Bank of Commerce Holdings - FORM 10-Q

Attached files

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EX-32.0 - EXHIBIT 32.0 - Bank of Commerce Holdings	ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - Bank of Commerce Holdings	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Bank of Commerce Holdings	ex31-1.htm

Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

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)

1901 Churn Creek Road Redding, California	96002
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (530) 722-3952

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes☒ No ☐

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

(Check One)


Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller Reporting Company ☐

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

Yes ☐ No ☒

Outstanding shares of Common Stock, no par value, as of October 28, 2016: 13,439,422

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q

Part I. FINANCIAL INFORMATION
	Item 1. Financial Statements	3
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	42
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	69
	Item 4. Controls and Procedures	69

Part II. OTHER INFORMATION
	Item 1. Legal Proceedings	70
	Item 1a. Risk Factors	70
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	70
	Item 3. Defaults Upon Senior Securities	70
	Item 4. Mine Safety Disclosures	70
	Item 5. Other Information	70
	Item 6. Exhibits	70

SIGNATURES		71

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

September 30, 2016 and December 31, 2015

	September 30,			December 31,
(Amounts in thousands, except share information)	2016			2015
Assets:
Cash and due from banks	$	19,699		$	9,730
Interest-bearing deposits in other banks		65,431			41,462
Total cash and cash equivalents		85,130			51,192

Securities available-for-sale, at fair value		156,440			159,030
Securities held-to-maturity, at amortized cost		31,771			35,899

Loans, net of deferred fees and costs		780,174			717,509
Allowance for loan and lease losses		(11,849	)		(11,180	)
Net loans		768,325			706,329

Premises and equipment, net		15,930			11,072
Other real estate owned		793			1,423
Life insurance		22,946			22,485
Deferred tax asset, net		8,171			9,760
Goodwill and core deposit intangibles, net		2,307			—
Other assets		19,205			18,251
Total assets	$	1,111,018		$	1,015,441

Liabilities and shareholders' equity:
Liabilities:
Demand - noninterest bearing	$	254,435		$	169,507
Demand - interest bearing		394,525			315,658
Savings		110,201			94,503
Certificates of deposit		216,332			224,067
Total deposits		975,493			803,735

Term debt:
Principal		19,317			94,917
Less unamortized debt issuance costs		(193	)		(223	)
Net term debt		19,124			94,694

Junior subordinated debentures		10,310			10,310
Other liabilities		11,798			16,180
Total liabilities		1,016,725			924,919

Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized: 17,161,096 issued; 13,439,422 outstanding as of September 30, 2016 and 13,385,154 outstanding as of December 31, 2015		24,483			24,214
Retained earnings		68,321			66,562
Accumulated other comprehensive income (loss)		1,489			(254	)
Total shareholders' equity		94,293			90,522
Total liabilities and shareholders' equity	$	1,111,018		$	1,015,441

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

For the three and nine months ended September 30, 2016 and 2015

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(Amounts in thousands, except per share information)	2016		2015		2016			2015
Interest income:
Interest and fees on loans	$	9,007	$	8,357	$	26,254		$	24,572
Interest on taxable securities		689		743		2,281			2,489
Interest on tax-exempt securities		552		592		1,734			1,793
Interest on interest-bearing deposits in other banks		82		40		222			167
Total interest income		10,330		9,732		30,491			29,021
Interest expense:
Interest on demand deposits		136		116		388			339
Interest on savings deposits		43		53		129			162
Interest on certificates of deposit		524		586		1,636			1,771
Interest on term debt		292		475		1,369			1,187
Interest on junior subordinated debentures		59		47		172			143
Total interest expense		1,054		1,277		3,694			3,602
Net interest income		9,276		8,455		26,797			25,419
Provision for loan and lease losses		—		—		—			—
Net interest income after provision for loan and lease losses		9,276		8,455		26,797			25,419
Noninterest income:
Service charges on deposit accounts		133		52		293			153
ATM and point of sale fees		287		96		714			279
Fees on payroll and benefit processing		133		138		432			416
Earnings on cash surrender value - life insurance		152		158		461			482
Gain on sale of investment securities, net		70		137		192			413
Impairment losses on investment securities		—		—		(546	)		—
Other income		184		227		799			800
Total noninterest income		959		808		2,345			2,543
Noninterest expense:
Salaries and related benefits		3,873		3,208		12,188			10,693
Premises and equipment		1,071		714		2,847			2,157
Federal Deposit Insurance Corporation insurance premium		176		159		513			544
Data processing fees		464		243		1,142			736
Professional service fees		303		337		1,209			1,167
Telecommunications		199		116		545			335
Branch acquisition costs		—		—		580			—
Loss on cancellation of interest rate swap		—		—		2,325			—
Other expenses		1,039		797		3,445			2,657
Total noninterest expense		7,125		5,574		24,794			18,289
Income before provision for income taxes		3,110		3,689		4,348			9,673
Provision for income taxes		744		1,164		1,386			2,957
Net income	$	2,366	$	2,525	$	2,962		$	6,716
Less: Preferred stock dividends		—		50		—			150
Income available to common shareholders	$	2,366	$	2,475	$	2,962		$	6,566

Earnings per share - basic	$	0.18	$	0.18	$	0.22		$	0.49
Weighted average shares - basic		13,369		13,340		13,366			13,327
Earnings per share - diluted	$	0.18	$	0.18	$	0.22		$	0.49
Weighted average shares - diluted		13,439		13,377		13,412			13,358

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 nine months ended September 30, 2016 and 2015

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Amounts in thousands)	2016			2015			2016			2015
Net income	$	2,366		$	2,525		$	2,962		$	6,716

Available-for-sale securities:
Unrealized (losses) gains arising during the period		(306	)		253			294			(544	)
Income taxes		126			(104	)		(121	)		224
Change in unrealized (losses) gains, net of tax		(180	)		149			173			(320	)

Reclassification adjustment for realized gains included in net income		(48	)		(137	)		(171	)		(413	)
Income taxes		19			54			70			170
Realized gains, net of tax		(29	)		(83	)		(101	)		(243	)

Reclassification adjustment for other than temporary impairment included in net income		—			—			546			—
Income taxes		—			—			(225	)		—
Realized impairment, net of tax		—			—			321			—
Net change in unrealized (losses) gains on available-for-sale securities		(209	)		66			393			(563	)


Held-to-maturity securities:
Amortization of held-to-maturity fair value adjustment		(22	)		(37	)		(79	)		(116	)
Income taxes		9			14			33			47
Net change in fair value adjustment on held-to-maturity securities		(13	)		(23	)		(46	)		(69	)

Derivatives:
Unrealized losses arising during the period		—			(457	)		(348	)		(917	)
Income taxes		—			188			143			377
Change in unrealized losses, net of tax		—			(269	)		(205	)		(540	)

Reclassification adjustments for net losses on derivatives included in net income		—			418			2,721			1,005
Income taxes		—			(177	)		(1,120	)		(414	)
Reclassification adjustments for net losses included in net income, net of tax		—			241			1,601			591
Net change in unrealized losses on derivatives		—			(28	)		1,396			51
Other comprehensive income (loss)		(222	)		15			1,743			(581	)
Comprehensive income – Bank of Commerce Holdings	$	2,144		$	2,540		$	4,705		$	6,135

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, 2015 and nine months ended September 30, 2016 (Unaudited)

(Amounts in thousands except per share information)	Preferred Stock Amount			Common Shares		Common Stock Amount		Retained Earnings			Accumulated Other Comp- Income (Loss) Net of Tax			Total
Balance at January 1, 2015	$	19,931			13,294	$	23,891	$	59,867		$	(87	)	$	103,602
Net income		—			—		—		8,586			—			8,586
Other comprehensive loss, net of tax		—			—		—		—			(167	)		(167	)
Comprehensive income		—			—		—		—			—			8,419
Dividend on preferred stock		—			—		—		(189	)		—			(189	)
Dividend on common stock ($0.12 per share)		—			—		—		(1,600	)		—			(1,600	)
Common stock issued under employee plans		—			9		36		—			—			36
Stock options exercised		—			39		156		—			—			156
Compensation expense associated with stock options		—			—		42		—			—			42
Compensation expense associated with restricted stock		—			—		89		—			—			89
Preferred stock redemption		(20,000	)		—		—		(33	)		—			(20,033	)
Preferred stock accretion		69			—		—		(69	)		—			—
Balance at December 31, 2015⁽¹⁾	$	—			13,342	$	24,214	$	66,562		$	(254	)	$	90,522

⁽¹⁾Excludes 43 unvested restricted shares

								Accumulated
			Common					Other Comp-
	Common		Stock		Retained			Income (Loss)
(Amounts in thousands except per share information)	Shares		Amount		Earnings			Net of Tax			Total
Balance at January 1, 2016		13,342	$	24,214	$	66,562		$	(254	)	$	90,522
Net income		—		—		2,962			—			2,962
Other comprehensive income, net of tax		—		—		—			1,743			1,743
Comprehensive income		—		—		—			—			4,705
Dividend on common stock ($0.09 per share)		—		—		(1,203	)		—			(1,203	)
Common stock issued under employee plans		26		84		—			—			84
Stock options exercised		1		4		—			—			4
Compensation expense associated with stock options		—		18		—			—			18
Compensation expense associated with restricted stock		—		163		—			—			163
Balance at September 30, 2016 ⁽¹⁾		13,369	$	24,483	$	68,321		$	1,489		$	94,293

⁽¹⁾Excludes 70 unvested restricted shares

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2016 and September 30, 2015

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2016			2015
Cash flows from operating activities:
Net income	$	2,962		$	6,716
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation and amortization		1,397			1,126
Amortization of core deposit intangibles		130			—
Amortization of debt issuance costs		30			—
Compensation expense associated with stock options		18			33
Compensation expense associated with restricted stock		163			68
Net gain on sale or call of securities		(192	)		(413	)
Other than temporary impairment on investment securities		546			—
Amortization of investment premiums and accretion of discounts, net		1,256			1,424
Amortization of held-to-maturity fair value adjustments		(79	)		(116	)
Loss on cancellation of interest rate swap		2,325			—
Loss (gain) on disposal of fixed assets		2			(4	)
Write-down of fixed assets		—			238
Write-down of other real estate owned		76			—
Loss on sale of other real estate owned		119			4
Decrease in deferred income taxes		363			—
Increase in cash surrender value of life insurance		(461	)		(482	)
(Decrease) increase in deferred compensation and salary continuation plans		(26	)		28
Increase in deferred loan fees and costs		(285	)		(561	)
(Increase) decrease in other assets		(796	)		669
Decrease in other liabilities		(1,059	)		(1,165	)
Net cash provided by operating activities		6,489			7,565

