19%~~(16%) compared to the same period in the prior year.

●o

Average certificates of deposit totaled ~~$164.1~~$157.6 million, a decrease of ~~$6.7~~$5.7 million ~~(4%~~(3%) compared to same period in the prior year.

	●	The Company’s efficiency ratio was ~~65.9%~~56.4% compared to ~~61.2%~~58.4% during the same period in the prior year.
	●	~~The Company’s efficiency ratio of 65.9% for the second quarter of 2019 includes $376 thousand in acquisition costs and $464 thousand in name change costs.~~

●

Book value per common share was ~~$9.22~~$9.42 at ~~June~~September 30, 2019 compared to ~~$7.97~~$8.14 at ~~June~~September 30, 2018.

●

Tangible book value per common share was ~~$8.29~~$8.51 at ~~June~~September 30, 2019 compared to ~~$7.85~~$8.03 at ~~June~~September 30, 2018.

Credit Quality

●

Nonperforming assets at ~~June~~September 30, 2019 totaled ~~$13.5~~$12.8 million or ~~0.94%~~0.87% of total assets, an increase of ~~$9.1~~$9.0 million since ~~June~~September 30, 2018. The increase in nonperforming assets results from one ~~$10.3~~$10.1 million commercial real estate loan. The loan is current and management believes it is adequately collateralized.

●

Net loan recoveries were ~~$203~~$160 thousand in the ~~second~~third quarter of 2019 compared with net loan ~~charge-offs~~recoveries of ~~$50~~$4 thousand for the same quarter a year ago.

Financial highlights for the first ~~six~~nine months of 2019 compared to the same period a year ago:

Performance

	●	Net income of ~~$6.0~~$10.6 million ($~~0.33~~0.59 per share – diluted) was a decrease of ~~$909~~$299 thousand ~~(13%~~(3%) from ~~$6.9~~$10.9 million ($~~0.42~~0.67 per share – diluted) earned during the same period in the prior year.
	●	~~Acquisition~~ The current year includes acquisition costs ~~associated with~~of $2.2 million and name change costs of $501 thousand, as well as the impact of issuing 1,834,142 shares of common stock during the first quarter as part of our acquisition of ~~Merchants totaled $2.3 million. Costs related to the name change of our subsidiary bank totaled $464 thousand.~~Merchants.

●

Net interest income increased ~~$3.6~~$5.2 million ~~(16%~~(15%) to ~~$26.5~~$40.2 million compared to ~~$22.9~~$35.1 million for the same period in the prior year.

●

Net interest margin improved to 3.98% compared to 3.88% for the same period in the prior year

●

Return on average assets decreased to ~~0.83%~~0.98% compared to ~~1.10%~~1.14% for the same period in the prior year.

●

Return on average equity decreased to ~~7.59%~~8.74% compared to ~~10.84%~~11.29% for the same period in the prior year.

●

Average loans totaled ~~$1.011~~$1.017 billion, an increase of ~~$107~~$104 million ~~(12%~~(11%) compared to average loans for the same period in the prior year.

●

Average earning assets totaled ~~$1.345~~$1.350 billion, an increase of ~~$150~~$143 million ~~(13%~~(12%) compared the same period in the prior year.

●

Average deposits totaled $1.232 billion, an increase of $154 million (14%) compared the same period in the prior year.

Average non-maturing deposits totaled $1.069 billion, an increase of $163 million (18%) compared to the same period in the prior year.

	●o	Average ~~deposits~~certificates of deposit totaled ~~$1.221 billion, an increase~~$163.0 million, a decrease of ~~$158~~$8.9 million ~~(15%~~(5%) compared to the same period in the prior year.
	●	~~Average non-maturing deposits totaled $1.055 billion, an increase of $169 million (19%) compared to the same period in the prior year.~~
	●	~~Average certificates of deposit totaled $165.8 million, a decrease of $10.6 million (6%) compared to the same period in the prior year.~~

●

The Company’s efficiency ratio was ~~71.7%~~66.5% compared to ~~63.1%~~61.5% for the same period in the prior year.

~~Table of Contents~~

~~BANK OF COMMERCE HOLDINGS & SUBSIDIARIES~~

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

●o

The Company’s efficiency ratio of ~~71.7%~~66.5% for the first ~~six~~nine months of 2019 includes ~~$2.3~~$2.2 million in acquisition costs and ~~$464~~$501 thousand in name change costs. The efficiency ratio excluding these non-recurring costs was 60.3%.

●

Book value per common share was ~~$9.22~~$9.42 at ~~June~~September 30, 2019 compared to $8.47 at December 31, 2018.

●

Tangible book value per common share was ~~$8.29~~$8.51 at ~~June~~September 30, 2019 compared to $8.36 at December 31, 2018.

Credit Quality

●

Nonperforming assets at ~~June~~September 30, 2019 totaled ~~$13.5~~$12.8 million or ~~0.94%~~0.87% of total assets, an increase of ~~$9.3~~$8.7 million since December 31, 2018. The increase in nonperforming assets results from one ~~$10.3~~$10.1 million commercial real estate loan. The loan is current and management believes it is adequately collateralized.

●

Net loan ~~recoveries~~charge-offs were ~~$153~~$7 thousand for the first ~~six~~nine months of 2019 compared with net recoveries of ~~$463~~$467 thousand for the same period in the prior year.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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, 2018 filed with the SEC on March 12, 2019. 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 cost 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 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.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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.

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 ~~available-for-sale debt~~ securities and purchased financial assets with credit deterioration.

Methods and timing of adoption – The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

~~Expected financial statement impact – We are currently evaluating~~FASB has voted to delay until January 2023 the ~~provisions~~implementation of the ASU ~~and have formed a committee~~No. 2016-13 for smaller reporting companies as defined by the ~~purpose~~SEC. The FASB affirmed that the one-time determination of ~~developing a model that~~whether an entity is ~~compliant with the requirements under the ASU. The committee is also gathering pertinent data, consulting with outside professionals and evaluating our IT systems~~eligible to ~~create reasonable and supportable forecasts. The committee has determined that we do not currently own any securities that~~be an smaller reporting company will be ~~required to maintain~~based on an ~~allowance as a result of implementing the ASU. Management expects to recognize a one–time cumulative effect adjustment to the allowance for loan and lease losses~~entity’s most recent assessment in accordance with SEC regulations as of the ~~first~~date that a final update on effective dates is issued (for example, November 20, 2019). We expect that we will qualify as a smaller reporting ~~period~~company on that date and in ~~which the new standard is effective. An estimate of the magnitude of the one-time adjustment or the overall impact~~light of this ~~standard~~very recent delay, management has not yet ~~been determined.~~determined when to implement the new ASU or the expected financial impact.

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

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 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.

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. 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.

In recent years, we have originated higher volumes of longer term fixed rate loans. In addition, many of the loans we recently acquired in our purchase of Merchants Holding Company are longer term and fixed rate. These loans, combined with the structure of our investment portfolio, the use of floors in the pricing of our variable rate loans and changes to our funding mix have caused the Company to become slightly more liability sensitive.

We rely on an asset/liability model to 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 various assumptions including the direction, magnitude and speed of interest rate changes, the slope of the yield curve and projected changes in the growth and mix of assets and liabilities.

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 declines in the value of 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 ~~June~~September 30, 2019 when loans are projected to reprice by year and by rate index.

											Years 6																Years 6
											Through		Beyond														Through		Beyond
(Amounts in thousands)	Year 1		Year 2		Year 3		Year 4		Year 5		Year 10		Year 10		Total		Year 1		Year 2		Year 3		Year 4		Year 5		Year 10		Year 10		Total
Rate Index:
Fixed	$	48,588	$	56,475	$	47,676	$	62,631	$	41,420	$	160,327	$	35,466	$	452,583	$	46,963	$	51,876	$	43,148	$	76,813	$	33,417	$	154,808	$	35,385	$	442,410
Variable:
Prime		107,931		2,634		6,032		7,495		9,420		1,737		—		135,249		99,652		4,827		5,729		8,198		7,667		1,644		—		127,717
5 Year Treasury		29,766		29,299		81,885		89,985		67,317		38,093		—		336,345		20,669		53,077		70,058		88,475		73,234		53,514		—		359,027
7 Year Treasury		892		943		11,370		4,855		5,671		14,005		—		37,736		904		3,556		8,698		4,762		5,629		13,919		—		37,468
1 Year LIBOR		23,347		—		—		—		—		—		—		23,347		21,615		—		—		—		—		—		—		21,615
Other Indexes		8,328		1,943		4,503		2,082		1,496		19,682		1,923		39,957		4,518		2,655		1,676		2,121		1,451		21,370		238		34,029
Nonaccrual		1,515		10,019		292		277		256		826		327		13,512		1,080		9,800		292		275		257		814		278		12,796
Total	$	220,367	$	101,313	$	151,758	$	167,325	$	125,580	$	234,670	$	37,716	$	1,038,729	$	195,401	$	125,791	$	129,601	$	180,644	$	121,655	$	246,069	$	35,901	$	1,035,062

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

RESULTS OF OPERATIONS

OVERVIEW

The ~~results for~~current year includes the benefits of our January 31, 2019 ~~include five months of income and expense associated with~~ acquisition of ~~Merchants.~~Merchants National Bank of Sacramento (“Merchants”). The acquisition added $190.2 million in deposits, $85.3 million in loans and $107.4 million in investment securities on January 31, ~~2019.~~2019.As previously announced, the Company’s subsidiary bank, which had been operating under multiple names, simultaneously changed the name for all locations to Merchants Bank of Commerce. To date, acquisition related costs have totaled $2.2 million and costs related to the name change have totaled $501 thousand. All significant costs for these two projects have now been absorbed.

~~Second~~Third Quarter of 2019 Compared With ~~Second~~Third Quarter of 2018

Net income for the ~~second~~third quarter of 2019 increased ~~$26~~$610 thousand compared to the ~~second~~third quarter of 2018. In the current quarter, net interest income was ~~$1.9~~$1.6 million higher and noninterest income was ~~$138~~$63 thousand higher. These positive changes were offset by noninterest expenses that were ~~$1.9 million~~$666 thousand higher and the provision for income taxes was ~~$87~~$382 thousand higher.

First ~~Six~~Nine Months of 2019 Compared With First ~~Six~~Nine Months of 2018

Net income for the first ~~six~~nine months of 2019 decreased ~~$909~~$299 thousand compared to the first ~~six~~nine months in 2018. In the current year, net interest income was ~~$3.6~~$5.2 million higher, noninterest income was ~~$213~~$276 thousand higher and the provision for income taxes was ~~$134~~$51 thousand lower. These positive changes were offset by noninterest expenses that were ~~$4.8~~$5.5 million higher.

The following table presents the return on average assets and return on average equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the Consolidated Statements of Income incorporated in this document.

For the Three Months Ended

For the Six Months Ended

June 30, 2019

June 30, 2018

June 30, 2019

June 30, 2018

Return on average assets
1.01
%
1.14
%
0.83
%
1.10
%
Return on average total equity
8.93
%
11.32
%
7.59
%
10.84
%

For the Three Months Ended

For the Nine Months Ended

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Return on average assets
1.26
%
1.23
%
0.98
%
1.14
%
Return on average total equity
10.86
%
12.16
%
8.74
%
11.29
%

NET INTEREST INCOME AND NET INTEREST MARGIN

For the three months ended ~~June~~September 30, 2019 compared to the same period a year ago, net interest income increased ~~$1.9~~$1.6 million.

Interest income for the ~~second~~third quarter of 2019 increased ~~$2.1~~$1.8 million or ~~16%~~13% to ~~$15.1 million:~~$15.2 million.

●
Interest and fees on loans increased ~~$1.7~~$1.4 million due to a ~~$105.5~~$98.7 million increase in average loan balances and ~~a 16~~an eight basis point increase in the average yield on the loan portfolio.
●
Interest on investment securities increased ~~$370~~$271 thousand due to a ~~$32.9~~$23.1 million increase in average securities balances and ~~a 21~~an 18 basis point increase in average yield on the securities portfolio.
●
Interest on interest-bearing deposits due from banks increased ~~$84~~$54 thousand due to ~~a $6.6~~an $8.5 million increase in average interest-bearing deposit balances, and a 60seven basis point increase in average yield.

Interest expense for the ~~second~~third quarter of 2019 increased ~~$222~~$175 thousand or ~~16%~~13% to ~~$1.6 million:~~$1.5 million.

●
Interest expense on interest-bearing deposits increased ~~$362~~$376 thousand. Average interest-bearing demand and savings deposit balances increased ~~$99.7~~$88.8 million, while average certificate of deposit balances decreased ~~$6.7~~$5.7 million. The average rate paid on interest-bearing deposits increased 1314 basis points.
●
Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased ~~$75~~$121 thousand. ~~Average~~There were no Federal Home Loan Bank of San Francisco borrowings ~~outstanding~~ in the current quarter ~~were $30.0 million~~ compared to ~~$55.3~~average borrowings of $22.3 million in the same quarter a year ago.
●
Interest expense on other term debt and junior subordinated debentures decreased ~~$65~~$80 thousand. During the ~~current~~second quarter of 2019, we completed the early repayment of our variable rate senior debt.