Cash flows from investing activities:
Proceeds from maturities of and payments on available-for-sale securities		25,660			18,328
Proceeds from sale of available-for-sale securities		46,699			61,255
Purchases of available-for-sale securities		(70,892	)		(52,015	)
Proceeds from maturities of and payments on held-to-maturity securities		4,310			849
Investment in qualified affordable housing partnerships		(688	)		(863	)
Net redemption of Federal Home Loan Bank of San Francisco stock		—			1,263
Loan originations, net of principal repayments		(74,008	)		(51,452	)
Net repayment on (purchase of) loan pools		12,316			(9,833	)
Purchase of premises and equipment		(2,067	)		(347	)
Proceeds from the sale of other real estate owned		545			2,864
Payments to derivative counterparties for the termination of interest rate swaps		(2,578	)		—
Acquisition of branches, net of cash paid		142,411			—
Net cash provided (used) by investing activities		81,708			(29,951	)

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2016			2015
Cash flows from financing activities:
Net increase in demand deposits and savings accounts	$	54,607		$	6,727
Net decrease in certificates of deposit		(31,896	)		(16,257	)
Advances on term debt		55,000			240,000
Repayment of term debt		(130,772	)		(240,000	)
Proceeds from stock options exercised		4			152
Cash dividends paid on preferred stock		—			(150	)
Cash dividends paid on common stock		(1,202	)		(1,199	)
Net cash used in financing activities		(54,259	)		(10,727	)
Net increase (decrease) in cash and cash equivalents		33,938			(33,113	)
Cash and cash equivalents at beginning of year		51,192			58,422
Cash and cash equivalents at end of period	$	85,130		$	25,309

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the nine months ended September 30, 2016 and September 30, 2015

	For the Nine Months Ended
	September 30,
(Amounts in thousands)	2016			2015
Supplemental disclosures of cash flow activity:
Cash paid during the period for:
Income taxes	$	3,444		$	3,650
Interest	$	3,884		$	3,486
Supplemental disclosures of non cash investing activities:
Transfer of loans to other real estate owned	$	110		$	3,721
Transfer of fixed asset to other real estate owned	$	—		$	170

Changes in unrealized gain (loss) on investment securities available-for-sale	$	669		$	(957	)
Changes in net deferred tax asset related to changes in unrealized gain (loss) on investment securities available-for-sale		(276	)		394
Changes in accumulated other comprehensive income due to changes in unrealized gain on investment securities available-for-sale	$	393		$	(563	)

Accretion of held-to-maturity investment securities from other comprehensive income to interest income	$	(79	)	$	(116	)
Changes in deferred tax related to accretion of held-to-maturity investment securities		33			47
Changes in accumulated other comprehensive income due to accretion of held-to-maturity investment securities	$	(46	)	$	(69	)

Changes in unrealized loss on derivatives	$	(348	)	$	(917	)
Changes in net deferred tax asset related to changes in unrealized loss on derivatives		143			377
Changes in accumulated other comprehensive income due to changes in unrealized loss on derivatives	$	(205	)	$	(540	)

Reclassification of losses on derivatives	$	2,721		$	1,005
Changes in net deferred tax asset related to reclassification of losses on derivatives		(1,120	)		(414	)
Changes in accumulated other comprehensive income due to reclassification of losses on derivatives	$	1,601		$	591
Supplemental disclosures of non cash financing activities:
Vested restricted stock issued under employee plans	$	84		$	36
Cash dividend declared on common shares and payable after period-end	$	401		$	400
Cash dividend declared on preferred shares and payable after period-end	$	—		$	50
Transactions Related to Acquisition:
Assets acquired - fair value	$	155,230		$	—
Goodwill	$	665		$	—
Liabilities assumed - fair value	$	149,239		$	—

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”), is a bank holding company (“BHC”) with its principal offices in Redding, California. The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, which have been derived from the unaudited interim consolidated financial statements and audited consolidated financial statements, 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, although 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 determination of the allowance for loan and lease losses (“ALLL”), 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 2015 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2016 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Holding Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. As of September 30, 2016 and December 31, 2015, the Company had one wholly-owned trust (“Trust”) formed in 2005 to issue trust preferred securities and related common securities. The Company has not consolidated the accounts of the Trust in its Consolidated Financial Statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB”) ASC 810, Consolidation (“ASC 810”). As a result, the junior subordinated debentures issued by the Company to the Trust are reflected in our Consolidated Balance Sheets.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

In June of 2016, the FASB issued Accounting Standards Update (“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.

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. We are currently evaluating the provisions of the ASU to determine the potential impact the new standard will have on our consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

In March of 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impacts of this ASU on our consolidated financial statements.

In February of 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 812). 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. 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. 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. We are currently evaluating the provisions of this ASU to determine the potential impact the new standard will have on our consolidated financial statements.

In May of 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which creates Topic 606 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

The standard is effective for public entities for interim and annual periods beginning after December 15, 2017 as deferred by ASU No. 2015-14; early adoption is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. We are currently evaluating the provisions of the ASU to determine the potential impact the new standard will have on our consolidated financial statements.

NOTE 3. EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders 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 could 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 subsequently 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following is a computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015.

	For the Three Months Ended				For the Nine Months Ended
(Amounts in thousands, except per share information)	September 30,				September 30,
Earnings Per Share	2016		2015		2016		2015
Numerators:
Net income	$	2,366	$	2,525	$	2,962	$	6,716
Less:
Preferred stock dividends		—		50		—		150
Net income available to common shareholders	$	2,366	$	2,475	$	2,962	$	6,566
Denominators:
Weighted average number of common shares outstanding - basic		13,369		13,340		13,366		13,327
Potentially dilutive common shares ⁽¹⁾		70		37		46		31
Weighted average number of common shares outstanding - diluted		13,439		13,377		13,412		13,358
Earnings per common share:
Basic	$	0.18	$	0.18	$	0.22	$	0.49
Diluted	$	0.18	$	0.18	$	0.22	$	0.49
Anti-dilutive options not included in diluted earnings per share calculation		74		121		111		121
Anti-dilutive restricted shares not included in diluted earnings per share calculation		—		—		41		30

⁽¹⁾Represents the effects of the assumed exercise of stock options and vesting of non-participating restricted shares.

NOTE 4. SECURITIES

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities as of September 30, 2016, and December 31, 2015.

	As of September 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(Amounts in thousands)	Cost		Gain		Loss			Fair Value
Available-for-sale securities:
Obligations of state and political subdivisions	$	57,937	$	2,059	$	(44	)	$	59,952
Residential mortgage backed securities and collateralized mortgage obligations		53,907		369		(230	)		54,046
Corporate securities		16,190		238		(82	)		16,346
Commercial mortgage backed securities		16,291		24		(61	)		16,254
Other asset backed securities		9,826		87		(71	)		9,842
Total	$	154,151	$	2,777	$	(488	)	$	156,440
Held-to-maturity securities:
Obligations of state and political subdivisions	$	31,771	$	1,628	$	(11	)	$	33,388

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
(Amounts in thousands)	Cost		Gain		Loss			Fair Value
Available-for-sale securities:
U.S. government & agencies	$	3,886	$	57	$	—		$	3,943
Obligations of state and political subdivisions		59,332		1,811		(39	)		61,104
Residential mortgage backed securities and collateralized mortgage obligations		32,215		192		(270	)		32,137
Corporate securities		33,775		194		(191	)		33,778
Commercial mortgage backed securities		12,893		10		(134	)		12,769
Other asset backed securities		15,331		82		(114	)		15,299
Total	$	157,432	$	2,346	$	(748	)	$	159,030
Held-to-maturity securities:
Obligations of state and political subdivisions	$	35,899	$	966	$	(220	)	$	36,645

The following table presents the expected maturities of investment securities at September 30, 2016.

	Available-For-Sale				Held-To-Maturity
(Amounts in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	4,946	$	4,991	$	—	$	—
One year through five years		62,910		63,417		4,575		4,830
Five years through ten years		33,575		34,693		13,435		14,087
After ten years		52,720		53,339		13,761		14,471
Total	$	154,151	$	156,440	$	31,771	$	33,388

The amortized cost and fair value of residential mortgage backed, 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.

The following table presents the fair value of the securities held for pledging, segregated by purpose, as of September 30, 2016.

(Amounts in thousands)	Pledged		Available To Be Pledged		Total Held For Pledging Purposes
Public funds collateral	$	17,687	$	7,921	$	25,608
Federal Home Loan Bank of San Francisco borrowings		—		18,616		18,616
Total	$	17,687	$	26,537	$	44,224

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents the cash proceeds from sales of securities and the associated gross realized gains and gross realized losses that have been included in earnings for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Amounts in thousands)	2016			2015			2016			2015
Proceeds from sales of securities	$	12,310		$	25,340		$	46,699		$	61,255

Gross realized gains on sales of securities:
Obligations of state and political subdivisions	$	25		$	16		$	136		$	86
Residential mortgage backed securities and collateralized mortgage obligations		12			49			14			111
Corporate securities		29			52			105			134
Commercial mortgage backed securities		—			10			4			14
Other asset backed securities		10			50			31			142
Total gross realized gains on sales of securities		76			177			290			487
Gross realized losses on sales of securities:
U.S. government & agencies		—			(4	)		—			(5	)
Obligations of state and political subdivisions		(3	)		(4	)		(3	)		(4	)
Residential mortgage backed securities and collateralized mortgage obligations		—			(2	)		(64	)		(12	)
Corporate securities		(2	)		—			(27	)		—
Commercial mortgage backed securities		(1	)		—			(1	)		—
Other asset backed securities		—			(30	)		(3	)		(53	)
Total gross realized losses on sales of securities		(6	)		(40	)		(98	)		(74	)
Gain on investment securities, net	$	70		$	137		$	192		$	413

Investment securities that were in an unrealized loss position as of September 30, 2016 and December 31, 2015 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. 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 underlying collateral.