For the ~~six~~nine months ended ~~June~~September 30, 2019 compared to the same period a year ago, net interest income increased ~~$3.6~~$5.2 million.

Interest income for the first ~~six~~nine months of 2019 increased ~~$4.0~~$5.8 million or ~~16%~~15% to ~~$29.6~~$44.8 million:

●
Interest and fees on loans increased ~~$3.0~~$4.4 million due to a ~~$107.4~~$104.5 million increase in average loan balances and an ~~seven~~eight basis point increase in the average yield on the loan portfolio.
●
Interest on securities increased ~~$849 thousand~~$1.1 million due to a ~~$35.6~~$31.4 million increase in average securities balances and a 2724 basis point increase in average yield on the securities portfolio.
●
Interest on interest-bearing deposits due from banks increased ~~$200~~$254 thousand due to a ~~$7.0~~$7.5 million increase in average interest-bearing deposit balances, and a 7544 basis point increase in average yield.

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Interest expense for the first ~~six~~nine months of 2019 increased ~~$460~~$635 thousand or ~~18%~~16% to ~~$3.1~~$4.5 million:

●
Interest expense on interest-bearing deposits increased ~~$603~~$979 thousand. Average interest-bearing demand and savings deposit balances increased ~~$93.2~~$91.7 million, while average certificate of deposit balances decreased ~~$10.6~~$8.9 million. The average rate paid on interest-bearing deposits increased 1011 basis points.
●
Interest expense on borrowings from the Federal Home Loan Bank of San Francisco decreased ~~$67~~$188 thousand. Average Federal Home Loan Bank of San Francisco borrowings outstanding in the current ~~quarter~~period were ~~$19.4~~$12.9 million compared to ~~$34.0~~$30.0 million in the same ~~quarter~~period a year ago.
●
Interest expense on other term debt and junior subordinated debentures decreased ~~$76~~$156 thousand. During the second quarter of 2019, we completed the early repayment of our variable rate senior debt.

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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 tables present condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Three Months Ended June 30, 2019

Three Months Ended June 30, 2018

Three Months Ended September 30, 2019

Three Months Ended September 30, 2018

Average

Average

Average

Average

(Amounts in thousands)

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Interest-earning assets:

Net loans ⁽²⁾
$ 1,028,187 $ 12,847 5.01
%
$ 922,687 $ 11,164 4.85
%
$ 1,029,534 $ 13,013 5.01
%
$ 930,863 $ 11,568 4.93
%
Taxable securities
249,907 1,733 2.78
%
206,247 1,278 2.49
%
238,601 1,609 2.68
%
199,883 1,209 2.40
%
Tax-exempt securities ⁽³⁾
39,501 328 3.33
%
50,306 413 3.29
%
32,974 271 3.26
%
48,561 400 3.27
%
Interest-bearing deposits in other banks
35,605 219 2.47
%
29,041 135 1.86
%
58,897 308 2.07
%
50,397 254 2.00
%
Average interest-earning assets
1,353,200 15,127 4.48
%
1,208,281 12,990 4.31
%
1,360,006 15,201 4.43
%
1,229,704 13,431 4.33
%
Cash and due from banks
21,942 19,880 23,822 21,834
Premises and equipment, net
15,819 14,167 15,922 13,768
Goodwill and core deposit intangible, net
16,995 1,943 16,769 1,888
Other assets
42,769 32,426 45,925 33,084
Average total assets
$ 1,450,725 $ 1,276,697 $ 1,462,444 $ 1,300,278

Interest-bearing liabilities:

Demand - interest-bearing
$ 238,840 129 0.22
%
$ 225,927 80 0.14
%
$ 243,553 117 0.19
%
$ 235,664 104 0.18
%
Money market
296,326 380 0.51
%
241,724 135 0.22
%
309,188 451 0.58
%
259,242 172 0.26
%
Savings
139,307 123 0.35
%
107,108 64 0.24
%
138,296 131 0.38
%
107,349 73 0.27
%
Certificates of deposit
164,084 497 1.21
%
170,824 488 1.15
%
157,620 491 1.24
%
163,302 465 1.13
%
Federal Home Loan Bank of San Francisco borrowings
30,000 192 2.57
%
55,275 267 1.94
%
— — —
%
22,283 121 2.15
%
Other borrowings
10,841 201 7.44
%
15,614 279 7.17
%
9,942 183 7.30
%
14,681 265 7.16
%
Junior subordinated debentures
10,310 110 4.28
%
10,310 97 3.77
%
10,310 106 4.08
%
10,310 104 4.00
%
Average interest-bearing liabilities
889,708 1,632 0.74
%
826,782 1,410 0.68
%
868,909 1,479 0.68
%
812,831 1,304 0.64
%
Noninterest-bearing demand
379,173 309,199 405,853 343,948
Other liabilities
18,246 12,535 18,074 12,000
Shareholders’ equity
163,598 128,181 169,608 131,499
Average liabilities and shareholders’ equity
$ 1,450,725 $ 1,276,697 $ 1,462,444 $ 1,300,278
Net interest income and net interest margin⁽⁴⁾
$ 13,495 4.00
%
$ 11,580 3.84
%
$ 13,722 4.00
%
$ 12,127 3.91
%
⁽¹⁾Interest income on loans includes deferred fees and costs of approximately ~~$91~~$161 thousand and ~~$145~~$74 thousand for the three months ended ~~June~~September 30, 2019 and 2018, respectively.
⁽²⁾Net loans includes average nonaccrual loans of ~~$13.7~~$13.2 million and ~~$4.2~~$3.8 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively.
⁽³⁾Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
⁽⁴⁾Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the three months ended September 30, 2019 included $193 thousand in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by five basis points.
⁽⁵⁾Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.
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Nine Months Ended September 30, 2019

Nine Months Ended September 30, 2018

Average

Average

(Amounts in thousands)

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Interest-earning assets:

Net loans ⁽²⁾
$ 1,017,127 $ 37,891 4.98
%
$ 912,648 $ 33,461 4.90
%
Taxable securities
247,139 5,106 2.76
%
203,791 3,696 2.42
%
Tax-exempt securities ⁽³⁾
40,912 986 3.22
%
52,844 1,276 3.23
%
Interest-bearing deposits in other banks
44,995 772 2.29
%
37,515 518 1.85
%
Average interest-earning assets
1,350,173 44,755 4.43
%
1,206,798 38,951 4.32
%
Cash and due from banks
22,375 19,801
Premises and equipment, net
15,445 14,161
Goodwill and core deposit intangible, net
15,230 1,943
Other assets
43,253 32,666
Average total assets
$ 1,446,476 $ 1,275,369

Interest-bearing liabilities:

Demand - interest-bearing
$ 241,924 372 0.21
%
$ 231,958 273 0.16
%
Money market
299,694 1,120 0.50
%
245,797 439 0.24
%
Savings
136,254 365 0.36
%
108,382 196 0.24
%
Certificates of deposit
163,020 1,478 1.21
%
171,941 1,448 1.13
%
Federal Home Loan Bank of San Francisco borrowings
12,894 247 2.56
%
30,037 435 1.94
%
Other borrowings
11,213 623 7.43
%
15,601 825 7.07
%
Junior subordinated debentures
10,310 329 4.27
%
10,310 283 3.67
%
Average interest-bearing liabilities
875,309 4,534 0.69
%
814,026 3,899 0.64
%
Noninterest-bearing demand
391,208 320,316
Other liabilities
17,927 12,094
Shareholders’ equity
162,032 128,933
Average liabilities and shareholders’ equity
$ 1,446,476 $ 1,275,369
Net interest income and net interest margin⁽⁴⁾
$ 40,221 3.98
%
$ 35,052 3.88
%
⁽¹⁾Interest income on loans includes deferred fees and costs of approximately $433 thousand and $356 thousand for the nine months ended September 30, 2019 and 2018, respectively.
⁽²⁾Net loans includes average nonaccrual loans of $11.8 million and $4.3 million for the nine months ended September 30, 2019 and 2018, 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.~~
⁽⁵⁾~~Yields and rates are calculated by dividing~~assets. Net interest income for for the ~~income or expense by the average balance~~nine months ended September 30, 2019 2019 included $431 thousand in accretion of the ~~assets or liabilities, respectively, and annualizing~~discount on the ~~result.~~
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~~BANK OF COMMERCE HOLDINGS & SUBSIDIARIES~~
~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Six Months Ended June 30, 2019

Six Months Ended June 30, 2018

Average

Average

(Amounts in thousands)

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Balance

Interest⁽¹⁾

Yield/ Rate⁽⁵⁾

Interest-earning assets:

Net loans ⁽²⁾
$ 1,010,821 $ 24,878 4.96
%
$ 903,389 $ 21,893 4.89
%
Taxable securities
251,479 3,497 2.80
%
205,777 2,487 2.44
%
Tax-exempt securities ⁽³⁾
44,947 715 3.21
%
55,021 876 3.21
%
Interest-bearing deposits in other banks
37,930 464 2.47
%
30,967 264 1.72
%
Average interest-earning assets
1,345,177 29,554 4.43
%
1,195,154 25,520 4.31
%
Cash and due from banks
21,640 18,767
Premises and equipment, net
15,203 14,361
Goodwill and core deposit intangible, net
14,447 1,971
Other assets
41,894 32,457
Average total assets
$ 1,438,361 $ 1,262,710

Interest-bearing liabilities:

Demand - interest-bearing
$ 241,095 255 0.21
%
$ 230,075 169 0.15
%
Money market
294,869 669 0.46
%
238,963 267 0.23
%
Savings
135,217 234 0.35
%
108,907 123 0.23
%
Certificates of deposit
165,764 987 1.20
%
176,332 983 1.12
%
Federal Home Loan Bank of San Francisco borrowings
19,448 247 2.56
%
33,978 314 1.86
%
Other borrowings
11,859 440 7.48
%
16,069 560 7.03
%
Junior subordinated debentures
10,310 223 4.36
%
10,310 179 3.50
%
Average interest-bearing liabilities
878,562 3,055 0.70
%
814,634 2,595 0.64
%
Noninterest-bearing demand
383,766 308,304
Other liabilities
17,851 12,144
Shareholders’ equity
158,182 127,628
Average liabilities and shareholders’ equity
$ 1,438,361 $ 1,262,710
Net interest income and net interest margin⁽⁴⁾
$ 26,499 3.97
%
$ 22,925 3.87
%
⁽¹⁾~~Interest income on~~ loans ~~includes deferred fees and costs of approximately $272 thousand and $282 thousand for~~acquired from Merchants Holding Company, which improved the ~~six months ended June 30, 2019 and 2018, respectively.~~
⁽²⁾~~Net loans includes average nonaccrual loans of $11.1 million and $4.5 million for the six months ended June 30, 2019 and 2018, respectively.~~
⁽³⁾~~Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.~~
⁽⁴⁾ ~~Net~~net interest margin ~~is net interest income expressed as a percentage of average interest-earning assets.~~by four basis points.
⁽⁵⁾ Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.

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

Analysis of Changes in Net Interest Income

The following tables set forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume variance) and changes in average rates (rate variance) for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. 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 June 30, 2019 Over
Three Months Ended June 30, 2018

Three Months Ended September 30, 2019 Over
Three Months Ended September 30, 2018

(Amounts in thousands)

Volume

Rate

Net Change

Volume

Rate

Net Change

Increase (decrease) in interest income:

Net loans
$ 1,309 $ 374 $ 1,683 $ 1,244 $ 201 $ 1,445
Taxable securities
291 164 455 251 149 400
Tax-exempt securities⁽¹⁾
(90 ) 5 (85 ) (128 ) (1 ) (129 )
Interest-bearing deposits in other banks
35 49 84 44 10 54
Total increase
1,545 592 2,137 1,411 359 1,770

Increase (decrease) in interest expense:

Demand - interest-bearing
5 44 49 4 9 13
Money market
36 209 245 39 240 279
Savings
23 36 59 25 33 58
Certificates of deposit
(17 ) 26 9 (15 ) 41 26
Federal Home Loan Bank of San Francisco borrowings
(259 ) 184 (75 ) (121 ) — (121 )
Other borrowings
(89 ) 11 (78 ) (87 ) 5 (82 )
Junior subordinated debentures
— 13 13 — 2 2
Total (decrease) increase
(301 ) 523 222 (155 ) 330 175
Net increase (decrease)
$ 1,846 $ 69 $ 1,915
Net increase
$ 1,566 $ 29 $ 1,595
⁽¹⁾ Interest income on tax-exempt securities are not presented on a taxable equivalent basis.