	As of September 30, 2016
	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Amounts in thousands)	Value		Losses			Value		Losses			Value		Losses
Available-for-sale securities:
Obligations of states and political subdivisions	$	4,793	$	(44	)	$	—	$	—		$	4,793	$	(44	)
Residential mortgage backed securities and collateralized mortgage obligations		18,276		(109	)		5,283		(121	)		23,559		(230	)
Corporate securities		5,014		(55	)		2,648		(27	)		7,662		(82	)
Commercial mortgage backed securities		8,155		(43	)		2,944		(18	)		11,099		(61	)
Other asset backed securities		2,222		(5	)		1,345		(66	)		3,567		(71	)
Total temporarily impaired securities	$	38,460	$	(256	)	$	12,220	$	(232	)	$	50,680	$	(488	)
Held-to-maturity securities:
Obligations of states and political subdivisions	$	1,433	$	(4	)	$	1,023	$	(7	)	$	2,456	$	(11	)

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2015
	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:
Obligations of states and political subdivisions	$	7,682	$	(39	)	$	—	$	—		$	7,682	$	(39	)
Residential mortgage backed securities and collateralized mortgage obligations		16,279		(210	)		4,931		(60	)		21,210		(270	)
Corporate securities		18,707		(191	)		—		—			18,707		(191	)
Commercial mortgage backed securities		7,557		(62	)		1,516		(72	)		9,073		(134	)
Other asset backed securities		4,734		(13	)		3,430		(101	)		8,164		(114	)
Total temporarily impaired securities	$	54,959	$	(515	)	$	9,877	$	(233	)	$	64,836	$	(748	)
Held-to-maturity securities:
Obligations of states and political subdivisions	$	1,513	$	(63	)	$	4,831	$	(157	)	$	6,344	$	(220	)

At September 30, 2016, 40 securities were in unrealized loss positions and at December 31, 2015, 59 securities were in unrealized loss positions.

Other-Than-Temporary Impairment

At June 30, 2016, we held $3.2 million par value of AgriBank subordinated notes due July 15, 2019. On April 28, 2016 AgriBank announced that, on July 15, 2016 it would redeem all of the outstanding principal amount of these notes at 100% of the principal amount together with all accrued and unpaid interest. During the second quarter of 2016, we determined that the present value of the expected cash flows on our AgriBank investment was $546 thousand less than our amortized cost basis and recorded an other-than-temporary impairment for that amount. We did not recognize any additional, other-than-temporary impairment losses for the nine months ended September 30, 2016, or the year ended December 31, 2015.

NOTE 5. LOANS

Outstanding loan balances consisted of the following at September 30, 2016, and December 31, 2015.

(Amounts in thousands)	September 30,			December 31,
Loan Portfolio	2016			2015
Commercial	$	136,235		$	132,805
Commercial real estate:
Real estate - construction and land development		48,365			28,319
Real estate - commercial non-owner occupied		281,977			243,374
Real estate - commercial owner occupied		160,474			156,299
Residential real estate:
Real estate - residential - Individual Tax Identification Number (“ITIN”)		46,458			49,106
Real estate - residential - 1-4 family mortgage		10,770			11,390
Real estate - residential - equity lines		42,363			45,473
Consumer and other		52,377			49,873
Gross loans		779,019			716,639
Deferred fees and costs		1,155			870
Loans, net of deferred fees and costs		780,174			717,509
Allowance for loan and lease losses		(11,849	)		(11,180	)
Net loans	$	768,325		$	706,329

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Gross loan balances in the table above include net purchase discounts of $2.9 million and $2.3 million as of September 30, 2016, and December 31, 2015, respectively.

Age analysis of gross loan balances for past due loans, segregated by class of loans, as of September 30, 2016, and December 31, 2015, was as follows.

					Greater								Recorded
(Amounts in thousands)	30-59		60-89		Than 90								Investment >
Past Due Loans at	Days Past		Days Past		Days Past		Total Past						90 Days and
September 30, 2016	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	299	$	—	$	—	$	299	$	135,936	$	136,235	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		48,365		48,365		—
Real estate - commercial non-owner occupied		—		—		1,196		1,196		280,781		281,977		—
Real estate - commercial owner occupied		—		—		113		113		160,361		160,474		—
Residential real estate:
Real estate - residential - ITIN		664		159		979		1,802		44,656		46,458		—
Real estate - residential - 1-4 family mortgage		155		405		665		1,225		9,545		10,770		—
Real estate - residential - equity lines		181		35		—		216		42,147		42,363		—
Consumer and other		291		73		—		364		52,013		52,377		—
Total	$	1,590	$	672	$	2,953	$	5,215	$	773,804	$	779,019	$	—

					Greater								Recorded
(Amounts in thousands)	30-59		60-89		Than 90								Investment >
Past Due Loans at	Days Past		Days Past		Days Past		Total Past						90 Days and
December 31, 2015	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	—	$	30	$	634	$	664	$	132,141	$	132,805	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		28,319		28,319		—
Real estate - commercial non-owner occupied		64		—		5,665		5,729		237,645		243,374		—
Real estate - commercial owner occupied		—		—		1,071		1,071		155,228		156,299		—
Residential real estate:
Real estate - residential - ITIN		1,018		118		850		1,986		47,120		49,106		—
Real estate - residential - 1-4 family mortgage		—		404		871		1,275		10,115		11,390		—
Real estate - residential - equity lines		137		97		—		234		45,239		45,473		—
Consumer and other		150		50		88		288		49,585		49,873		88
Total	$	1,369	$	699	$	9,179	$	11,247	$	705,392	$	716,639	$	88

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize impaired loans by loan class as of September 30, 2016, and December 31, 2015.

	As of September 30, 2016
			Unpaid
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,728	$	2,562	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		1,196		1,196		—
Real estate - commercial owner occupied		800		847		—
Residential real estate:
Real estate - residential - ITIN		6,252		7,881		—
Real estate - residential - 1-4 family mortgage		1,798		2,585		—
Real estate - residential - equity lines		1,085		1,411		—
Consumer and other		222		225		—
Total with no related allowance recorded	$	13,081	$	16,707	$	—

With an allowance recorded:
Commercial	$	707	$	707	$	74
Commercial real estate:
Real estate - commercial non-owner occupied		811		811		24
Real estate - commercial owner occupied		341		341		64
Residential real estate:
Real estate - residential - ITIN		2,420		2,465		481
Real estate - residential - equity lines		543		543		271
Consumer and other		30		30		11
Total with an allowance recorded	$	4,852	$	4,897	$	925

By loan class:
Commercial	$	2,435	$	3,269	$	74
Commercial real estate		3,148		3,195		88
Residential real estate		12,098		14,885		752
Consumer and other		252		255		11
Total impaired loans	$	17,933	$	21,604	$	925

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2015
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,282	$	1,519	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		5,488		6,226		—
Real estate - commercial owner occupied		1,071		1,794		—
Residential real estate:
Real estate - residential - ITIN		7,063		8,662		—
Real estate - residential - 1-4 family mortgage		1,775		2,775		—
Real estate - residential - equity lines		142		142		—
Consumer and other		—		—		—
Total with no related allowance recorded	$	16,821	$	21,118	$	—

With an allowance recorded:
Commercial	$	761	$	820	$	122
Commercial real estate:
Real estate - commercial non-owner occupied		824		824		35
Real estate - commercial owner occupied		350		350		62
Residential real estate:
Real estate - residential - ITIN		2,044		2,089		321
Real estate - residential - equity lines		558		558		279
Consumer and other		32		32		13
Total with an allowance recorded	$	4,569	$	4,673	$	832

By loan class:
Commercial	$	2,043	$	2,339	$	122
Commercial real estate		7,733		9,194		97
Residential real estate		11,582		14,226		600
Consumer and other		32		32		13
Total impaired loans	$	21,390	$	25,791	$	832

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately $93 thousand and $127 thousand for the three months ended September 30, 2016 and 2015, respectively. We would have recognized additional interest income, net of tax, of approximately $249 thousand and $287 thousand for the nine months ended September 30, 2016 and 2015, respectively.

Nonaccrual loans, segregated by loan class, were as follows as of September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30,		December 31,
Nonaccrual Loans	2016		2015
Commercial	$	1,710	$	1,994
Commercial real estate:
Real estate - commercial non-owner occupied		1,196		5,488
Real estate - commercial owner occupied		800		1,071
Residential real estate:
Real estate - residential - ITIN		3,392		3,649
Real estate - residential - 1-4 family mortgage		1,798		1,775
Real estate - residential - equity lines		942		—
Consumer and other		252		32
Total	$	10,090	$	14,009

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended				Three Months Ended
	September 30, 2016				September 30, 2015
	Average		Interest		Average		Interest
(Amounts in thousands)	Recorded		Income		Recorded		Income
Average Recorded Investment and Interest Income	Investment		Recognized		Investment		Recognized
Commercial	$	2,601	$	10	$	2,885	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		2,010		12		6,874		12
Real estate - commercial owner occupied		1,147		6		2,281		15
Residential real estate:
Real estate - residential - ITIN		8,831		42		9,616		36
Real estate - residential - 1-4 family mortgage		1,808		—		1,677		—
Real estate - residential - equity lines		1,661		7		742		6
Consumer and other		257		—		33		—
Total	$	18,315	$	77	$	24,108	$	69

	Nine Months Ended				Nine Months Ended
	September 30, 2016				September 30, 2015
	Average		Interest		Average		Interest
(Amounts in thousands)	Recorded		Income		Recorded		Income
Average Recorded Investment and Interest Income	Investment		Recognized		Investment		Recognized
Commercial	$	2,551	$	14	$	3,919	$	22
Commercial real estate:
Real estate - commercial non-owner occupied		2,015		35		7,767		37
Real estate - commercial owner occupied		1,333		19		2,286		52
Residential real estate:
Real estate - residential - ITIN		9,037		124		9,819		102
Real estate - residential - 1-4 family mortgage		1,774		—		1,790		—
Real estate - residential - equity lines		1,558		20		763		20
Consumer and other		133		—		34		—
Total	$	18,401	$	212	$	26,378	$	233

The impaired loans for which these interest income amounts were recognized primarily relate to 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.

At September 30, 2016 and December 31, 2015, impaired loans of $7.4 million and $6.9 million, respectively, were classified as performing restructured loans.

In order 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. We had no obligation to lend additional funds on any restructured loans as of September 30, 2016 or December 31, 2015.

As of September 30, 2016, we had $11.2 million in troubled debt restructurings compared to $15.9 million as of December 31, 2015. As of September 30, 2016, we had 119 loans that qualified as troubled debt restructurings, of which 110 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.43% of gross loans as of September 30, 2016, compared to 2.22% at December 31, 2015.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Rate – A modification in which the interest rate is modified.

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

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

The following tables present the period end balances of newly restructured loans and the types of modifications that occurred during the three and nine months ended September 30, 2016 and 2015.

	For the Three Months Ended September 30, 2016								For the Three Months Ended September 30, 2015
(Amounts in thousands)													Rate &
Troubled Debt Restructuring Modification Types	Maturity		Rate & Maturity		Principal Reduction		Total		Rate		Rate & Maturity		Payment Deferral		Payment Deferral		Total
Commercial	$	139	$	—	$	—	$	139	$	—	$	45	$	—	$	—	$	45
Residential real estate:
Real estate - residential - ITIN		—		—		82		82		—		—		—		103		103
Total	$	139	$	—	$	82	$	221	$	—	$	45	$	—	$	103	$	148

	For the Nine Months Ended September 30, 2016										For the Nine Months Ended September 30, 2015
(Amounts in thousands)															Rate &
Troubled Debt Restructuring Modification Types	Maturity		Rate & Maturity		Principal Reduction		Payment Deferral		Total		Rate		Rate & Maturity		Payment Deferral		Payment Deferral		Total
Commercial	$	139	$	951	$	—	$	—	$	1,090	$	—	$	45	$	—	$	734	$	779
Residential real estate:
Real estate - residential - ITIN		—		—		82		118		200		115		—		266		206		587
Total	$	139	$	951	$	82	$	118	$	1,290	$	115	$	45	$	266	$	940	$	1,366

For the three and nine month periods ended September 30, 2016 and 2015, the tables below provide information regarding the number of loans where the contractual terms have been restructured in a manner, which grants a concession to a borrower experiencing financial difficulties.

	For the Three Months Ended September 30, 2016						For the Three Months Ended September 30, 2015
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Amounts in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		1	$	135	$	147		1	$	49	$	49
Residential real estate:
Real estate - residential - ITIN		1		97		82		2		225		193
Total		2	$	232	$	229		3	$	274	$	242

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	For the Nine Months Ended September 30, 2016						For the Nine Months Ended September 30, 2015
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
(Amounts in thousands)	Number of		Recorded		Recorded		Number of		Recorded		Recorded
Troubled Debt Restructurings	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial		2	$	1,262	$	1,273		2	$	872	$	872
Residential real estate:
Real estate - residential - ITIN		2		267		252		8		747		678
Total		4	$	1,529	$	1,525		10	$	1,619	$	1,550

There were no loans modified as troubled debt restructuring during the 12 month periods preceding September 30, 2016 and 2015, for which there was a payment default during the three and nine month periods ended September 30, 2016 and 2015.

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, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed.

Performing and nonperforming loans, segregated by class of loans, were as follows at September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30, 2016
Performing and Nonperforming Loans	Performing		Nonperforming		Total
Commercial	$	134,525	$	1,710	$	136,235
Commercial real estate:
Real estate - construction and land development		48,365		—		48,365
Real estate - commercial non-owner occupied		280,781		1,196		281,977
Real estate - commercial owner occupied		159,674		800		160,474
Residential real estate:
Real estate - residential - ITIN		43,066		3,392		46,458
Real estate - residential - 1-4 family mortgage		8,972		1,798		10,770
Real estate - residential - equity lines		41,421		942		42,363
Consumer and other		52,125		252		52,377
Total	$	768,929	$	10,090	$	779,019

(Amounts in thousands)	December 31, 2015
Performing and Nonperforming Loans	Performing		Nonperforming		Total
Commercial	$	130,811	$	1,994	$	132,805
Commercial real estate:
Real estate - construction and land development		28,319		—		28,319
Real estate - commercial non-owner occupied		237,886		5,488		243,374
Real estate - commercial owner occupied		155,228		1,071		156,299
Residential real estate:
Real estate - residential - ITIN		45,457		3,649		49,106
Real estate - residential - 1-4 family mortgage		9,615		1,775		11,390
Real estate - residential - equity lines		45,473		—		45,473
Consumer and other		49,753		120		49,873
Total	$	702,542	$	14,097	$	716,639

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 class:

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.

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,

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

●

Unanticipated and severe decline in market values,

●

High reliance on secondary source of repayment,

●

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

●

Fraud committed by the borrower,

●

IRS liens that take precedence,

●

Forfeiture statutes for assets involved in criminal activities,

●

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

●

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

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

●

Proposed merger(s),

●

Acquisition or liquidation procedures,

●

Capital injection,

●

Perfecting liens on additional collateral,

●

Refinancing plans.

Generally, a Doubtful Grade does not remain outstanding for a period greater than six months. After six months, the pending events should have either occurred or not occurred. The credit grade should have improved or the principal balance charged against the ALLL.

The following tables summarize internal risk ratings by loan class as of September 30, 2016 and December 31, 2015.

	As of September 30, 2016
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	113,413	$	10,871	$	7,850	$	4,101	$	—	$	136,235
Commercial real estate:
Real estate - construction and land development		47,834		531		—		—		—		48,365
Real estate - commercial non-owner occupied		276,775		880		1,336		2,986		—		281,977
Real estate - commercial owner occupied		152,098		6,555		499		1,322		—		160,474
Residential real estate:
Real estate - residential - ITIN		39,149		—		—		7,309		—		46,458
Real estate - residential - 1-4 family mortgage		8,459		514		—		1,797		—		10,770
Real estate - residential - equity lines		39,170		1,578		43		1,572		—		42,363
Consumer and other		52,079		3		—		295		—		52,377
Total	$	728,977	$	20,932	$	9,728	$	19,382	$	—	$	779,019

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2015
					Special
(Amounts in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial	$	108,696	$	10,240	$	9,587	$	4,282	$	—	$	132,805
Commercial real estate:
Real estate - construction and land development		28,291		28		—		—		—		28,319
Real estate - commercial non-owner occupied		234,177		917		1,588		6,692		—		243,374
Real estate - commercial owner occupied		149,327		3,864		1,687		1,421		—		156,299
Residential real estate:
Real estate - residential - ITIN		41,480		—		—		7,626		—		49,106
Real estate - residential - 1-4 family mortgage		9,041		—		575		1,774		—		11,390
Real estate - residential - equity lines		41,149		1,760		1,682		882		—		45,473
Consumer and other		49,551		—		256		66		—		49,873
Total	$	661,712	$	16,809	$	15,375	$	22,743	$	—	$	716,639

The following tables summarize the ALLL by portfolio for the three and nine months ended September 30, 2016 and 2015.

	For the Three Months Ended September 30, 2016
(Amounts in thousands)				Commercial		Residential
ALLL by Portfolio	Commercial			Real Estate		Real Estate			Consumer			Unallocated			Total
Beginning balance	$	2,591		$	6,029	$	1,871		$	763		$	610		$	11,864
Charge offs		—			—		(130	)		(227	)		—			(357	)
Recoveries		305			—		18			19			—			342
Provision		(491	)		512		45			171			(237	)		—
Ending balance	$	2,405		$	6,541	$	1,804		$	726		$	373		$	11,849

	For the Three Months Ended September 30, 2015
(Amounts in thousands)				Commercial			Residential
ALLL by Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	3,389		$	5,447		$	1,480		$	583		$	503		$	11,402
Charge offs		—			(289	)		(309	)		(181	)		—			(779	)
Recoveries		121			1			139			7			—			268
Provision		(91	)		64			(45	)		194			(122	)		—
Ending balance	$	3,419		$	5,223		$	1,265		$	603		$	381		$	10,891

	For the Nine Months Ended September 30, 2016
(Amounts in thousands)				Commercial			Residential
ALLL by Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total
Beginning balance	$	2,493		$	5,784		$	1,577		$	770		$	556		$	11,180
Charge offs		(1,106	)		(37	)		(680	)		(575	)		—			(2,398	)
Recoveries		383			2,481			104			99			—			3,067
Provision		635			(1,687	)		803			432			(183	)		—
Ending balance	$	2,405		$	6,541		$	1,804		$	726		$	373		$	11,849

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	For the Nine Months Ended September 30, 2015
(Amounts in thousands)				Commercial			Residential
ALLL by Portfolio	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total
Beginning balance	$	3,503		$	4,875		$	1,671		$	449		$	322	$	10,820
Charge offs		(406	)		(428	)		(450	)		(385	)		—		(1,669	)
Recoveries		869			669			202			—			—		1,740
Provision		(547	)		107			(158	)		539			59		—
Ending balance	$	3,419		$	5,223		$	1,265		$	603		$	381	$	10,891

The following tables summarize the ALLL and the recorded investment in loans and leases as of September 30, 2016 and December 31, 2015.

	As of September 30, 2016
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	74	$	88	$	752	$	11	$	—	$	925
Collectively evaluated for impairment		2,331		6,453		1,052		715		373		10,924
Total	$	2,405	$	6,541	$	1,804	$	726	$	373	$	11,849
Gross loans:
Individually evaluated for impairment	$	2,435	$	3,148	$	12,098	$	252	$	—	$	17,933
Collectively evaluated for impairment		133,800		487,668		87,493		52,125		—		761,086
Total gross loans	$	136,235	$	490,816	$	99,591	$	52,377	$	—	$	779,019

	As of December 31, 2015
			Commercial		Residential
(Amounts in thousands)	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
ALLL:
Individually evaluated for impairment	$	122	$	97	$	600	$	13	$	—	$	832
Collectively evaluated for impairment		2,371		5,687		977		757		556		10,348
Total	$	2,493	$	5,784	$	1,577	$	770	$	556	$	11,180
Gross loans:
Individually evaluated for impairment	$	2,043	$	7,733	$	11,582	$	32	$	—	$	21,390
Collectively evaluated for impairment		130,762		420,259		94,387		49,841		—		695,249
Total gross loans	$	132,805	$	427,992	$	105,969	$	49,873	$	—	$	716,639

The ALLL totaled $11.8 million or 1.52% of total gross loans at September 30, 2016 and $11.2 million or 1.56% at December 31, 2015. As of September 30, 2016 and December 31, 2015, we had $222.1 million and $230.6 million in commitments to extend credit, respectively. The reserve for unfunded commitments recorded in Other Liabilities in the Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 was $695 thousand.

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. Our ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated 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 reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 September 30, 2016. 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 September 30, 2016, approximately 76% 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 our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

All 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 ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2016, the unallocated allowance amount represented 3% of the ALLL, compared to 5% at December 31, 2015. While the ALLL composition is an indication of specific amounts or loan categories in which future charge offs may occur, actual amounts may differ.