Six Months Ended June 30, 2019 Over
Six Months Ended June 30, 2018

Nine Months Ended September 30, 2019 Over
Nine Months Ended September 30, 2018

(Amounts in thousands)

Volume

Rate

Net Change

Volume

Rate

Net Change

Increase (decrease) in interest income:

Net loans
$ 2,639 $ 346 $ 2,985 $ 3,885 $ 545 $ 4,430
Taxable securities
602 408 1,010 852 558 1,410
Tax-exempt securities⁽¹⁾
(160 ) (1 ) (161 ) (288 ) (2 ) (290 )
Interest-bearing deposits in other banks
68 132 200 115 139 254
Total increase
3,149 885 4,034 4,564 1,240 5,804

Increase (decrease) in interest expense:

Demand - interest-bearing
8 78 86 12 87 99
Money market
74 328 402 114 567 681
Savings
35 76 111 59 110 169
Certificates of deposit
(29 ) 33 4 (63 ) 93 30
Federal Home Loan Bank of San Francisco borrowings
(538 ) 471 (67 ) (433 ) 245 (188 )
Other borrowings
(159 ) 39 (120 ) (246 ) 44 (202 )
Junior subordinated debentures
— 44 44 — 46 46
Total (decrease) increase
(609 ) 1,069 460 (557 ) 1,192 635
Net increase (decrease)
$ 3,758 $ (184 ) $ 3,574
Net increase
$ 5,121 $ 48 $ 5,169
⁽¹⁾ Interest income on tax-exempt securities are not presented on a taxable equivalent basis.

PROVISION FOR LOAN AND LEASE LOSSES

The nonaccrual status of a ~~$10.3~~$10.1 million commercial real estate loan has resulted in a deterioration in our asset quality ~~metrics. However, net~~metrics when compared to December 31, 2018. The loan is current and management believes it is adequately collateralized. Net loan loss ~~recoveries totaled $153~~charge-offs were only $7 thousand during the ~~six~~nine months ended ~~June~~September 30, 2019 and no provision for loan and lease losses was necessary. There was also no provision for loan and lease losses for the ~~six~~nine months ended ~~June~~September 30, 2018. See Note 4 Loans in the Notes to Consolidated Financial Statements for further discussion.

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NONINTEREST INCOME

The following table presents the key components of noninterest income for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(Amounts in thousands)

2019

2018

Amount

Percent

2019

2018

Amount

Percent

Noninterest income:

Service charges on deposit accounts
$ 187 $ 175 $ 12 7
%
$ 355 $ 351 $ 4 1
%
ATM and point of sale
318 300 18 6
%
583 566 17 3
%
Payroll and benefit processing fees
157 146 11 8
%
328 315 13 4
%
Life insurance
155 127 28 22
%
284 256 28 11
%
Gain on sales of investment securities, net
33 4 29 725
%
125 40 85 213
%
Federal Home Loan Bank of San Francisco dividends
124 95 29 31
%
245 175 70 40
%
Gain on sale of OREO
18 — 18 —
%
41 16 25 156
%
Other
108 115 (7 ) (6
)%
196 225 (29 ) (13
)%
Total noninterest income
$ 1,100 $ 962 $ 138 14
%
$ 2,157 $ 1,944 $ 213 11
%

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Amounts in thousands)

2019

2018

Amount

Percent

2019

2018

Amount

Percent

Noninterest income:

Service charges on deposit accounts
$ 177 $ 170 $ 7 4
%
$ 532 $ 521 $ 11 2
%
ATM and point of sale
293 282 11 4
%
876 848 28 3
%
Payroll and benefit processing fees
158 159 (1 ) (1
)%
486 474 12 3
%
Life insurance
126 128 (2 ) (2
)%
410 384 26 7
%
Gain on sales of investment securities, net
12 1 11 1,100
%
137 41 96 234
%
Federal Home Loan Bank of San Francisco dividends
131 104 27 26
%
376 279 97 35
%
Gain on sale of OREO
— (7 ) 7 100
%
41 9 32 356
%
Other
109 106 3 3
%
305 331 (26 ) (8
)%
Total noninterest income
$ 1,006 $ 943 $ 63 7
%
$ 3,163 $ 2,887 $ 276 10
%

NONINTEREST EXPENSE

The following table presents the key components of noninterest expense for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018.

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(Amounts in thousands)

2019

2018

Amount

Percent

2019

2018

Amount

Percent

Noninterest expense:

Salaries & related benefits
$ 5,146 $ 4,513 $ 633 14
%
$ 10,875 $ 9,368 $ 1,507 16
%
Premises & equipment
945 1,016 (71 ) (7
)%
1,937 2,087 (150 ) (7
)%
Federal Deposit Insurance Corporation insurance premium
95 93 2 2
%
195 189 6 3
%
Data processing fees
621 471 150 32
%
1,180 903 277 31
%
Professional service fees
535 314 221 70
%
838 659 179 27
%
Telecommunications
180 178 2 1
%
353 394 (41 ) (10
)%
Acquisition costs
376 — 376 100
%
2,306 — 2,306 100
%
Other
1,713 1,086 627 58
%
2,850 2,104 746 35
%
Total noninterest expense
$ 9,611 $ 7,671 $ 1,940 25
%
$ 20,534 $ 15,704 $ 4,830 31
%

Three Months Ended September 30,

Change

Nine Months Ended September 30,

Change

(Amounts in thousands)

2019

2018

Amount

Percent

2019

2018

Amount

Percent

Noninterest expense:

Salaries & related benefits
$ 5,005 $ 4,529 $ 476 11
%
$ 15,880 $ 13,897 $ 1,983 14
%
Premises & equipment
950 1,017 (67 ) (7
)%
2,887 3,104 (217 ) (7
)%
Federal Deposit Insurance Corporation insurance premium
(104 ) 94 (198 ) (211
)%
91 283 (192 ) (68
)%
Data processing fees
565 518 47 9
%
1,745 1,421 324 23
%
Professional services s
392 336 56 17
%
1,230 995 235 24
%
Telecommunications
194 55 139 253
%
547 449 98 22
%
Acquisition and merger
(113 ) 42 (155 ) (369
)%
2,193 42 2,151 5,121
%
Other
1,411 1,043 368 35
%
4,261 3,147 1,114 35
%
Total noninterest expense
$ 8,300 $ 7,634 $ 666 9
%
$ 28,834 $ 23,338 $ 5,496 24
%

Noninterest expense for the three months ended ~~June~~September 30, 2019 increased ~~$1.9~~$666 thousand compared to the same period a year previous. The increase was primarily due to increased operating costs from our Merchants acquisition and $191 thousand in amortization of the core deposit intangible for the deposits acquired from Merchants. The increases were partially offset by $193 thousand in Small Bank Assessment Credits from the FDIC.
Noninterest expense for the nine months ended September 30, 2019 increased $5.5 million compared to the same period a year ~~previous, which included:~~previous. The increase included $1.9 million in increased operating costs from our Merchants acquisition that includes certain IT processing and compensation costs that will not continue. Other increases in noninterest expense included the following:

●
$~~464 thousand in costs related to the name change.~~
●
~~$376 thousand in acquisition costs.~~
●
~~$739 thousand increase in operating expenses from the Merchants acquisition.~~
~~Noninterest expense for the six months ended June 30, 2019 increased $4.8 million compared to the same period a year previous, which included:~~
●
~~$464 thousand in costs related to the name change.~~
●
~~$2.3~~2.2 million in acquisition costs.
●
$~~1.3 million increase~~501 thousand in ~~operating expenses~~costs related to our name change.
●
$363 thousand in amortization of the core deposit intangible for the deposits acquired from ~~the Merchants acquisition. The increase in operating expenses includes certain IT processing and compensation costs that are not expected to continue.~~Merchants.

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~~BANK OF COMMERCE HOLDINGS & SUBSIDIARIES~~
~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~These increases were partially offset by $193 thousand in Small Bank Assessment Credits from the FDIC.

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 June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Amounts in thousands)

2019

2018

2019

2018

2019

2018

2019

2018

Income before provision for income taxes
$ 4,984 $ 4,871 $ 8,122 $ 9,165 $ 6,428 $ 5,436 $ 14,550 $ 14,601
Provision for income taxes
$ 1,340 $ 1,253 $ 2,172 $ 2,306 $ 1,786 $ 1,404 $ 3,958 $ 3,710
Effective tax rate
26.9
%
25.7
%
26.7
%
25.2
%
27.8
%
25.8
%
27.2
%
25.4
%

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

For the three months ended ~~June~~September 30, 2019, our income tax provision of ~~$1.3~~$1.8 million on pre-tax income of ~~$5.0~~$6.4 million was an effective tax rate of ~~26.9%~~27.8%. The tax provision for the ~~second~~third quarter of the prior year was ~~$1.3~~$1.4 million on pre-tax income of ~~$4.9~~$5.4 million for an effective tax rate of ~~25.7%~~25.8%. The increase during the current quarter ~~includes $28~~was also due to the write-off of a $41 thousand deferred tax asset resulting from expiration of ~~acquisition costs which are not tax deductible.~~a capital loss carryforward.

For the ~~six~~nine months ended ~~June~~September 30, 2019, our income tax provision of ~~$2.2~~$4.0 million on pre-tax income of ~~$8.1~~$14.6 million was an effective tax rate of ~~26.7%~~27.2%. The tax provision for the same period a year ago was ~~$2.3~~$3.7 million on pre-tax income of ~~$9.2~~$14.6 million for an effective tax rate of ~~25.2%~~25.4%. The current year includes $178 thousand, of acquisition costs, which are not tax ~~deductible.~~deductible and the write-off of a $41 thousand deferred tax asset resulting from expiration of a capital loss carryforward. The Company’s effective tax rate has also increased as muni income, tax credits and permanent deductions arising from investments in low income housing partnerships comprise a smaller percentage of pre-tax income.

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

FINANCIAL CONDITION

CONSOLIDATED BALANCE SHEETS

As of ~~June~~September 30, 2019, we had total consolidated assets of ~~$1.442~~$1.472 billion, gross loans of ~~$1.037~~$1.033 billion, allowance for loan and lease losses (“ALLL”) of $12 million, total deposits of ~~$1.236~~$1.262 billion, and shareholders’ equity of ~~$168~~$172 million.
We maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of ~~$21.3~~$32.5 million and we also held interest-bearing deposits in the amount of ~~$19.3~~$56.1 million.

Available-for-sale investment securities totaled ~~$285.8~~$272.3 million at ~~June~~September 30, 2019, compared to $257.0 million at December 31, 2018. Our investment portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations. During the first ~~six~~nine months of 2019, we purchased securities with a par value of ~~$25.5~~$48.6 million and the Merchants acquisition added securities with a par value of $107.4 million. During the first ~~six~~nine months of 2019, we sold securities with a par value of ~~$86.3~~$100.1 million resulting in ~~$125~~$137 thousand in net realized gains. During the ~~six~~nine months ended ~~June~~September 30, 2019, we also received ~~$24.6~~$47.5 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.

At ~~June~~September 30, 2019, our net unrealized gains on available-for-sale investment securities were ~~$3.4~~$3.3 million compared to net unrealized losses of $4.3 million at December 31, 2018. The change in net unrealized losses to net unrealized gains during the ~~six~~nine months ended ~~June~~September 30, 2019 was driven by significant changes in market interest rates.

We recorded gross loan balances of ~~$1.037~~$1.033 billion at ~~June~~September 30, 2019, compared to $946 million at December 31, 2018 an increase of ~~$91~~$87 million. The increase in gross loans included ~~$83.4~~$83.1 million in loans received from the acquisition of Merchants.

The ALLL at ~~June~~September 30, 2019 ~~increased $153~~decreased $7 thousand to ~~$12.4~~$12.3 million compared to $12.3 million at December 31, 2018. At ~~June~~September 30, 2019, relying on our ALLL methodology, which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, 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.

Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, increased by ~~$9.4~~$8.7 million to ~~$13.5~~$12.8 million, or ~~1.30%~~1.24% of gross loans, as of ~~June~~September 30, 2019, compared to $4.1 million, or 0.44% of gross loans as of December 31, 2018. The increase in nonperforming loans is due to one ~~$10.3~~$10.1 million commercial real estate loan.

Past due loans as of ~~June~~September 30, 2019 decreased ~~$2.2~~$13.2 million to ~~$11.7 million,~~$736 thousand, compared to $13.9 million as of December 31, 2018. The decrease in past due loans was primarily due to repayments on two commercial real estate loans ~~for~~totaling $1.2 ~~million.~~million and a $10.1 million commercial real estate loan that was brought current. We believe that risk 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 ~~$15.8~~$16.1 million at ~~June~~September 30, 2019, an increase of ~~$2.7~~$3.0 million compared to $13.1 million at December 31, 2018. The increase included $2.2 million in premises and equipment acquired from Merchants.

~~At June~~Our OREO balance at September 30, 2019 ~~we had no OREO properties~~was $58 thousand compared to $31 thousand in OREO properties at December 31, 2018. For the nine months ended September 30, 2019, we transferred three foreclosed properties in the amount of $74 thousand to OREO. During the ~~six~~nine months ended ~~June~~September 30, 2019, we sold two properties with a balance of ~~$31~~$46 thousand for a net gain of $41 thousand.