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 vary.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Generally, CRE loans 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.

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 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 and based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.

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

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

NOTE 6. OTHER REAL ESTATE OWNED

At September 30, 2016, and December 31, 2015, the recorded investment in OREO was $793 thousand and $1.4 million, respectively. During the nine months ended September 30, 2016, we transferred two foreclosed properties in the amount of $110 thousand to OREO and we sold eight properties with a balance of $664 thousand for a net loss of $119 thousand. During the nine months ended September 30, 2016, we recognized a write-down in OREO for three properties totaling $76 thousand. The September 30, 2016 OREO balance consists of two 1-4 family residential real estate property in the amount of $110 thousand, two nonfarm nonresidential properties in the amount of $558 thousand and one undeveloped commercial property in the amount of $126 thousand. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure is $1.2 million.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 7. INTANGIBLES

In March of 2016, as part of our branch acquisition, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. The acquired core deposit base provides value as a source of below market rate funds and the realization of cost savings is a fundamental rationale for assuming these deposit liabilities. The cost savings is defined as the difference between the cost of funds on our new deposits (i.e., interest and net maintenance costs) and the cost of an equal amount of funds from an alternative source having a similar term as the new deposit base. Our core deposit intangible was recorded at fair value which was derived by using the income approach and represents the present value of the cost savings over the projected term of our new deposit base.

The core deposit intangible is being amortized on a straight-line basis over the estimated useful life of the deposits, which is eight years, with no expected residual value. For tax purposes, the core deposit intangible will be amortized over 15 years.

As of September 30, 2016, we have recorded the following amounts related to the core deposit intangible.

(Amounts in thousands)	September 30,
Intangibles	2016
Gross carrying amount	$	1,772
Accumulated amortization		(130	)
Core deposit intangibles, net	$	1,642

The following table sets forth, as of September 30, 2016, the total estimated future amortization of intangible assets:

(Amounts in thousands)
For the year ended December 31,	Amount
2016	$	56
2017		221
2018		221
2019		221
2020		221
2021		221
2022 and thereafter		481
Total	$	1,642

Goodwill is calculated as the amount of cash paid in excess of the fair value of the net assets acquired in the transaction. Goodwill is not amortized, but is annually reviewed for impairment. For tax purposes, the goodwill will be amortized over 15 years. See Note 16 Branch Acquisition in the Notes to Consolidated Financial Statements in this document for further detail on the branch acquisition.

NOTE 8. QUALIFIED AFFORDABLE HOUSING PARTNERSHIP INVESTMENTS

Our investment in Qualified Affordable Housing Partnerships that generate Low Income Housing Tax Credits (“LIHTC”) and deductible operating losses was $4.3 million at September 30, 2016. These investments are recorded in other assets with a corresponding funding obligation of $495 thousand recorded in Other Liabilities in our Consolidated Balance Sheets. 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. None of the original investments will be repaid. 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 4% and 7%. 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 Operations as a component of income tax expense.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at September 30, 2016 and December 31, 2015. In addition, the table reflects the tax credits and tax benefits, amortization of the investment and the net impact to our income tax provision for the nine months ended September 30, 2016 and the year ended December 31, 2015.

(Amounts in thousands)	Original		Current		Unfunded		Tax Credits		Amortization		Net
Qualified Affordable Housing Partnerships at	Investment		Recorded		Liability		and		of		Income Tax
September 30, 2016	Value		Investment		Obligation		Benefits ⁽¹⁾		Investments ⁽²⁾		Benefit
Raymond James California Housing Opportunities Fund II	$	2,000	$	1,418	$	51	$	171	$	136	$	35
WNC Institutional Tax Credit Fund 38, L.P.		1,000		719		77		105		78		27
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,648		367		206		171		35
California Affordable Housing Fund		2,454		490		—		155		155		—
Total - investments in qualified affordable housing partnerships	$	7,954	$	4,275	$	495	$	637	$	540	$	97

(Amounts in thousands)	Original		Current		Unfunded		Tax Credits		Amortization		Net
Qualified Affordable Housing Partnerships at	Investment		Recorded		Liability		and		of		Income Tax
December 31, 2015	Value		Investment		Obligation		Benefits ⁽¹⁾		Investments ⁽²⁾		Benefit
Raymond James California Housing Opportunities Fund II	$	2,000	$	1,553	$	406	$	226	$	184	$	42
WNC Institutional Tax Credit Fund 38, L.P.		1,000		797		166		126		93		33
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,820		610		278		230		48
California Affordable Housing Fund		2,454		645		—		207		207		—
Total - investments in qualified affordable housing partnerships	$	7,954	$	4,815	$	1,182	$	837	$	714	$	123

⁽¹⁾	The amounts reflected in this column represent both the tax credits, and estimated tax benefits generated by operating losses.
⁽²⁾	This amount reduces the tax credits and benefits.

The following table presents our generated tax credits and tax benefits from investments in qualified affordable housing partnerships for the three and nine months ended September 30, 2016 and 2015.

	For the Three Months Ended
	September 30, 2016				September 30, 2015
(Amounts in thousands)	Generated		Tax Benefits From		Generated		Tax Benefits from
Qualified Affordable Housing Partnerships	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
Raymond James California Housing Opportunities Fund II	$	45	$	12	$	43	$	13
WNC Institutional Tax Credit Fund 38, L.P.		28		7		25		7
Merritt Community Capital Corporation Fund XV, L.P.		55		14		54		15
California Affordable Housing Fund		40		12		40		12
Total	$	168	$	45	$	162	$	47

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	For the Nine Months Ended
	September 30, 2016				September 30, 2015
(Amounts in thousands)	Generated		Tax Benefits From		Generated		Tax Benefits from
Qualified Affordable Housing Partnerships	Tax Credits		Taxable Losses		Tax Credits		Taxable Losses
Raymond James California Housing Opportunities Fund II	$	134	$	37	$	130	$	39
WNC Institutional Tax Credit Fund 38, L.P.		84		21		74		21
Merritt Community Capital Corporation Fund XV, L.P.		164		42		163		45
California Affordable Housing Fund		119		36		119		37
Total	$	501	$	136	$	486	$	142

The tax credits and benefits were partially offset by the amortization of the principal investment balances of $180 thousand and $540 thousand for the three and nine months ended September 30, 2016 respectively, compared to $181 thousand and $542 thousand for the comparable periods of 2015.

The following table reflects the anticipated net income tax benefit at September 30, 2016 that is expected to be recognized over the remaining life of the investments.

(Amounts in thousands)	Raymond James		WNC Institutional		Merritt Community		California		Total Net
Qualified Affordable	California Housing		Tax Credit		Capital Corporation		Affordable Housing		Income Tax
Housing Partnerships	Opportunities Fund II		Fund 38, L.P.		Fund XV, L.P		Fund		Benefit
Anticipated net income tax benefit less amortization of investments:
2016	$	11	$	9	$	12	$	—	$	32
2017		46		35		45		1		127
2018		45		34		44		—		123
2019		45		30		44		—		119
2020 and thereafter		218		128		194		1		541
Total	$	365	$	236	$	339	$	2	$	942

NOTE 9. FEDERAL FUNDS PURCHASED AND LINES OF CREDIT

At September 30, 2016 and December 31, 2015, we had no outstanding federal funds purchased balances. At September 30, 2016 and December 31, 2015, we had outstanding borrowings with the Federal Home Loan Bank of San Francisco of $-0- and $75.0 million, respectively. At September 30, 2016, the Bank had available lines of credit with the Federal Home Loan Bank of San Francisco totaling $312.9 million and with the Federal Reserve Bank totaling $26.7 million. These lines of credit are subject to maintenance of required capital ratios and minimum collateral requirements, namely pledged loans and securities.

The Bank had nonbinding federal funds line of credit agreements with three financial institutions totaling $40.0 million at September 30, 2016. The lines of credit had interest rates ranging from 0.64% to 1.34% at September 30, 2016. Availability of the lines is subject to federal funds balances available for loan, continued borrower eligibility and are reviewed and renewed periodically throughout the year. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 10. TERM DEBT

Term debt at September 30, 2016 and December 31, 2015 consisted of the following.

(Amounts in thousands)	September 30, 2016			December 31, 2015
Federal Home Loan Bank of San Francisco borrowings	$	—		$	75,000
Senior debt		9,167			9,917
Unamortized debt issuance costs		(12	)		(15	)
Subordinated debt		10,000			10,000
Unamortized debt issuance costs		(181	)		(208	)
Capital lease		150			—
Net term debt	$	19,124		$	94,694

Future contractual maturities of term debt at September 30, 2016 are as follows.

(Amounts in thousands)	2016		2017		2018		2019		2020		Thereafter		Total
Senior debt	$	167	$	1,000	$	1,000	$	1,000	$	6,000	$	—	$	9,167
Subordinated debt		—		—		—		—		—		10,000		10,000
Capital lease		10		41		44		46		9		—		150
Total future maturities	$	177	$	1,041	$	1,044	$	1,046	$	6,009	$	10,000	$	19,317

Federal Home Loan Bank of San Francisco Borrowings

The maximum amount outstanding from the Federal Home Loan Bank of San Francisco under term advances at any month end during the nine months ended September 30, 2016 and the year ended December 31, 2015 was $80.0 million and $120.0 million, respectively. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the nine months ended September 30, 2016 and the year ended December 31, 2015 was $24.0 million and $87.6 million, respectively. During the three months ended March 31, 2016, all outstanding Federal Home Loan Bank of San Francisco term advances were repaid. The weighted average interest rates on the borrowings outstanding at December 31, 2015, was 0.33%.

The Federal Home Loan Bank of San Francisco line of credit is secured by an investment in Federal Home Loan Bank of San Francisco stock, certain real estate mortgage loans which have been specifically pledged to the Federal Home Loan Bank of San Francisco pursuant to collateral requirements, and pledged securities held in the Bank’s investment securities portfolio. As of September 30, 2016, the Bank was required to hold an investment in Federal Home Loan Bank of San Francisco stock of $4.5 million. Furthermore, we have pledged $365.6 million of our commercial and real estate mortgage loans for the line of credit with the Federal Home Loan Bank of San Francisco. As of September 30, 2016 we held $18.6 million in securities with the Federal Home Loan Bank of San Francisco for pledging purposes. All of the securities held for pledging purposes with the Federal Home Loan Bank of San Francisco were unused as collateral as of September 30, 2016.