Bank-owned life insurance increased ~~$1.0~~$1.2 million during the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$23.4~~$23.6 million compared to $22.4 million at December 31, 2018. The increase included $755 thousand in bank-owned life insurance acquired from Merchants.

Goodwill and core deposit intangibles, net increased ~~$15.1~~$15.0 million during the ~~six~~nine months ended ~~June~~September 30, 2019 to ~~$16.9~~$16.8 million compared to $1.8 million at December 31, 2018. The increase was due to $11.0 million of goodwill and $4.1 million in net core deposit intangibles related to the acquisition of Merchants.

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 ~~$28.3~~$27.5 million at ~~June~~September 30, 2019 compared to $22.5 million at December 31, 2018. The increase included $1.5 million in Federal Home Loan Bank of San Francisco stock acquired from Merchants and a $4.0 million (net of $458 thousand recognized previously as part of the single lease cost) right-of-use lease asset recorded upon the adoption of ASU No. 2016-02.

Total deposits at ~~June~~September 30, 2019, increased ~~$104~~$130 million to ~~$1.236~~$1.262 billion compared to $1.132 billion December 31, 2018. During the first quarter of 2019, the Merchants Holding Company acquisition provided an additional $190.2 million of deposits. The acquired deposits had decreased $16.5 million at June 30, 2019 a change that is not attributable to the loss of any significant relationships. During the first six months of 2019 legacy deposits experienced their seasonal decline of $48.2 million while $21.8 million of wholesale time deposits matured and were not renewed.

●
Total non-maturing deposits increased ~~$95.6~~$127.2 million compared to December 31, 2018.
o
The Merchants Holding Company acquisition provided an additional $152.2 million in non-maturing deposits.

●
Certificates of deposit increased ~~$8.2~~$3.2 million compared to December 31, 2018.
o
The Merchants Holding Company acquisition provided an additional $38.0 million in certificates of deposit.
o
During the first nine months of 2019, $21.8 million of wholesale time deposits matured and were not renewed.

Other liabilities, which include the Bank’s supplemental executive retirement plan, operating leases and the funding obligation for investments in qualified affordable housing partnerships, increased $5.0 million to $18.4 million as of ~~June~~September 30, 2019 compared to $13.4 million at December 31, 2018. The increase included the $4.4 million operating lease liability recorded upon the adoption of ASU No. 2016-02.

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

Investment Securities

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

The investment securities portfolio also:

●
Partially mitigates interest rate risk;

●
Diversifies the credit risk inherent in the loan portfolio;

●
Provides a vehicle for the investment of excess liquidity;

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

●
Is used as collateral for certain public funds.

The carrying value of our available-for-sale investment securities totaled ~~$285.8~~$272.3 million at ~~June~~September 30, 2019, compared to $257.0 million at December 31, 2018. The Merchants acquisition added 231 securities with a par value of $107.4 million to our investment securities portfolio. During the ~~six months ended June 30,~~first quarter of 2019, we sold a portion of our investment securities portfolio to provide liquidity for our seasonal decline in deposit balances and our planned reduction of wholesale certificates of deposit.

The following table presents the available-for-sale investment securities portfolio at fair value by classification and major type as of ~~June~~September 30, 2019 and December 31, 2018.

June 30,

December 31,

(Amounts in thousands)

2019

2018

Available-for-sale securities:

U.S. government & agencies
$ 44,837 $ 40,087
Obligations of state and political subdivisions
45,003 50,530
Residential mortgage-backed securities and collateralized mortgage obligations
168,085 138,503
Corporate securities
2,978 2,922
Commercial mortgage-backed securities
24,868 24,762
Other asset-backed securities
48 124
Total
$ 285,819 $ 256,928

September 30,

December 31,

(Amounts in thousands)

2019

2018

Available-for-sale securities:

U.S. government & agencies
$ 40,467 $ 40,087
Obligations of state and political subdivisions
39,004 50,530
Residential mortgage-backed securities and collateralized mortgage obligations
165,994 138,503
Corporate securities
2,992 2,922
Commercial mortgage-backed securities
22,822 24,762
Other asset-backed securities
1,062 124
Total
$ 272,341 $ 256,928

The following table presents information at amortized cost of the maturity structure of the investment portfolio at ~~June~~September 30, 2019.

Maturities

Maturities

Maturities

Maturities

Maturities

Over One Through

Over Five Through

Maturities

Maturities

Over One Through

Over Five Through

Maturities

Within One Year

Five Years

Ten Years

Over Ten Years

Total

Within One Year

Five Years

Ten Years

Over Ten Years

Total

(Amounts in thousands)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Available-for-sale securities:⁽¹⁾
Available-for-sale securities:⁽¹⁾

Available-for-sale securities:⁽¹⁾

U.S. government & agencies
$ 1,269 3.01
%
$ 89 3.03
%
$ 13,883 3.64
%
$ 29,093 3.14
%
$ 44,334 3.30
%
$ 1,244 3.02
%
$ 51 3.00
%
$ 19,229 3.68
%
$ 19,431 3.18
%
$ 39,955 3.42
%
Obligations of state and political subdivisions
394 3.23
%
9,351 3.23
%
19,121 3.42
%
14,719 3.60
%
43,585 3.44
%
898 3.30
%
10,975 3.55
%
12,505 3.06
%
13,023 3.35
%
37,401 3.31
%
Residential mortgage-backed securities and collateralized mortgage obligations
217 3.48
%
112,083 2.96
%
46,356 2.98
%
8,027 3.63
%
166,683 3.00
%
3,252 1.46
%
139,832 2.82
%
21,287 3.05
%
604 3.31
%
164,975 2.82
%
Corporate securities
2,014 3.10
%
1,000 2.00
%
— —
%
— —
%
3,014 2.73
%
2,010 3.05
%
1,000 2.00
%
— —
%
— —
%
3,010 2.70
%
Commercial mortgage-backed securities
— —
%
3,018 2.19
%
5,470 2.53
%
16,256 2.71
%
24,744 2.61
%
— —
%
2,381 2.17
%
9,162 2.48
%
11,078 2.78
%
22,621 2.59
%
Other asset-backed securities
— —
%
— —
%
— —
%
48 5.20
%
48 5.20
%
— —
%
— —
%
— —
%
1,061 3.10
%
1,061 3.10
%
Total
$ 3,894 3.11
%
$ 125,541 2.95
%
$ 84,830 3.16
%
$ 68,143 3.20
%
$ 282,408 3.08
%
$ 7,404 2.38
%
$ 154,239 2.85
%
$ 62,183 3.16
%
$ 45,197 3.13
%
$ 269,023 2.96
%
⁽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
~~Loan Concentrations~~

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

The following table presents the composition of the loan portfolio as of ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)

June 30,

December 31,

Loan Portfolio

2019

%

2018

%

Commercial
$ 152,303 15
%
$ 135,543 14
%
Commercial real estate:

Real estate - construction and land development
37,685 4 22,563 2
Real estate - commercial non-owner occupied
468,706 45 433,708 46
Real estate - commercial owner occupied
210,711 21 204,622 22
Residential real estate:

Real estate - residential - ITIN
35,162 3 37,446 4
Real estate - residential - 1-4 family mortgage
67,092 6 34,366 4
Real estate - residential - equity lines
23,656 2 26,958 3
Consumer and other
41,409 4 51,045 5
Gross loans
1,036,724 100
%
946,251 100
%
Deferred loan fees and costs
2,005 1,927
Loans, net of deferred fees and costs
1,038,729 948,178
Allowance for loan and lease losses
(12,445 ) (12,292 )
Net loans
$ 1,026,284 $ 935,886
(Amounts in thousands)

September 30, 2019

December 31, 2018

Loan Portfolio

Amount

%

Amount

%

Commercial
$ 152,195 15
%
$ 135,543 14
%
Commercial real estate:

Real estate - construction and land development
35,606 3 22,563 2
Real estate - commercial non-owner occupied
475,678 47 433,708 46
Real estate - commercial owner occupied
210,767 20 204,622 22
Residential real estate:

Real estate - residential - ITIN
34,036 3 37,446 4
Real estate - residential - 1-4 family mortgage
64,747 6 34,366 4
Real estate - residential - equity lines
22,729 2 26,958 3
Consumer and other
37,324 4 51,045 5
Gross loans
1,033,082 100
%
946,251 100
%
Deferred loan fees and costs
1,980 1,927
Loans, net of deferred fees and costs
1,035,062 948,178
Allowance for loan and lease losses
(12,285 ) (12,292 )
Net loans
$ 1,022,777 $ 935,886

The following table sets forth the maturity and distribution of our loan portfolio as of ~~June~~September 30, 2019.

After One

After One

Within One

Through

After Five

Within One

Through

After Five

(Amounts in thousands)

Year

Five Years

Years

Total

Year

Five Years

Years

Total

Commercial
$ 51,118 $ 94,962 $ 7,062 $ 153,142 $ 67,176 $ 75,211 $ 10,655 $ 153,042
Commercial real estate:

Real estate - construction and land development
5,672 12,543 19,354 37,569 4,584 12,674 18,213 35,471
Real estate - commercial non-owner occupied
36,777 208,856 222,630 468,263 35,804 208,909 230,518 475,231
Real estate - commercial owner occupied
20,190 87,893 103,914 211,997 21,848 86,243 103,965 212,056
Residential real estate:

Real estate - residential - ITIN
3,437 13,567 18,158 35,162 3,413 13,475 17,148 34,036
Real estate - residential - 1-4 family mortgage
5,140 23,291 38,764 67,195 5,404 22,663 36,775 64,842
Real estate - residential - equity lines
548 2,423 20,991 23,962 478 2,259 20,296 23,033
Consumer and other
1,277 2,471 37,691 41,439 1,295 2,411 33,645 37,351
Loans, net of deferred fees and costs
$ 124,159 $ 446,006 $ 468,564 $ 1,038,729 $ 140,002 $ 423,845 $ 471,215 $ 1,035,062
Loans with:

Fixed rates
$ 48,588 $ 208,202 $ 195,793 $ 452,583 $ 46,963 $ 205,254 $ 190,193 $ 442,410
Variable rates
75,571 237,804 272,771 586,146 93,039 218,591 281,022 592,652
Total
$ 124,159 $ 446,006 $ 468,564 $ 1,038,729 $ 140,002 $ 423,845 $ 471,215 $ 1,035,062

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 of these ITIN loans, then we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.

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. Some of the loans contain promotional periods designed to allow the consumer to use the financing as a cash flow tool. The loans are serviced by SFC and have an average FICO credit score over 750. The servicing agreement with SFC will remain in effect until payment in full of the unpaid principal balance of the loans. In addition, if we become responsible for servicing of these loans, then we may realize additional monitoring and servicing costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.
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.

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

The following table presents the recorded investment in purchased loan pools and purchased participations at ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)

June 30, 2019

December 31, 2018

Loan Type

Balance

% of Gross Loan
Portfolio

Balance

% of Gross Loan
Portfolio

Commercial
$ 17 —
%
$ 66 —
%
Commercial real estate
23,627 2
%
29,096 3
%
Residential real estate
48,308 5
%
51,164 5
%
Consumer and other
36,252 3
%
46,049 5
%
Total purchased loans
$ 108,204 10
%
$ 126,375 13
%
(Amounts in thousands)

September 30, 2019

December 31, 2018

Loan Type

Balance

% of Gross Loan
Portfolio

Balance

% of Gross Loan
Portfolio

Commercial real estate
$ 19,782 2
%
$ 29,096 3
%
Residential real estate
46,920 5
%
51,164 5
%
Consumer and other
32,391 3
%
46,049 5
%
Total purchased loans
$ 99,093 10
%
$ 126,309 13
%

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 absorb probable incurred losses. 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 monthly basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan portfolio, prevailing economic conditions and other factors.

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

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

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 on 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.

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

The following table summarizes our nonperforming assets as of ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)

June 30,

December 31,

Nonperforming Assets

2019

2018

Commercial
$ 194 $ 959
Commercial real estate:

Real estate - commercial non-owner occupied
10,690 548
Total commercial real estate
10,690 548
Residential real estate:

Real estate - residential - ITIN
2,389 2,388
Real estate - residential - 1-4 family mortgage
217 185
Real estate - residential - equity lines
— 43
Total residential real estate
2,606 2,616
Consumer and other
22 23
Total nonaccrual loans
13,512 4,146
90 days past due and still accruing
— —
Total nonperforming loans
13,512 4,146
Other real estate owned
— 31
Total nonperforming assets
$ 13,512 $ 4,177
Nonperforming loans to gross loans
1.30
%
0.44
%
Nonperforming assets to total assets
0.94
%
0.32
%
(Amounts in thousands)

September 30,

December 31,

Nonperforming Assets

2019

2018

Commercial
$ 139 $ 959
Commercial real estate:

Real estate - commercial non-owner occupied
10,099 548
Total commercial real estate
10,099 548
Residential real estate:

Real estate - residential - ITIN
2,339 2,388
Real estate - residential - 1-4 family mortgage
198 185
Real estate - residential - equity lines
— 43
Total residential real estate
2,537 2,616
Consumer and other
21 23
Total nonaccrual loans
12,796 4,146
90 days past due and still accruing
— —
Total nonperforming loans
12,796 4,146
Other real estate owned
58 31
Total nonperforming assets
$ 12,854 $ 4,177
Nonperforming loans to gross loans
1.24
%
0.44
%
Nonperforming assets to total assets
0.87
%
0.32
%

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, 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.

As of ~~June~~September 30, 2019, we had ~~$8.2~~$6.7 million in troubled debt restructurings compared to $9.6 million as of December 31, 2018. As of ~~June~~September 30, 2019, we had ~~103~~99 restructured loans that qualified as troubled debt restructurings, of which ~~101~~97 loans were performing according to their restructured terms. Troubled debt restructurings represented ~~0.80%~~0.65% of gross loans as of ~~June~~September 30, 2019, compared to 1.01% at December 31, 2018.

Impaired loans of ~~$6.4~~$4.9 million and $6.9 million were classified as accruing troubled debt restructurings at ~~June~~September 30, 2019 and December 31, 2018, respectively. For a 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 December 31, 2018, we had one restructured commercial line of credit in nonaccrual status that had $313 thousand in available credit. As of ~~June~~September 30, 2019, we had no obligations to lend additional funds on any restructured loans.

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

The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)

June 30,

December 31,

September 30,

December 31,

Troubled Debt Restructurings

2019

2018

2019

2018

Accruing troubled debt restructurings

Commercial
$ 1,092 $ 1,224 $ 629 $ 1,224
Commercial real estate:

Real estate - commercial non-owner occupied
791 795 — 795
Residential real estate:

Real estate - residential - ITIN
4,300 4,484 4,072 4,484
Real estate - residential - equity lines
242 363 236 363
Total accruing troubled debt restructurings
$ 6,425 $ 6,866 $ 4,937 $ 6,866

Nonaccruing troubled debt restructurings

Commercial
$ 117 $ 877 $ 86 $ 877
Residential real estate:

Real estate - residential - ITIN
1,689 1,793 1,639 1,793
Consumer and other
22 23 21 23
Total nonaccruing troubled debt restructurings
$ 1,828 $ 2,693 $ 1,746 $ 2,693
Total troubled debt restructurings

Commercial
$ 1,209 $ 2,101 $ 715 $ 2,101
Commercial real estate:

Real estate - commercial non-owner occupied
791 795 — 795
Residential real estate:

Real estate - residential - ITIN
5,989 6,277 5,711 6,277
Real estate - residential - equity lines
242 363 236 363
Consumer and other
22 23 21 23
Total troubled debt restructurings
$ 8,253 $ 9,559 $ 6,683 $ 9,559

Total troubled debt restructurings to gross loans outstanding at period end
0.80
%
1.01
%
0.65
%
1.01
%

Allowance for Loan and Lease Losses

The ALLL at ~~June~~September 30, 2019 ~~increased $153~~decreased $7 thousand to ~~$12.4~~$12.3 million compared to $12.3 million at December 31, 2018. The nonaccrual status of a ~~$10.3~~$10.1 million commercial real estate loan has resulted in a deterioration in our asset quality metrics during the first ~~six~~nine months of 2019. However, net ~~recoveries~~loan loss charge-offs for the ~~six~~nine months ended ~~June~~September 30, 2019 totaled ~~$153~~$7 thousand and no provision for loan and lease losses was necessary during the first ~~six~~nine months of 2019 or the year ended December 31, 2018.

The loans acquired from Merchants were recorded at fair value, which included a discount for credit risk adjustments, which is not a part of the ALLL. No ALLL is required for these acquired ~~loans and as~~loans. As a result, our ALLL as a percentage of gross loans declined to ~~1.20%~~1.19% as of ~~June~~September 30, 2019 compared to ~~1.32%~~1.34% as of ~~June~~September 30, 2018 and 1.30% as of December 31, 2018.

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

The following table summarizes the ALLL roll forward for the ~~six~~nine months ended ~~June~~September 30, 2019, twelve months ended December 31, 2018 and the ~~six~~nine months ended ~~June~~September 30, 2018. This table also includes impaired loan information at ~~June~~September 30, 2019, December 31, 2018 and ~~June~~September 30, 2018.

For The Six Months Ended

For The Twelve Months Ended

For The Six Months Ended

For The Nine Months
Ended

For The Twelve Months
Ended

For The Nine Months
Ended

(Amounts in thousands)

June 30, 2019

December 31, 2018

June 30, 2018

September 30, 2019

December 31, 2018

September 30, 2018

Beginning balance ALLL
$ 12,292 $ 11,925 $ 11,925 $ 12,292 $ 11,925 $ 11,925
Provision for loan and lease loss charged to expense
— — — — — —
Loans charged off
(1,007 ) (1,248 ) (771 ) (1,326 ) (1,248 ) (969 )
Loan and lease loss recoveries
1,160 1,615 1,234 1,319 1,615 1,436
Ending balance ALLL
$ 12,445 $ 12,292 $ 12,388 $ 12,285 $ 12,292 $ 12,392

At June 30, 2019

At December 31, 2018

At June 30, 2018

Nonaccrual loans:

Commercial
$ 194 $ 959 $ 1,358
Real estate - commercial non-owner occupied
10,690 548 —
Real estate - residential - ITIN
2,389 2,388 2,613
Real estate - residential - 1-4 family mortgage
217 185 184
Real estate - residential - equity lines
— 43 44
Consumer and other
22 23 33
Total nonaccrual loans
13,512 4,146 4,232
Accruing troubled-debt restructured loans:

Commercial
1,092 1,224 1,420
Real estate - commercial non-owner occupied
791 795 799
Real estate - residential - ITIN
4,300 4,484 4,592
Real estate - residential - equity lines
242 363 372
Total accruing restructured loans
6,425 6,866 7,183

All other accruing impaired loans
— — —
Total impaired loans
$ 19,937 $ 11,012 $ 11,415

Gross loans outstanding
$ 1,036,724 $ 946,251 $ 936,816

Ratio of ALLL to gross loans outstanding
1.20
%
1.30
%
1.32
%
Nonaccrual loans to gross loans outstanding
1.30
%
0.44
%
0.45
%

At September 30, 2019

At December 31, 2018

At September 30, 2018

Nonaccrual loans:

Commercial
$ 139 $ 959 $ 899
Real estate - commercial non-owner occupied
10,099 548 —
Real estate - residential - ITIN
2,339 2,388 2,571
Real estate - residential - 1-4 family mortgage
198 185 179
Real estate - residential - equity lines
— 43 44
Consumer and other
21 23 24
Total nonaccrual loans
12,796 4,146 3,717
Accruing troubled-debt restructured loans:

Commercial
629 1,224 1,291
Real estate - commercial non-owner occupied
— 795 797
Real estate - residential - ITIN
4,072 4,484 4,535
Real estate - residential - equity lines
236 363 367
Total accruing restructured loans
4,937 6,866 6,990

All other accruing impaired loans
— — —
Total impaired loans
$ 17,733 $ 11,012 $ 10,707

Gross loans outstanding
$ 1,033,082 $ 946,251 $ 927,480

Ratio of ALLL to gross loans outstanding
1.19
%
1.30
%
1.34
%
Nonaccrual loans to gross loans outstanding
1.24
%
0.44
%
0.40
%

As of ~~June~~September 30, 2019, impaired loans totaled ~~$19.9~~$17.7 million, of which ~~$13.5~~$12.8 million were in nonaccrual status. The increase in nonaccrual loans and loans classified as impaired results from one ~~$10.3~~$10.1 million commercial real estate loan. The loan is current and management believes it is adequately collateralized. Of the total impaired loans, ~~$6.7~~$6.4 million or ~~105~~103 were ITIN loans with an average balance of approximately ~~$64~~$62 thousand. The remaining impaired loans consisted of ~~eight~~six commercial loans, ~~three~~one commercial real estate loans, two residential mortgage, five home equity loans and one consumer loan.

At ~~June~~September 30, 2019, impaired loans had a corresponding specific allowance of ~~$727~~$335 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 ~~June~~September 30, 2019 and December 31, 2018.

(Amounts in thousands)

June 30, 2019

December 31, 2018

ALLL

Amount

% Loan Category

Amount

% Loan Category

Commercial
$ 2,104 17
%
$ 2,205 18
%
Commercial real estate:

Real estate - construction and land development
192 2 107 1
Real estate - commercial non-owner occupied
5,469 43 5,169 42
Real estate - commercial owner occupied
1,937 16 1,840 15
Residential real estate:

Real estate - residential - ITIN
599 5 660 5
Real estate - residential - 1-4 family mortgage
184 1 162 1
Real estate - residential - equity lines
287 2 351 3
Consumer and other
1,070 9 1,356 11
Unallocated
603 5 442 4
Total ALLL
$ 12,445 100
%
$ 12,292 100
%
(Amounts in thousands)

September 30, 2019

December 31, 2018

ALLL

Amount

% Loan Category

Amount

% Loan Category

Commercial
$ 1,944 16
%
$ 2,205 18
%
Commercial real estate:

Real estate - construction and land development
186 2 107 1
Real estate - commercial non-owner occupied
5,534 44 5,169 42
Real estate - commercial owner occupied
1,998 16 1,840 15
Residential real estate:

Real estate - residential - ITIN
583 5 660 5
Real estate - residential - 1-4 family mortgage
185 2 162 1
Real estate - residential - equity lines
286 2 351 3
Consumer and other
991 8 1,356 11
Unallocated
578 5 442 4
Total ALLL
$ 12,285 100
%
$ 12,292 100
%

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 risk grading-based component, or in the specific reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of ~~June~~September 30, 2019, the unallocated allowance amount represents 5% of the ALLL, compared to 4% at December 31, 2018. 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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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 on the Consolidated Balance Sheets, was ~~$595~~$695 thousand at ~~June~~September 30, 2019 and ~~$695 thousand at~~ December 31, 2018. ~~The decrease in the reserve was primarily due to a reduction in our unfunded loan commitments.~~ 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.

Deposits
Total deposits as of ~~June~~September 30, 2019 were ~~$1.236~~$1.262 billion compared to $1.132 billion at December 31, 2018, an increase of ~~$104~~$130 million. The following table presents the deposit balances by major category as of ~~June~~September 30, 2019, and December 31, 2018.

(Amounts in thousands)

June 30, 2019

December 31, 2018

Deposits

Amount

Percentage

Amount

Percentage

Noninterest-bearing demand
$ 397,349 32
%
$ 347,199 31
%
Interest-bearing demand
238,175 20 252,202 22
Money market
300,847 24 265,093 23
Savings
138,591 11 114,840 10
Certificates of deposit, $100,000 or greater
127,527 10 119,376 11
Certificates of deposit, less than $100,000
33,029 3 33,006 3
Total
$ 1,235,518 100
%
$ 1,131,716 100
%
(Amounts in thousands)

September 30, 2019

December 31, 2018

Deposits

Amount

Percentage

Amount

Percentage

Noninterest-bearing demand
$ 412,410 33
%
$ 347,199 31
%
Interest-bearing demand
239,547 18 252,202 22
Money market
317,120 25 265,093 23
Savings
137,441 11 114,840 10
Certificates of deposit, $100,000 or greater
123,636 10 119,376 11
Certificates of deposit, less than $100,000
31,985 3 33,006 3
Total
$ 1,262,139 100
%
$ 1,131,716 100
%

The following table presents the change in acquired and legacy deposits during the ~~six~~nine months ended ~~June~~September 30, 2019.