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. The loan is payable in monthly installments of $83 thousand principal, plus accrued and unpaid interest, commencing on January 1, 2016 and continuing to and including December 10, 2020. The loan may be prepaid in whole or in part at any time without any prepayment penalty. The principal amount of the loan bears interest at a variable rate, resetting monthly that is 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 are being amortized over the life of the loan as additional interest expense. The loan is secured by a pledge from the Holding Company of all of the outstanding stock of Redding 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 future junior subordinated debt obligations, preferred stock and common stock of the Holding Company. 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

Capital Lease

As part of the acquisition of branches from Bank of America, the Bank entered into a capital lease with Bank of America for one of the branch locations. The total obligation under the lease agreement was $172 thousand payable over a four-year period in monthly installments of principal and interest at a 6.0% annual interest rate. The fair value of the capital lease obligation was determined using a discounted cash flow based on the contractual interest rate of the lease agreement. The fair value of the leased asset is included in premises and equipment and the lease liability is included with term debt obligations. Amortization of the leased asset is included with the provision for depreciation and amortization as part of our premises and equipment expense in our Consolidated Statements of Operations. The lease may terminate early upon receipt of certification that there are no adverse environmental conditions. Upon termination of the lease agreement, the net present value of the lease becomes due and title will be transferred to the Bank.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Lease Commitments – We lease eight 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 the lease term one or more times following expiration of the initial term. We have one capital lease as of September 30, 2016. See Note 10 Term Debt in the Notes to Consolidated Financial Statements in this document for further detail on the Capital Lease.

The following table sets forth rent expense and rent income for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Amounts in thousands)	2016		2015		2016		2015
Rent income	$	23	$	7	$	43	$	13
Rent expense		211		142		506		426
Net rent expense	$	188	$	135	$	463	$	413

The following table sets forth, as of September 30, 2016, the future minimum lease payments under non-cancelable operating leases.

(Amounts in thousands)
Amounts due in:
2016	$	177
2017		645
2018		530
2019		502
2020		515
Thereafter		1,487
Total	$	3,856

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

The following table presents a summary of our commitments and contingent liabilities at September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30, 2016		December 31, 2015
Commitments to extend credit	$	216,817	$	224,757
Standby letters of credit		1,967		2,477
Affordable housing grants		3,344		3,356
Total commitments	$	222,128	$	230,590

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.

We hold cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. We were not required to perform on any financial guarantees for the nine months ended September 30, 2016, and the year ended December 31, 2015. At September 30, 2016 approximately $1.9 million of standby letters of credit expire within one year, and $99 thousand expire thereafter.

The reserve for unfunded commitments, which is included in Other Liabilities on the Consolidated Balance Sheets, was $695 thousand at September 30, 2016 and $695 thousand at December 31, 2015 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. During the nine months ended September 30, 2016, we made no additional provision to the reserve for unfunded commitments. When necessary, the provision expense is recorded in other noninterest expense in the Consolidated Statements of Operations.

Legal Proceedings – We are involved in various pending and threatened legal actions arising in the ordinary course of business. 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 real estate construction, commercial, and installment loans to customers throughout northern California. In our judgment, a concentration exists in real estate related loans, which represented approximately 76% and 74% of our gross loan portfolio at September 30, 2016 and December 31, 2015, respectively.

Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes 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. Personal and business incomes, 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 to any single correspondent, we have established general standards for selecting correspondent banks as well as internal limits for allowable exposure to other depository institutions in aggregate or to any single correspondent. 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.

NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents activity in accumulated other comprehensive income for the nine months ended September 30, 2016.

	Unrealized			Unrealized			Accumulated Other
	Gains on			(Losses) Gains on			Comprehensive
(Amounts in thousands)	Securities			Derivatives			(Loss) Income
Accumulated other comprehensive income (loss) as of December 31, 2015	$	1,142		$	(1,396	)	$	(254	)
Comprehensive income three months ended March 31, 2016		50			1,396			1,446
Comprehensive income three months ended June 30, 2016		519			—			519
Comprehensive loss three months ended September 30, 2016		(222	)		—			(222	)
Accumulated other comprehensive income as of September 30, 2016	$	1,489		$	—		$	1,489

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents activity in accumulated other comprehensive income for the nine months ended September 30, 2015.

	Unrealized			Unrealized			Accumulated Other
	Gains on			Losses on			Comprehensive
(Amounts in thousands)	Securities			Derivatives			(Loss) Income
Accumulated other comprehensive income (loss) as of December 31, 2014	$	1,810		$	(1,897	)	$	(87	)
Comprehensive income three months ended March 31, 2015		292			(21	)		271
Comprehensive (loss) three months ended June 30, 2015		(967	)		100			(867	)
Comprehensive income three months ended September 30, 2015		43			(28	)		15
Accumulated other comprehensive (loss) as of September 30, 2015	$	1,178		$	(1,846	)	$	(668	)

Accumulated other comprehensive income is reported net of related tax effects. Detailed information on the tax effects of the individual components of comprehensive income are presented in the Consolidated Statements of Comprehensive Income.

NOTE 13. DERIVATIVES

During March of 2016, we paid off the $75.0 million Federal Home Loan Bank of San Francisco borrowing (the “hedged instrument”) and terminated all of our interest rate swaps (active and forward starting). Prior to the time of termination, a $2.3 million unrealized pretax loss on swaps was carried in Other Liabilities in our Consolidated Balance Sheets. At termination, we immediately reclassified the loss to noninterest expense.

Prior to March of 2016, we used derivatives to hedge the risk of changes in market interest rates to limit the impact on earnings and cash flows relating to specific groups of assets and liabilities. During 2015 and the first quarter of 2016 we utilized interest rate swaps (the “hedging instrument”) with other major financial institutions (counterparties) to hedge interest expenses associated with certain Federal Home Loan Bank of San Francisco borrowings (the “hedged instrument”). We do not use derivative instruments for trading or speculative purposes.

For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which the effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in cash flows of the related underlying exposures. Any ineffective portion of the changes in cash flow of the instruments is recognized immediately into earnings.

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheets. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument, except any ineffective portion, are recorded in accumulated other comprehensive income until earnings are impacted by the hedged instrument. No components of our hedging instruments are excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

Classification of the gain or loss in the Consolidated Statements of Operations upon release from accumulated other comprehensive income is the same as that of the underlying exposure. We discontinue the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were recorded in accumulated other comprehensive income are recognized immediately in earnings.

At December 31, 2015, we had one active interest rate swap, and one forward starting interest rate swap to hedge interest rate risk associated with current and forecasted variable rate Federal Home Loan Bank of San Francisco advances. The hedge strategy converted LIBOR based variable rate of interest on active and forecasted Federal Home Loan Bank of San Francisco advances to fixed interest rates.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes our interest rate swap contracts with counterparties outstanding at December 31, 2015. The interest rate swap contracts were made with a single issuer and included the right of offset.

(Amounts in thousands)
Description	We Pay Fixed			We Receive Variable ⁽¹⁾			Notional Amount		Effective Date	Maturity Date
Interest rate swap		2.64	%		0.33	%	$	75,000	August 3, 2015	August 1, 2016
Forward starting interest rate swap		3.22	%	Variable			$	75,000	August 1, 2016	August 1, 2017

⁽¹⁾Rate floats to three month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.

The following table individually lists the active and forward starting interest rate swap derivatives that were in a liability (loss) position, and the fair value of such derivatives at September 30, 2016, and December 31, 2015. There were no interest rate swap derivatives that were in an asset (gain) position at September 30, 2016, or at December 31, 2015.

		Liability Derivatives
(Amounts in thousands)		September 30,		December 31,
Description	Balance Sheet Location	2016		2015
Interest rate swap	Cash flow hedge	$	—	$	869
Forward starting interest rate swap	Cash flow hedge		—		1,500
Total		$	—	$	2,369

The following table summarizes the losses recorded during the three and nine months ended September 30, 2016 and 2015, and their locations within the Consolidated Statements of Operations.

(Amounts in thousands)		Three Months Ended September 30,				Nine Months Ended September 30,
Description	Consolidated Statement of Operations Location	2016		2015		2016		2015
Interest rate swap⁽¹⁾	Interest on term debt	$	—	$	410	$	396	$	997
Forward starting interest rate swap - terminated⁽²⁾	Other noninterest expense		—		—		2,325		—
Total		$	—	$	410	$	2,721	$	997

⁽¹⁾ Losses represent tax effected amounts reclassified from accumulated other comprehensive income pertaining to net settlements recorded during the period on active interest rate swaps.

⁽²⁾Losses represent tax effected amounts reclassified from accumulated other comprehensive income pertaining to the terminated active and forward starting interest rate swaps.

The following table summarizes the loss, net of tax, on all derivative instruments (active and forward starting) designated as cash flow hedges that were reclassified from accumulated other comprehensive income into earnings during the three and nine months ended September 30, 2016 and 2015.

(Amounts in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Description	2016		2015		2016		2015
Interest rate swaps	$	—	$	241	$	1,601	$	591

The following table summarizes the derivatives that have a right of offset at December 31, 2015.

						Gross Amounts Not Offset In The Consolidated Balance Sheets
(Amounts in thousands)	Gross Amounts of Recognized Assets / (Liabilities)			Gross Amounts Offset In The Consolidated Balance Sheets		Net Amounts of Assets / (Liabilities) Included In The Consolidated Balance Sheets			Collateral Posted		Net Amount
December 31, 2015
Derivative liabilities
Interest rate swaps	$	(2,369	)	$	—	$	(2,369	)	$	4,008	$	1,639

Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the contract. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties fail to perform under the terms of those contracts. Assuming no recoveries of underlying collateral, credit risk is measured by the market value of the derivative financial instrument.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The contracts with the derivative counterparties contain a provision where if we fail to maintain our status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. Similarly, we could be required to settle our obligations under certain of our agreements if specific regulatory events occur, such as if we were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels.

We were required to post collateral against the obligations of $2.4 million at December 31, 2015. Accordingly, we pledged three mortgage backed securities with an aggregate par value of $3.8 million and an aggregate fair value of $4.0 million. In March of 2016, upon the termination of all of our interest rate swaps the securities were returned to us.