Legacy Deposits

Acquired
Merchants Deposits

Change In Acquired
Deposits For The
Five Months Ended

Change In Legacy
Deposits For The Six
Months Ended

Deposits At

Legacy Deposits

Acquired
Merchants Deposits

Change In Acquired
Deposits For The
Eight Months Ended

Change In Legacy
Deposits For The
Nine Months Ended

Deposits At

At December 31,

At January 31,

At June 30,

At June 30,

At June 30,

At December 31,

At January 31,

At September 30,

At September 30,

At September 30,

2018

2019

2019

2019

2019

2018

2019

2019

2019

2019

Demand - noninterest-bearing
$ 347,199 $ 51,880 $ (2,777 ) $ 1,047 $ 397,349 $ 347,199 $ 51,880 $ (5,233 ) $ 18,564 $ 412,410
Demand - interest-bearing
252,202 28,231 (5,695 ) (36,563 ) 238,175 252,202 28,231 (5,031 ) (35,855 ) 239,547
Money market
265,093 43,316 (1,805 ) (5,757 ) 300,847 265,093 43,316 (2,314 ) 11,025 317,120
Total demand
864,494 123,427 (10,277 ) (41,273 ) 936,371 864,494 123,427 (12,578 ) (6,266 ) 969,077

Savings
114,840 28,786 (1,998 ) (3,037 ) 138,591 114,840 28,786 (3,530 ) (2,655 ) 137,441
Total non-maturing deposits
979,334 152,213 (12,275 ) (44,310 ) 1,074,962 979,334 152,213 (16,108 ) (8,921 ) 1,106,518

Certificates of deposit
152,382 38,003 (4,174 ) (25,655 ) 160,556 152,382 38,003 (7,047 ) (27,717 ) 155,621
Total deposits
$ 1,131,716 $ 190,216 $ (16,449 ) $ (69,965 ) $ 1,235,518 $ 1,131,716 $ 190,216 $ (23,155 ) $ (36,638 ) $ 1,262,139

During the first quarter of 2019, the Merchants Holding Company acquisition provided an additional $190.2 million of deposits. The $23.2 million decrease in the acquired deposits ~~of $16.5 million at June~~during the eight months ended September 30, 2019 is not attributable to the loss of any significant relationships. ~~Legacy deposits experienced their seasonal decline, while~~During the first nine months of 2019, $21.8 million of wholesale time deposits ~~have~~ matured and were not renewed.
The interest rate environment has become more competitive in 2019 as customers have begun to seek higher interest rates on their deposits. During 2019, management strategically raised interest rates on certain deposits while striving to maintain a net interest margin that is above our peer group average. As competition increases, management will strive to maintain market discipline, which could result in further decreases in deposit balances for depositors who are highly interest rate sensitive.

The following table sets forth the distribution of our year-to-date average daily balances for deposits and their respective average rates for the ~~six~~nine months ended ~~June~~September 30, 2019, and the year ended December 31, 2018.

For the Six Months Ended June 30, 2019

For the Year Ended December 31, 2018

For the Nine Months Ended September 30, 2019

For the Year Ended December 31, 2018

(Amounts in thousands)

Average Balance

Rate

Average Balance

Rate

Average Balance

Rate

Average Balance

Rate

Interest-bearing demand
$ 241,095 0.21
%
$ 238,328 0.17
%
$ 241,924 0.21
%
$ 238,328 0.17
%
Money market
294,869 0.46
%
250,685 0.26
%
299,694 0.50
%
250,685 0.26
%
Savings
135,217 0.35
%
109,025 0.26
%
136,254 0.36
%
109,025 0.26
%
Certificates of deposit
165,764 1.20
%
168,183 1.14
%
163,020 1.21
%
168,183 1.14
%
Interest-bearing deposits
836,945 0.52
%
766,221 0.43
%
840,892 0.53
%
766,221 0.43
%
Noninterest-bearing demand
383,766 332,197 391,208 332,197
Total deposits
$ 1,220,711 0.35
%
$ 1,098,418 0.24
%
$ 1,232,100 0.36
%
$ 1,098,418 0.24
%

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

Deposit Maturity Schedule

The following table sets forth the maturities of certificates of deposit in amounts of $100,000 or more as of ~~June~~September 30, 2019.

(Amounts in thousands)

June 30,

September 30,

Maturing in:

2019

2019

Three months or less
$ 28,211 $ 27,890
Three through six months
17,986 15,691
Six through twelve months
21,176 29,420
Over twelve months
60,154 50,635
Total
$ 127,527 $ 123,636

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.

Included in our certificates of deposit balances are $248 thousand of subscription time deposits obtained in years past through online deposit listing services. We no longer utilize online deposit listing services. As they mature, these listing service deposits will not be renewed.
Borrowings

The following table sets forth the distribution of our year-to-date average daily balances for borrowings and their respective average rates for the ~~six~~nine months ended ~~June~~September 30, 2019, and the year ended December 31, 2018.

For the Six Months Ended June 30, 2019

For the Year Ended December 31, 2018

(Amounts in thousands)

Average Balance

Rate

Average Balance

Rate

Federal Home Loan Bank of San Francisco borrowings
$ 19,448 2.56
%
$ 22,466 1.94
%
Other borrowings, net
11,859 7.48
%
15,143 7.11
%
Junior subordinated debentures
10,310 4.36
%
10,310 3.73
%
Total borrowings
$ 41,617 4.41
%
$ 47,919 3.96
%

For the Nine Months Ended September 30, 2019

For the Year Ended December 31, 2018

(Amounts in thousands)

Average Balance

Rate

Average Balance

Rate

Federal Home Loan Bank of San Francisco borrowings
$ 12,894 2.56
%
$ 22,466 1.94
%
Other borrowings, net
11,213 7.43
%
15,143 7.11
%
Junior subordinated debentures
10,310 4.27
%
10,310 3.73
%
Total borrowings
$ 34,417 4.66
%
$ 47,919 3.96
%

Term Debt

At ~~June~~September 30, 2019, we had term debt outstanding with a carrying value of $9.9 million compared to $13.4 million at December 31, 2018. Term debt consisted of the following:

Federal Home Loan Bank of San Francisco Borrowings

As of ~~June~~September 30, 2019 and December 31, 2018, the Bank had no Federal Home Loan Bank of San Francisco advances outstanding. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the ~~six~~nine months ended ~~June~~September 30, 2019 and the year ended December 31, 2018 was ~~$19.4~~$12.9 million and $22.5 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. The debt was secured by a pledge from the Holding Company of all of the outstanding stock of Merchants Bank of Commerce. During the second quarter of 2019, we completed the early repayment and termination of this 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 ~~June~~September 30, 2019, the Subordinated Debt had a balance of $9.9 million net of unamortized debt issuance costs. The notes are due in 2025.

Junior Subordinated Debentures
Bank of Commerce Holdings Trust II

During July of 2005, we participated in a $10.0 million private placement of fixed rate trust-preferred securities (the "Trust-Preferred Securities") through a wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). Trust II simultaneously issued $310 thousand common securities to the Holding Company. Rates paid on the Trust-Preferred Securities have transitioned from fixed to floating and are now paid on a quarterly basis at a rate equal to three month LIBOR plus 158 basis points ~~(3.99%~~(3.70% at ~~June~~September 30, 2019). The Trust-Preferred Securities mature on September 15, 2035, but allow for redemption of the securities at our option prior to maturity.

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

LIQUIDITY AND CASH FLOW

Merchants Bank of Commerce

On January 31, 2019, we completed the acquisition of Merchants Holding Company located in Sacramento, California. The transaction was attractive to us because it expanded our presence in the Sacramento market, provided a new source of low cost core deposits and a quality loan portfolio. The acquisition also provided approximately $104.5 million of additional liquidity ($119.8 cash and investment securities less $15.3 million paid to Merchants shareholders). During the current year, we sold ~~$86.3~~$100.1 million of investment securities to provide liquidity for our ~~seasonal~~ decline in deposit balances and our planned reduction of wholesale certificates of deposit. The sales also included the elimination of certain securities acquired from Merchants Holding Company that did not fit our investment strategy.

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 ~~June~~September 30, 2019 and December 31, 2018.

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 ~~June~~September 30, 2019, the Bank has the following credit arrangements:

●
We have an available line of credit with the Federal Home Loan Bank of San Francisco of ~~$426.3~~$436.5 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 ~~$20.4~~$24.9 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 ~~June~~September 30, 2019 and had interest rates ranging from ~~2.64%~~2.00% to ~~3.38%~~2.86%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions.

Bank of Commerce Holdings

The Holding Company is a separate entity from the Bank and must provide for its own cash liquidity. The principal source of cash is dividends received from the Bank and during the first ~~six~~nine months of 2019, the Bank paid a dividend of ~~$5.0~~$7.5 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.

Consolidated Statements of Cash Flows

As disclosed in the Consolidated Statements of Cash Flows, net cash of ~~$7.9~~$13.4 million was provided by operating activities during the ~~six~~nine months ended ~~June~~September 30, 2019. The primary difference between net income and cash provided by operating activities was non-cash items including depreciation, accretion and amortization totaling $1.5 million.

Net cash of ~~$76.7~~$93.5 million provided by investing activities during the ~~six~~nine months ended ~~June~~September 30, 2019 consisted principally of:

●
$~~85.7~~99.6 million in proceeds from sale of investment securities.

●
$~~24.6~~47.5 million in proceeds from maturities and payments of investment securities.
These sources of cash were partially offset by:

●
$~~24.8~~48.6 million in purchases of investment securities.

●
$~~4.8 million~~432 thousand in net loan originations.

●
$2.9 million of net cash paid for the acquisition of Merchants.

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~~BANK OF COMMERCE HOLDINGS & SUBSIDIARIES~~
~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~
Net cash of ~~$91.3~~$65.6 million used by financing activities during the ~~six~~nine months ended ~~June~~September 30, 2019 principally consisted of:

●
$~~56.6~~25.0 million decrease in deposits excluding $152.2 million in deposits provided by the acquisition of Merchants.

●
$~~29.8~~34.8 million decrease in certificates excluding $38.0 million in certificates provided by the acquisition of Merchants.

●
$3.5 million decrease in net term debt.

CAPITAL RESOURCES

~~We use equity~~Equity capital is available to support organic and strategic growth, pay dividends and ~~pay dividends.~~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.

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

~~As instructed by the Crapo Bill,~~For certain qualifying institutions, the FDIC has ~~published~~substituted a ~~proposed~~ Community Bank Leverage Ratio in lieu of the Basel III capital requirements. The FDIC has set the Community Bank Leverage Ratio at 9%. The ratio will be defined as the ratio of Tier 1 capital to average total consolidated assets. Banks that meet the following criteria will only be required to report one ratio effective January 1, 2020:
●
Community Bank Leverage Ratio above 9%,
●
Consolidated assets less than $10 billion,
●
Off-balance-sheet exposures of 25% or less of consolidated assets and
●
Total trading assets and liabilities of 5% or less of assets.
Any qualifying depository institution or its holding company that exceeds the Community Bank Leverage Ratio will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and considered to be “well capitalized” under the prompt corrective action ~~rules discussed above. It is difficult at this time to predict when or how the new standards under the Crapo Bill will ultimately be applied to us.~~rules. Based on management’s review and analysis of Basel III and the Crapo Bill, management believes that the Holding Company and the Bank will exceed the standards under these rules.

CAPITAL ADEQUACY

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

As of ~~June~~September 30, 2019, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action as revised by Basel III. There are no conditions or events since the notification that management believes have changed the Bank’s risk category. The Holding ~~Company~~Company’s and the Bank’s capital amounts and ratios as of ~~June~~September 30, 2019, are presented in the following table.

June 30, 2019

Well

Minimum

Capital

Minimum Capital

Actual

Capitalized

Capital

Conservation

Ratio plus Capital

(Amounts in thousands)

Capital

Ratio

Requirement

Requirement

Buffer

Conservation Buffer

Holding Company:

Common Equity Tier 1 Capital Ratio
$ 148,910 12.56
%
n/a 4.50
%
2.50
%
7.00
%
Tier 1 Capital Ratio
$ 158,910 13.41
%
n/a 6.00
%
2.50
%
8.50
%
Total Capital Ratio
$ 181,949 15.35
%
n/a 8.00
%
2.50
%
10.50
%
Tier 1 Leverage Ratio
$ 158,910 11.08
%
n/a 4.00
%
n/a 4.00
%

Bank:

Common Equity Tier 1 Capital Ratio
$ 166,506 14.06
%
6.50
%
4.50
%
2.50
%
7.00
%
Tier 1 Capital Ratio
$ 166,506 14.06
%
8.00
%
6.00
%
2.50
%
8.50
%
Total Capital Ratio
$ 179,546 15.16
%
10.00
%
8.00
%
2.50
%
10.50
%
Tier 1 Leverage Ratio
$ 166,506 11.61
%
5.00
%
4.00
%
n/a 4.00
%

September 30, 2019

Well

Minimum

Capital

Minimum Capital

Actual

Capitalized

Capital

Conservation

Ratio plus Capital

(Amounts in thousands)

Capital

Ratio

Requirement

Requirement

Buffer

Conservation Buffer

Holding Company:

Common Equity Tier 1 Capital Ratio
$ 152,658 12.85
%
n/a 4.50
%
2.50
%
7.00
%
Tier 1 Capital Ratio
$ 162,658 13.69
%
n/a 6.00
%
2.50
%
8.50
%
Total Capital Ratio
$ 185,638 15.62
%
n/a 8.00
%
2.50
%
10.50
%
Tier 1 Leverage Ratio
$ 162,658 11.28
%
n/a 4.00
%
n/a 4.00
%

Bank:

Common Equity Tier 1 Capital Ratio
$ 169,215 14.25
%
6.50
%
4.50
%
2.50
%
7.00
%
Tier 1 Capital Ratio
$ 169,215 14.25
%
8.00
%
6.00
%
2.50
%
8.50
%
Total Capital Ratio
$ 182,195 15.34
%
10.00
%
8.00
%
2.50
%
10.50
%
Tier 1 Leverage Ratio
$ 169,215 11.74
%
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, 2018 for further detail on potential risks relating to the Subordinated Notes.

Capital ratios for the Holding Company include the benefit derived from issuing 1,834,142 shares of common stock valued at $19.6 million during the first quarter of 2019 as part of our acquisition of Merchants.

On September 18, 2019, we announced that our Board of Directors had authorized a stock repurchase program. The stock repurchase program authorizes the Company to purchase up to one million shares of its common stock over a period ending March 31, 2020 and is effective immediately. Purchases may be made in the open market, including in block trades, or through privately negotiated transactions, from time to time when management determines that market conditions and other factors warrant such purchases. There is no guarantee as to the exact number of shares to be purchased, and the stock repurchase program may be modified, suspended, or terminated without prior notice. There were no repurchases during the third quarter of 2019.

6056
Table of Contents

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

Cash Dividends and Payout Ratios per Common Share

The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. 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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2019

2018

2019

2018

2019

2018

2019

2018

Dividends declared per common share
$ 0.05 $ 0.04 $ 0.09 $ 0.07 $ 0.05 $ 0.04 $ 0.14 $ 0.11
Dividend payout ratio
25
%
18
%
27
%
17
%
19
%
16
%
24
%
16
%
Tangible Book Value Per Share

We have recorded net core deposit intangibles of ~~$5.2~~$5.0 million and goodwill of $11.7 million. Both intangible assets are subtracted from equity as part of the calculation of tangible book value per share. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess the value of the Company. Tangible book value per common share was $8.51 at September 30, 2019 compared to $8.36 at December 31, 2018.

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.

6157
Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our assessment of market risk as of ~~June~~September 30, 2019 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, 2018.

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 ~~June~~September 30, 2019, 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 ~~six~~nine months of 2019 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

6258
Table of Contents

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

There have been no significant changes in the risk factors previously disclosed in the Company’s Form 10-K for the period ended December 31, 2018, filed with the SEC on March 12, 2019.

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

a)
Not Applicable

b)
Not Applicable

c)
Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

3.2
Amended and Restated Bylaws of Bank of Commerce Holdings, as amended August 20, 2019 (incorporated by reference to Exhibit 3.2 to the
Form 8-K filed August 21, 2019)
10.1
2019 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-8 (Registration No. 333-233024))
31.1
Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002
32.0
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 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

6359
Table of Contents

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: ~~August 2,~~November 1, 2019

/s/ James A. Sundquist

James A. Sundquist

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

6460

	Three Months Ended June 30, 2019							Three Months Ended June 30, 2018							Three Months Ended September 30, 2019							Three Months Ended September 30, 2018
	Average							Average							Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾
Interest-earning assets:
Net loans ⁽²⁾	$	1,028,187	$	12,847		5.01	%	$	922,687	$	11,164		4.85	%	$	1,029,534	$	13,013		5.01	%	$	930,863	$	11,568		4.93	%
Taxable securities		249,907		1,733		2.78	%		206,247		1,278		2.49	%		238,601		1,609		2.68	%		199,883		1,209		2.40	%
Tax-exempt securities ⁽³⁾		39,501		328		3.33	%		50,306		413		3.29	%		32,974		271		3.26	%		48,561		400		3.27	%
Interest-bearing deposits in other banks		35,605		219		2.47	%		29,041		135		1.86	%		58,897		308		2.07	%		50,397		254		2.00	%
Average interest-earning assets		1,353,200		15,127		4.48	%		1,208,281		12,990		4.31	%		1,360,006		15,201		4.43	%		1,229,704		13,431		4.33	%
Cash and due from banks		21,942							19,880							23,822							21,834
Premises and equipment, net		15,819							14,167							15,922							13,768
Goodwill and core deposit intangible, net		16,995							1,943							16,769							1,888
Other assets		42,769							32,426							45,925							33,084
Average total assets	$	1,450,725						$	1,276,697						$	1,462,444						$	1,300,278

Interest-bearing liabilities:
Demand - interest-bearing	$	238,840		129		0.22	%	$	225,927		80		0.14	%	$	243,553		117		0.19	%	$	235,664		104		0.18	%
Money market		296,326		380		0.51	%		241,724		135		0.22	%		309,188		451		0.58	%		259,242		172		0.26	%
Savings		139,307		123		0.35	%		107,108		64		0.24	%		138,296		131		0.38	%		107,349		73		0.27	%
Certificates of deposit		164,084		497		1.21	%		170,824		488		1.15	%		157,620		491		1.24	%		163,302		465		1.13	%
Federal Home Loan Bank of San Francisco borrowings		30,000		192		2.57	%		55,275		267		1.94	%		—		—		—	%		22,283		121		2.15	%
Other borrowings		10,841		201		7.44	%		15,614		279		7.17	%		9,942		183		7.30	%		14,681		265		7.16	%
Junior subordinated debentures		10,310		110		4.28	%		10,310		97		3.77	%		10,310		106		4.08	%		10,310		104		4.00	%
Average interest-bearing liabilities		889,708		1,632		0.74	%		826,782		1,410		0.68	%		868,909		1,479		0.68	%		812,831		1,304		0.64	%
Noninterest-bearing demand		379,173							309,199							405,853							343,948
Other liabilities		18,246							12,535							18,074							12,000
Shareholders’ equity		163,598							128,181							169,608							131,499
Average liabilities and shareholders’ equity	$	1,450,725						$	1,276,697						$	1,462,444						$	1,300,278
Net interest income and net interest margin⁽⁴⁾			$	13,495		4.00	%			$	11,580		3.84	%			$	13,722		4.00	%			$	12,127		3.91	%

	Nine Months Ended September 30, 2019							Nine Months Ended September 30, 2018
	Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾
Interest-earning assets:
Net loans ⁽²⁾	$	1,017,127	$	37,891		4.98	%	$	912,648	$	33,461		4.90	%
Taxable securities		247,139		5,106		2.76	%		203,791		3,696		2.42	%
Tax-exempt securities ⁽³⁾		40,912		986		3.22	%		52,844		1,276		3.23	%
Interest-bearing deposits in other banks		44,995		772		2.29	%		37,515		518		1.85	%
Average interest-earning assets		1,350,173		44,755		4.43	%		1,206,798		38,951		4.32	%
Cash and due from banks		22,375							19,801
Premises and equipment, net		15,445							14,161
Goodwill and core deposit intangible, net		15,230							1,943
Other assets		43,253							32,666
Average total assets	$	1,446,476						$	1,275,369

Interest-bearing liabilities:
Demand - interest-bearing	$	241,924		372		0.21	%	$	231,958		273		0.16	%
Money market		299,694		1,120		0.50	%		245,797		439		0.24	%
Savings		136,254		365		0.36	%		108,382		196		0.24	%
Certificates of deposit		163,020		1,478		1.21	%		171,941		1,448		1.13	%
Federal Home Loan Bank of San Francisco borrowings		12,894		247		2.56	%		30,037		435		1.94	%
Other borrowings		11,213		623		7.43	%		15,601		825		7.07	%
Junior subordinated debentures		10,310		329		4.27	%		10,310		283		3.67	%
Average interest-bearing liabilities		875,309		4,534		0.69	%		814,026		3,899		0.64	%
Noninterest-bearing demand		391,208							320,316
Other liabilities		17,927							12,094
Shareholders’ equity		162,032							128,933
Average liabilities and shareholders’ equity	$	1,446,476						$	1,275,369
Net interest income and net interest margin⁽⁴⁾			$	40,221		3.98	%			$	35,052		3.88	%

	Six Months Ended June 30, 2019							Six Months Ended June 30, 2018
	Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾
Interest-earning assets:
Net loans ⁽²⁾	$	1,010,821	$	24,878		4.96	%	$	903,389	$	21,893		4.89	%
Taxable securities		251,479		3,497		2.80	%		205,777		2,487		2.44	%
Tax-exempt securities ⁽³⁾		44,947		715		3.21	%		55,021		876		3.21	%
Interest-bearing deposits in other banks		37,930		464		2.47	%		30,967		264		1.72	%
Average interest-earning assets		1,345,177		29,554		4.43	%		1,195,154		25,520		4.31	%
Cash and due from banks		21,640							18,767
Premises and equipment, net		15,203							14,361
Goodwill and core deposit intangible, net		14,447							1,971
Other assets		41,894							32,457
Average total assets	$	1,438,361						$	1,262,710

Interest-bearing liabilities:
Demand - interest-bearing	$	241,095		255		0.21	%	$	230,075		169		0.15	%
Money market		294,869		669		0.46	%		238,963		267		0.23	%
Savings		135,217		234		0.35	%		108,907		123		0.23	%
Certificates of deposit		165,764		987		1.20	%		176,332		983		1.12	%
Federal Home Loan Bank of San Francisco borrowings		19,448		247		2.56	%		33,978		314		1.86	%
Other borrowings		11,859		440		7.48	%		16,069		560		7.03	%
Junior subordinated debentures		10,310		223		4.36	%		10,310		179		3.50	%
Average interest-bearing liabilities		878,562		3,055		0.70	%		814,634		2,595		0.64	%
Noninterest-bearing demand		383,766							308,304
Other liabilities		17,851							12,144
Shareholders’ equity		158,182							127,628
Average liabilities and shareholders’ equity	$	1,438,361						$	1,262,710
Net interest income and net interest margin⁽⁴⁾			$	26,499		3.97	%			$	22,925		3.87	%

	Three Months Ended June 30, 2019 Over Three Months Ended June 30, 2018								Three Months Ended September 30, 2019 Over Three Months Ended September 30, 2018
(Amounts in thousands)	Volume			Rate		Net Change			Volume			Rate			Net Change
Increase (decrease) in interest income:
Net loans	$	1,309		$	374	$	1,683		$	1,244		$	201		$	1,445
Taxable securities		291			164		455			251			149			400
Tax-exempt securities⁽¹⁾		(90	)		5		(85	)		(128	)		(1	)		(129	)
Interest-bearing deposits in other banks		35			49		84			44			10			54
Total increase		1,545			592		2,137			1,411			359			1,770

Increase (decrease) in interest expense:
Demand - interest-bearing		5			44		49			4			9			13
Money market		36			209		245			39			240			279
Savings		23			36		59			25			33			58
Certificates of deposit		(17	)		26		9			(15	)		41			26
Federal Home Loan Bank of San Francisco borrowings		(259	)		184		(75	)		(121	)		—			(121	)
Other borrowings		(89	)		11		(78	)		(87	)		5			(82	)
Junior subordinated debentures		—			13		13			—			2			2
Total (decrease) increase		(301	)		523		222			(155	)		330			175
Net increase (decrease)	$	1,846		$	69	$	1,915
Net increase									$	1,566		$	29		$	1,595

	Six Months Ended June 30, 2019 Over Six Months Ended June 30, 2018									Nine Months Ended September 30, 2019 Over Nine Months Ended September 30, 2018
(Amounts in thousands)	Volume			Rate			Net Change			Volume			Rate			Net Change
Increase (decrease) in interest income:
Net loans	$	2,639		$	346		$	2,985		$	3,885		$	545		$	4,430
Taxable securities		602			408			1,010			852			558			1,410
Tax-exempt securities⁽¹⁾		(160	)		(1	)		(161	)		(288	)		(2	)		(290	)
Interest-bearing deposits in other banks		68			132			200			115			139			254
Total increase		3,149			885			4,034			4,564			1,240			5,804

Increase (decrease) in interest expense:
Demand - interest-bearing		8			78			86			12			87			99
Money market		74			328			402			114			567			681
Savings		35			76			111			59			110			169
Certificates of deposit		(29	)		33			4			(63	)		93			30
Federal Home Loan Bank of San Francisco borrowings		(538	)		471			(67	)		(433	)		245			(188	)
Other borrowings		(159	)		39			(120	)		(246	)		44			(202	)
Junior subordinated debentures		—			44			44			—			46			46
Total (decrease) increase		(609	)		1,069			460			(557	)		1,192			635
Net increase (decrease)	$	3,758		$	(184	)	$	3,574
Net increase										$	5,121		$	48		$	5,169

	Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
(Amounts in thousands)	2019		2018		Amount			Percent			2019		2018		Amount			Percent
Noninterest income:
Service charges on deposit accounts	$	187	$	175	$	12			7	%	$	355	$	351	$	4			1	%
ATM and point of sale		318		300		18			6	%		583		566		17			3	%
Payroll and benefit processing fees		157		146		11			8	%		328		315		13			4	%
Life insurance		155		127		28			22	%		284		256		28			11	%
Gain on sales of investment securities, net		33		4		29			725	%		125		40		85			213	%
Federal Home Loan Bank of San Francisco dividends		124		95		29			31	%		245		175		70			40	%
Gain on sale of OREO		18		—		18			—	%		41		16		25			156	%
Other		108		115		(7	)		(6	)%		196		225		(29	)		(13	)%
Total noninterest income	$	1,100	$	962	$	138			14	%	$	2,157	$	1,944	$	213			11	%

	Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
(Amounts in thousands)	2019		2018		Amount			Percent			2019		2018		Amount			Percent
Noninterest expense:
Salaries & related benefits	$	5,146	$	4,513	$	633			14	%	$	10,875	$	9,368	$	1,507			16	%
Premises & equipment		945		1,016		(71	)		(7	)%		1,937		2,087		(150	)		(7	)%
Federal Deposit Insurance Corporation insurance premium		95		93		2			2	%		195		189		6			3	%
Data processing fees		621		471		150			32	%		1,180		903		277			31	%
Professional service fees		535		314		221			70	%		838		659		179			27	%
Telecommunications		180		178		2			1	%		353		394		(41	)		(10	)%
Acquisition costs		376		—		376			100	%		2,306		—		2,306			100	%
Other		1,713		1,086		627			58	%		2,850		2,104		746			35	%
Total noninterest expense	$	9,611	$	7,671	$	1,940			25	%	$	20,534	$	15,704	$	4,830			31	%

	For the Three Months Ended June 30,						For the Six Months Ended June 30,						For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Amounts in thousands)	2019			2018			2019			2018			2019			2018			2019			2018
Income before provision for income taxes	$	4,984		$	4,871		$	8,122		$	9,165		$	6,428		$	5,436		$	14,550		$	14,601
Provision for income taxes	$	1,340		$	1,253		$	2,172		$	2,306		$	1,786		$	1,404		$	3,958		$	3,710
Effective tax rate		26.9	%		25.7	%		26.7	%		25.2	%		27.8	%		25.8	%		27.2	%		25.4	%

							Maturities					Maturities																					Maturities					Maturities
		Maturities					Over One Through					Over Five Through					Maturities											Maturities					Over One Through					Over Five Through					Maturities
		Within One Year					Five Years					Ten Years					Over Ten Years					Total						Within One Year					Five Years					Ten Years					Over Ten Years					Total
(Amounts in thousands)		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield				Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale securities:⁽¹⁾	Available-for-sale securities:⁽¹⁾																										Available-for-sale securities:⁽¹⁾
U.S. government & agencies		$	1,269		3.01	%	$	89		3.03	%	$	13,883		3.64	%	$	29,093		3.14	%	$	44,334		3.30	%		$	1,244		3.02	%	$	51		3.00	%	$	19,229		3.68	%	$	19,431		3.18	%	$	39,955		3.42	%
Obligations of state and political subdivisions			394		3.23	%		9,351		3.23	%		19,121		3.42	%		14,719		3.60	%		43,585		3.44	%			898		3.30	%		10,975		3.55	%		12,505		3.06	%		13,023		3.35	%		37,401		3.31	%
Residential mortgage-backed securities and collateralized mortgage obligations			217		3.48	%		112,083		2.96	%		46,356		2.98	%		8,027		3.63	%		166,683		3.00	%			3,252		1.46	%		139,832		2.82	%		21,287		3.05	%		604		3.31	%		164,975		2.82	%
Corporate securities			2,014		3.10	%		1,000		2.00	%		—		—	%		—		—	%		3,014		2.73	%			2,010		3.05	%		1,000		2.00	%		—		—	%		—		—	%		3,010		2.70	%
Commercial mortgage-backed securities			—		—	%		3,018		2.19	%		5,470		2.53	%		16,256		2.71	%		24,744		2.61	%			—		—	%		2,381		2.17	%		9,162		2.48	%		11,078		2.78	%		22,621		2.59	%
Other asset-backed securities			—		—	%		—		—	%		—		—	%		48		5.20	%		48		5.20	%			—		—	%		—		—	%		—		—	%		1,061		3.10	%		1,061		3.10	%
Total		$	3,894		3.11	%	$	125,541		2.95	%	$	84,830		3.16	%	$	68,143		3.20	%	$	282,408		3.08	%		$	7,404		2.38	%	$	154,239		2.85	%	$	62,183		3.16	%	$	45,197		3.13	%	$	269,023		2.96	%

			After One								After One
	Within One		Through		After Five				Within One		Through		After Five
(Amounts in thousands)	Year		Five Years		Years		Total		Year		Five Years		Years		Total
Commercial	$	51,118	$	94,962	$	7,062	$	153,142	$	67,176	$	75,211	$	10,655	$	153,042
Commercial real estate:
Real estate - construction and land development		5,672		12,543		19,354		37,569		4,584		12,674		18,213		35,471
Real estate - commercial non-owner occupied		36,777		208,856		222,630		468,263		35,804		208,909		230,518		475,231
Real estate - commercial owner occupied		20,190		87,893		103,914		211,997		21,848		86,243		103,965		212,056
Residential real estate:
Real estate - residential - ITIN		3,437		13,567		18,158		35,162		3,413		13,475		17,148		34,036
Real estate - residential - 1-4 family mortgage		5,140		23,291		38,764		67,195		5,404		22,663		36,775		64,842
Real estate - residential - equity lines		548		2,423		20,991		23,962		478		2,259		20,296		23,033
Consumer and other		1,277		2,471		37,691		41,439		1,295		2,411		33,645		37,351
Loans, net of deferred fees and costs	$	124,159	$	446,006	$	468,564	$	1,038,729	$	140,002	$	423,845	$	471,215	$	1,035,062
Loans with:
Fixed rates	$	48,588	$	208,202	$	195,793	$	452,583	$	46,963	$	205,254	$	190,193	$	442,410
Variable rates		75,571		237,804		272,771		586,146		93,039		218,591		281,022		592,652
Total	$	124,159	$	446,006	$	468,564	$	1,038,729	$	140,002	$	423,845	$	471,215	$	1,035,062

	For The Six Months Ended			For The Twelve Months Ended			For The Six Months Ended			For The Nine Months Ended			For The Twelve Months Ended			For The Nine Months Ended
(Amounts in thousands)	June 30, 2019			December 31, 2018			June 30, 2018			September 30, 2019			December 31, 2018			September 30, 2018
Beginning balance ALLL	$	12,292		$	11,925		$	11,925		$	12,292		$	11,925		$	11,925
Provision for loan and lease loss charged to expense		—			—			—			—			—			—
Loans charged off		(1,007	)		(1,248	)		(771	)		(1,326	)		(1,248	)		(969	)
Loan and lease loss recoveries		1,160			1,615			1,234			1,319			1,615			1,436
Ending balance ALLL	$	12,445		$	12,292		$	12,388		$	12,285		$	12,292		$	12,392

	At June 30, 2019			At December 31, 2018			At June 30, 2018
Nonaccrual loans:
Commercial	$	194		$	959		$	1,358
Real estate - commercial non-owner occupied		10,690			548			—
Real estate - residential - ITIN		2,389			2,388			2,613
Real estate - residential - 1-4 family mortgage		217			185			184
Real estate - residential - equity lines		—			43			44
Consumer and other		22			23			33
Total nonaccrual loans		13,512			4,146			4,232
Accruing troubled-debt restructured loans:
Commercial		1,092			1,224			1,420
Real estate - commercial non-owner occupied		791			795			799
Real estate - residential - ITIN		4,300			4,484			4,592
Real estate - residential - equity lines		242			363			372
Total accruing restructured loans		6,425			6,866			7,183

All other accruing impaired loans		—			—			—
Total impaired loans	$	19,937		$	11,012		$	11,415

Gross loans outstanding	$	1,036,724		$	946,251		$	936,816

Ratio of ALLL to gross loans outstanding		1.20	%		1.30	%		1.32	%
Nonaccrual loans to gross loans outstanding		1.30	%		0.44	%		0.45	%

	At September 30, 2019			At December 31, 2018			At September 30, 2018
Nonaccrual loans:
Commercial	$	139		$	959		$	899
Real estate - commercial non-owner occupied		10,099			548			—
Real estate - residential - ITIN		2,339			2,388			2,571
Real estate - residential - 1-4 family mortgage		198			185			179
Real estate - residential - equity lines		—			43			44
Consumer and other		21			23			24
Total nonaccrual loans		12,796			4,146			3,717
Accruing troubled-debt restructured loans:
Commercial		629			1,224			1,291
Real estate - commercial non-owner occupied		—			795			797
Real estate - residential - ITIN		4,072			4,484			4,535
Real estate - residential - equity lines		236			363			367
Total accruing restructured loans		4,937			6,866			6,990

All other accruing impaired loans		—			—			—
Total impaired loans	$	17,733		$	11,012		$	10,707

Gross loans outstanding	$	1,033,082		$	946,251		$	927,480

Ratio of ALLL to gross loans outstanding		1.19	%		1.30	%		1.34	%
Nonaccrual loans to gross loans outstanding		1.24	%		0.44	%		0.40	%

	Legacy Deposits		Acquired Merchants Deposits		Change In Acquired Deposits For The Five Months Ended			Change In Legacy Deposits For The Six Months Ended			Deposits At		Legacy Deposits		Acquired Merchants Deposits		Change In Acquired Deposits For The Eight Months Ended			Change In Legacy Deposits For The Nine Months Ended			Deposits At
	At December 31,		At January 31,		At June 30,			At June 30,			At June 30,		At December 31,		At January 31,		At September 30,			At September 30,			At September 30,
	2018		2019		2019			2019			2019		2018		2019		2019			2019			2019
Demand - noninterest-bearing	$	347,199	$	51,880	$	(2,777	)	$	1,047		$	397,349	$	347,199	$	51,880	$	(5,233	)	$	18,564		$	412,410
Demand - interest-bearing		252,202		28,231		(5,695	)		(36,563	)		238,175		252,202		28,231		(5,031	)		(35,855	)		239,547
Money market		265,093		43,316		(1,805	)		(5,757	)		300,847		265,093		43,316		(2,314	)		11,025			317,120
Total demand		864,494		123,427		(10,277	)		(41,273	)		936,371		864,494		123,427		(12,578	)		(6,266	)		969,077

Savings		114,840		28,786		(1,998	)		(3,037	)		138,591		114,840		28,786		(3,530	)		(2,655	)		137,441
Total non-maturing deposits		979,334		152,213		(12,275	)		(44,310	)		1,074,962		979,334		152,213		(16,108	)		(8,921	)		1,106,518

Certificates of deposit		152,382		38,003		(4,174	)		(25,655	)		160,556		152,382		38,003		(7,047	)		(27,717	)		155,621
Total deposits	$	1,131,716	$	190,216	$	(16,449	)	$	(69,965	)	$	1,235,518	$	1,131,716	$	190,216	$	(23,155	)	$	(36,638	)	$	1,262,139

	For the Six Months Ended June 30, 2019					For the Year Ended December 31, 2018					For the Nine Months Ended September 30, 2019					For the Year Ended December 31, 2018
(Amounts in thousands)	Average Balance		Rate			Average Balance		Rate			Average Balance		Rate			Average Balance		Rate
Interest-bearing demand	$	241,095		0.21	%	$	238,328		0.17	%	$	241,924		0.21	%	$	238,328		0.17	%
Money market		294,869		0.46	%		250,685		0.26	%		299,694		0.50	%		250,685		0.26	%
Savings		135,217		0.35	%		109,025		0.26	%		136,254		0.36	%		109,025		0.26	%
Certificates of deposit		165,764		1.20	%		168,183		1.14	%		163,020		1.21	%		168,183		1.14	%
Interest-bearing deposits		836,945		0.52	%		766,221		0.43	%		840,892		0.53	%		766,221		0.43	%
Noninterest-bearing demand		383,766					332,197					391,208					332,197
Total deposits	$	1,220,711		0.35	%	$	1,098,418		0.24	%	$	1,232,100		0.36	%	$	1,098,418		0.24	%

	June 30, 2019
						Well			Minimum			Capital			Minimum Capital
			Actual			Capitalized			Capital			Conservation			Ratio plus Capital
(Amounts in thousands)	Capital		Ratio			Requirement			Requirement			Buffer			Conservation Buffer
Holding Company:
Common Equity Tier 1 Capital Ratio	$	148,910		12.56	%		n/a			4.50	%		2.50	%		7.00	%
Tier 1 Capital Ratio	$	158,910		13.41	%		n/a			6.00	%		2.50	%		8.50	%
Total Capital Ratio	$	181,949		15.35	%		n/a			8.00	%		2.50	%		10.50	%
Tier 1 Leverage Ratio	$	158,910		11.08	%		n/a			4.00	%		n/a			4.00	%

Bank:
Common Equity Tier 1 Capital Ratio	$	166,506		14.06	%		6.50	%		4.50	%		2.50	%		7.00	%
Tier 1 Capital Ratio	$	166,506		14.06	%		8.00	%		6.00	%		2.50	%		8.50	%
Total Capital Ratio	$	179,546		15.16	%		10.00	%		8.00	%		2.50	%		10.50	%
Tier 1 Leverage Ratio	$	166,506		11.61	%		5.00	%		4.00	%		n/a			4.00	%

3.2	Amended and Restated Bylaws of Bank of Commerce Holdings, as amended August 20, 2019 (incorporated by reference to Exhibit 3.2 to the Form 8-K filed August 21, 2019)
10.1	2019 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-8 (Registration No. 333-233024))
31.1	Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002
32.0	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 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

Date: ~~August 2,~~November 1, 2019			/s/ James A. Sundquist
			James A. Sundquist
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)