NOTE 14. FAIR VALUES

The following table presents estimated fair values of our financial instruments as of September 30, 2016 and December 31, 2015, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets. The table indicates 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
September 30, 2016	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	85,130	$	85,130	$	—	$	—
Securities available-for-sale	$	156,440	$	—	$	156,440	$	—
Securities held-to-maturity	$	31,771	$	—	$	33,388	$	—
Net loans	$	768,325	$	—	$	—	$	775,640
Federal Home Loan Bank of San Francisco stock	$	4,465	$	4,465	$	—	$	—
Financial liabilities
Deposits	$	975,493	$	—	$	976,983	$	—
Term debt	$	19,124	$	—	$	19,124	$	—
Junior subordinated debenture	$	10,310	$	—	$	8,751	$	—

(Amounts in thousands)	Carrying		Fair Value Measurements Using
December 31, 2015	Amounts		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	51,192	$	51,192	$	—	$	—
Securities available-for-sale	$	159,030	$	—	$	159,030	$	—
Securities held-to-maturity	$	35,899	$	—	$	36,645	$	—
Net loans	$	706,329	$	—	$	—	$	711,528
Federal Home Loan Bank of San Francisco stock	$	4,465	$	4,465	$	—	$	—
Financial liabilities
Deposits	$	803,735	$	—	$	804,490	$	—
Term debt	$	94,694	$	—	$	94,694	$	—
Junior subordinated debenture	$	10,310	$	—	$	5,402	$	—
Derivatives	$	2,369	$	—	$	2,369	$	—

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 minimizes the use of unobservable inputs when developing fair value measurements. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value:

Cash and cash equivalents – The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a reasonable estimate of fair value because of the relatively short term between the origination of the instrument and its expected realization. Therefore, we believe the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.

Securities – Investment securities fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices or matrix pricing, which is a mathematical technique, used widely by the industry that relies on the securities relationship to other benchmark securities, and are classified as Level 2.

Net Loans – For variable rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans, projected cash flows are discounted back to their present value based on specific risk adjusted spreads to the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The ALLL is considered to be a reasonable estimate of loan discount for credit quality concerns. Given that there are commercial loans with specific terms that are not readily available; we believe the fair value of loans is derived from Level 3 inputs.

Federal Home Loan Bank of San Francisco stock – The carrying value of Federal Home Loan Bank of San Francisco stock approximates fair value as the shares can only be redeemed by the issuing institution at par. We measure the fair value of Federal Home Loan Bank of San Francisco stock using Level 1 inputs.

Deposits – We measure fair value of maturing deposits using Level 2 inputs. The fair values of deposits were derived by discounting their expected future cash flows based on the Federal Home Loan Bank of San Francisco yield curves, and maturities. We obtained Federal Home Loan Bank of San Francisco yield curve rates as of the measurement date, and believe these inputs fall under Level 2 of the fair value hierarchy. Deposits with no defined maturities, the fair values are the amounts payable on demand at the respective reporting date.

Term Debt – For variable rate term debt, the carrying value approximates fair value. The fair value of fixed rate term debt is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debt would be issued with similar credit ratings as ours and similar remaining maturities. We measure the fair value of term debt using Level 2 inputs.

Junior subordinated debenture – The fair value of the subordinated debenture is estimated by discounting the future cash flows using market rates at the reporting date, of which similar debentures would be issued with similar credit ratings as ours and similar remaining maturities. At September 30, 2016, future cash flows were discounted at 3.44%. We measure the fair value of subordinated debentures using Level 2 inputs.

Commitments – Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower’s credit quality has declined, we record a reserve for these unfunded commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is not material. As such, no disclosures are made on the fair value of commitments.

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale securities and derivatives are recorded at fair value on a recurring basis. From time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans and certain other assets including OREO or goodwill. These nonrecurring fair value adjustments involve the application of lower of cost or fair value accounting or write-downs of individual assets.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table presents information about our assets and liabilities measured at fair value on a recurring basis, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, as of September 30, 2016 and December 31, 2015.

(Amounts in thousands)	Fair Value at September 30, 2016
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. government and agencies	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions		59,952		—		59,952		—
Residential mortgage backed securities and collateralized mortgage obligations		54,046		—		54,046		—
Corporate securities		16,346		—		16,346		—
Commercial mortgage backed securities		16,254		—		16,254		—
Other investment securities (1)		9,842		—		9,842		—
Total assets measured at fair value	$	156,440	$	—	$	156,440	$	—

⁽¹⁾Principally consists of residential mortgage backed securities issued by both by governmental and nongovernmental agencies, and SBA pool securities.

(Amounts in thousands)	Fair Value at December 31, 2015
Recurring Basis	Total		Level 1		Level 2		Level 3
Available-for-sale securities
U.S. government and agencies	$	3,943	$	—	$	3,943	$	—
Obligations of states and political subdivisions		61,104		—		61,104		—
Residential mortgage backed securities and collateralized mortgage obligations		32,137		—		32,137		—
Corporate securities		33,778		—		33,778		—
Commercial mortgage backed securities		12,769		—		12,769		—
Other investment securities (1)		15,299		—		15,299		—
Total assets measured at fair value	$	159,030	$	—	$	159,030	$	—
Derivatives – interest rate swaps	$	2,369	$	—	$	2,369	$	—
Total liabilities measured at fair value	$	2,369	$	—	$	2,369	$	—

⁽¹⁾ Principally consists of residential mortgage backed securities issued by both by governmental and nongovernmental agencies, and SBA pool securities.

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.

Forward starting interest rate swaps – The valuation of our interest rate swaps was obtained from third party pricing services. The fair values of the interest rate swaps were determined by using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis was based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. We have determined that the source of these derivatives’ fair values falls within Level 2 of the fair value hierarchy.

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 nine months ended September 30, 2016 or the year ended December 31, 2015.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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. The following tables present information about our assets and liabilities at September 30, 2016 and December 31, 2015 measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value 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 September 30, 2016
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	1,686	$	—	$	—	$	1,686
Other real estate owned		207		—		—		207
Total assets measured at fair value	$	1,893	$	—	$	—	$	1,893

(Amounts in thousands)	Fair Value at December 31, 2015
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	707	$	—	$	—	$	707
Other real estate owned		743		—		—		743
Total assets measured at fair value	$	1,450	$	—	$	—	$	1,450

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2016 and 2015 for assets that are included on the balance sheet at period end.

(Amounts in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Fair value adjustments	2016		2015		2016		2015
Collateral dependent impaired loans	$	15	$	199	$	1,068	$	744
Other real estate owned		—		—		71		108
Total	$	15	$	199	$	1,139	$	852

During the nine months ended September 30, 2016, collateral dependent impaired loans with a carrying amount of $2.8 million outstanding at period end were written down to their fair value of $1.7 million, resulting in a $1.1 million adjustment to the ALLL.

During the nine months ended September 30, 2016, two OREO properties with an aggregate carrying value of $278 thousand outstanding at period end were written down to their fair value of $207 thousand, resulting in a $71 thousand adjustment to the ALLL.

The loan amounts above represent impaired, collateral dependent loans that have been adjusted to fair value during the respective reporting period. When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the ALLL.

The loss represents charge offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged off is zero. When the fair value of the collateral is based on a current appraised value, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan as nonrecurring Level 3.

The OREO amount above represents 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 between 8% and 15%. We record OREO as a nonrecurring Level 3.

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Fair value estimates are based on current on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities, and property, plant and equipment. 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 15. PURCHASE OF FINANCIAL ASSETS

On May 12, 2014, we agreed to purchase $40.0 million of unsecured consumer home improvement loans. The loans were purchased without recourse or servicing rights. During 2015, we agreed to purchase an additional $10.0 million increasing the maximum par value to $50.0 million. For the period from May 12, 2014 through September 30, 2016, we have paid aggregate cash totaling $90.9 million, and received aggregate cash repayments of $43.3 million for $47.6 million in net loans outstanding. We initially measured the acquired loan portfolio at a fair equal to the price paid to acquire the portfolio as the difference between the par value and cash purchase price represents the fair value adjustment.

NOTE 16. BRANCH ACQUISITION

On March 11, 2016, we completed the purchase of five Bank of America branches located in northern California. The acquired branches are located in Colusa, Willows, Orland, Corning, and Yreka. The Bank also acquired three offsite ATM locations in Williams, Orland and Corning. The Bank paid cash consideration of $6.7 million and acquired $155.2 million in assets, primarily cash and premises. The Bank assumed $149.2 million in liabilities, primarily deposits.

The transaction provided a new source of low cost core deposits and allowed us to execute our plan to reconfigure our Balance Sheet. On March 14, 2016, we utilized a portion of that new liquidity to reduce our reliance on wholesale funding sources repaying $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and redeeming $17.5 million of brokered time deposits.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. The Bank engaged third party specialists to assist in valuing certain assets, including the real estate and the core deposit intangible that resulted from the acquisition.

The contribution of the acquired operations of the five former Bank of America offices was immaterial. Therefore, disclosure of supplemental pro forma financial information, especially prior period comparison is deemed neither practical nor meaningful. Additionally, the acquired operation was not considered a “significant business combination” as defined by the Securities and Exchange Commission.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

During the second quarter of 2016, we received the final settlement statement from Bank of America which resulted in an immaterial adjustment to the total goodwill of $52 thousand. The following table provides an assessment of the consideration transferred, assets purchased, and the liabilities assumed.

			Fair Value and
	As Recorded by		Other Merger
	Bank of		Related		As Recorded by
(Amounts in thousands)	America		Adjustments		the Company
Consideration paid:
Cash paid					$	6,656
Total consideration					$	6,656

Assets acquired:
Cash and cash equivalents	$	149,067	$	—	$	149,067

Premises and equipment, net		1,835		2,355		4,190

Other assets		201		—		201
Core deposit intangibles		—		1,772		1,772
Total assets acquired	$	151,103	$	4,127	$	155,230

Liabilities assumed:
Deposits	$	149,047	$	—	$	149,047

Other liabilities		20		172		192
Total liabilities assumed	$	149,067	$	172	$	149,239
Net identifiable assets acquired over liabilities assumed	$	2,036	$	3,955	$	5,991
Goodwill					$	665

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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

Forward Looking Statements and Risk Factors

This report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (“Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These statements are based on management’s 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,” “intend,” “plan,” “believes,” “estimate,” “consider” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” 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.

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 branch purchases;
	●	Difficulties in integrating acquired bank branches, including our ability to retain the acquired deposits;
	●	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;
	●	Continued 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, including 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 consumer spending, borrowing and savings habits;
	●	Changes in the level of our nonperforming assets and 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;
	●	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;
	●	The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
	●	Natural disaster or recurring energy shortage, especially in California, such as earthquakes, wildfires, droughts, floods and mudslides;
	●	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; and
	●	Our inability to manage the risks involved in the foregoing.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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.

Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties discussed in “RISK FACTORS” and in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 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, 2015 to September 30, 2016. Also discussed are significant trends and changes in the Company’s results of operations for the nine months ended September 30, 2016, compared to the same period in 2015. 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 (“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”). The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) which operates under two separate names (Redding Bank of Commerce and Sacramento Bank of Commerce, a division of Redding Bank of Commerce). 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 with the completion of the purchase of five Bank of America branches during the first quarter of 2016, we now operate nine full service facilities in Northern California. 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.

Our principal executive office is located at 1901 Churn Creek Road, Redding, California and the telephone number is (530) 722-3939.

EXECUTIVE OVERVIEW

Net income available to common shareholders for the quarter ended September 30, 2016 was $2.4 million or $0.18 per share – diluted, compared with $2.5 million or $0.18 per share – diluted for the same period of 2015. Net income available to common shareholders for the nine months ended September 30, 2016 was $3.0 million or $0.22 per share –diluted compared with $6.6 million or $0.49 per share – diluted for the same period of 2015.

The current year-to-date results were impacted by the following expenses totaling $3.0 million related to the acquisition of five Bank of America branches and the execution of our plans to reconfigure our Balance Sheet using liquidity provided by those branches:

	●	$2.3 million loss on termination of interest rate hedge
	●	$580 thousand of branch acquisition transition costs
	●	$57 thousand prepayment penalty on early repayment of $75.0 million Federal Home Loan Bank of San Francisco hedged term debt
	●	$39 thousand accelerated amortization of broker fees recorded in interest expense when $17.5 million of brokered time deposits were called and redeemed

Unrelated to the branch acquisition, the nine month results were negatively impacted by the $546 thousand impairment of a bond investment and by the $363 thousand write-off of a deferred tax asset.

On March 11, 2016, we completed the purchase of five Bank of America branches located in Northern California. The transaction was most attractive to us because it provided a new source of low cost core deposits and allowed us to execute our plan to reconfigure our Balance Sheet. The acquisition provided approximately $142.3 million of new liquidity ($149.0 million of new deposits less payments of $6.7 million made to Bank of America). We utilized a portion of that new liquidity to reduce our reliance on wholesale funding sources repaying $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and redeeming $17.5 million of brokered time deposits. We are using the remaining liquidity to fund loan growth.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The acquired branches are located in Colusa, Willows, Orland, Corning, and Yreka. The Bank also acquired three offsite ATM locations in Williams, Orland and Corning.

The Bank paid cash consideration of $6.7 million and acquired $155.2 million in assets recorded at fair value, primarily cash and premises. The Bank assumed $149.2 million in liabilities recorded at fair value, primarily deposits with an average interest cost of 0.09%.

The current quarter is the second full quarter, reflecting the benefits derived from the acquisition of five Bank of America branches and the reconfiguration of the Company’s Balance Sheet. Compared against the second quarter of 2016 we realized the following improvements:

Significant items for the three months ended September 30, 2016 were as follows:

Performance

●

Return on average assets declined to 0.86% for the third quarter of 2016 compared to 0.99% for the same period in the prior year.

●

Return on average equity improved to 10.10% for the third quarter of 2016 compared to 9.12% for the same period in the prior year.

●

Tangible book value per common share was $6.84 at September 30, 2016 compared to $6.76 at December 31, 2015.

●

Efficiency ratio was 69.6% during the third quarter of 2016 compared to 60.2% during the same period in 2015.

●

Deposits at September 30, 2016 totaled $975.5 million, an increase of $38.0 million (16% annualized) since June 30, 2016. This growth which occurred in both our Sacramento and Redding marketplaces was centered entirely in core deposits.

●

Gross loans at September 30, 2016 totaled $779.0 million, an increase of $24.9 million (13% annualized) since June 30, 2016. All of this growth occurred in the our Sacramento marketplace and is the result of investments in our SBA division and in our expanded Sacramento commercial banking group.

Credit Quality

	●	Nonperforming assets at September 30, 2016 totaled $10.9 million or 0.98% of total assets, a decrease of $4.6 million (40% annualized) from $15.5 million or 1.53% of total assets at December 31, 2015.
	●	Net loan charge offs were $15 thousand in the third quarter of 2016 compared with net charge offs of $511 thousand for the same period in 2015.

Significant items for the nine months ended September 30, 2016 were as follows:

Performance

●

Return on average assets was 0.37% for the first nine months of 2016 compared to 0.89% for the same period in 2015.

●

Return on average equity was 4.30%% for the first nine months of 2016 compared to 8.27% for the same period in 2015.

●

Efficiency ratio was 85.08% during the first nine months of 2016 compared to 65.41% during the same period in 2015. Excluding $3.0 million of one-time expenses related to the branch acquisition and reconfiguring of our Balance Sheet the efficiency ratio for the first nine months of 2016 would have been 74.78%.

●

Deposits at September 30, 2016 totaled $975.5 million, an increase of $171.8 million (29% annualized) since December 31, 2015.

●

Gross loans at September 30, 2016 totaled $779.0 million, an increase of $62.3 million (12% annualized) since December 31, 2015.

Credit Quality

	●	Nonperforming assets at September 30, 2016 totaled $10.9 million or 0.98% of total assets, a decrease of $6.2 million from $17.1 million or 1.73% of total assets at September 30, 2015.
	●	Net loan loss recoveries of $669 thousand combined with continuing improved asset quality resulted in no provision for loan and lease losses during the nine months ended September 30, 2016.

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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, 2015 filed with the SEC on March 8, 2016. 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 of Investments and Impairment of 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 for 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 Committee’s assessment of whether 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 4 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. 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, 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 would have on the loan portfolio as a whole. See Note 5 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 scheduled reversals of deferred tax liabilities, 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 combined 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.

Derivative Financial Instruments and Hedging Activities

During March of 2016, we terminated all of our interest rate swaps (active and forward starting) and simultaneously paid off the $75.0 million Federal Home Loan Bank of San Francisco borrowing (the “hedged instrument”). At the time of termination, the interest rate swaps were carried at a $2.3 million loss in our Consolidated Balance Sheets. Accordingly, we immediately reclassified $1.4 million in unrealized losses from other comprehensive income into earnings resulting in a pre-tax loss of $2.3 million recorded in noninterest expense.

We used derivatives to hedge the risk of changes in market interest rates to limit the impact on earnings and cash flows relating to specific groups of assets and liabilities. During 2015 and the first quarter of 2016, we utilized interest rate swaps (the “hedging instrument”) with other major financial institutions (counterparties) to hedge interest expenses associated with certain Federal Home Loan Bank of San Francisco borrowings (the “hedged instrument”). We do not use derivative instruments for trading or speculative purposes.

For derivative financial instruments accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. We formally assess both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in cash flows of the instruments is recognized immediately into earnings.

ASC 815-10, Derivatives and Hedging (“ASC 815”) requires companies to recognize all derivative instruments as assets or liabilities at fair value in the Consolidated Balance Sheets. In accordance with ASC 815, we designated our interest rate swaps as cash flow hedges of certain active and forecasted variable rate Federal Home Loan Bank of San Francisco advances. Changes in the fair value of the hedging instrument in cash flow hedges were recorded in accumulated other comprehensive income until earnings were impacted by the hedged instrument. No components of our hedging instruments were excluded from the assessment of hedge effectiveness in hedging exposure to variability in cash flows.

Classification of the gain or loss in the Consolidated Statements of Operations upon release from accumulated other comprehensive income is the same as that of the underlying exposure. We discontinue the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. When we discontinue hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally expected period, or within an additional two-month period thereafter, changes to fair value that were in accumulated other comprehensive income are recognized immediately in earnings.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

(Amounts in thousands)
Description	We Pay Fixed			We Receive Variable ⁽¹⁾			Notional Amount		Effective Date	Maturity Date
Interest rate swap		2.64	%		0.33	%	$	75,000	August 3, 2015	August 1, 2016
Forward starting interest rate swap		3.22	%	Variable			$	75,000	August 1, 2016	August 1, 2017

⁽¹⁾ Rate floats to three month LIBOR payable quarterly on February 1, May 1, August 1, and November 1.

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”) 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 14 Fair Values in the Notes to Consolidated Financial Statements incorporated in this document.

SOURCES OF 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. Sources of noninterest income include fees earned on deposit related services, ATM and point of sale fees, payroll processing, gain on sale of available-for-sale securities, earnings on bank-owned life insurance and dividends on Federal Home Loan Bank of San Francisco stock.

Net interest income is impacted by many factors that are beyond our control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. In recent years, we originated higher volumes of longer term fixed rate loans. These loans, combined with the structure of our investment portfolio, the use of floors in the pricing of our variable rate loans and funding mix caused the Company to become slightly liability sensitive, which could negatively impact earnings in a rising interest rate environment.

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

Increases or decreases in interest rates could adversely affect our net interest margin. Although our asset yields and funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, and cause our net interest margin to expand or contract. Many of our assets are tied to prime rate, so they may adjust faster in response to changes in interest rates. As a result, when interest rates fall, the yield we earn on our assets may fall faster than our ability to reprice a large portion of our liabilities, causing our net interest margin to contract.

Changes in the slope of the yield curve, the spread between short term and long term interest rates, could also reduce our net interest margin. Normally, the yield curve is upward sloping, which means that short term rates are lower than long term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.

We assess our interest rate risk by estimating the effect on our earnings under various simulated scenarios that differ based on assumptions including the direction, magnitude and speed of interest rate changes, and the slope of the yield curve.

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

RESULTS OF OPERATIONS

OVERVIEW

Net income available to common shareholders for the first nine months of 2016 decreased $3.6 million compared to the same period a year ago. The decrease is centered in branch acquisition and Balance Sheet reconfiguration costs totaling $3.0 million, a $546 thousand impairment of a bond investment and the write-off of a $363 thousand deferred tax asset.

Compared to the first nine months of 2015, net interest income increased $1.4 million. Noninterest income decreased $198 thousand including a $546 thousand impairment of a bond investment. Noninterest expense increased $6.5 million including branch acquisition and Balance Sheet reconfiguration costs of $3.0 million.

During the nine months ended September 30, 2016, we recorded an income tax expense of $1.0 million and wrote-off a $363 thousand deferred tax asset; a total expense of $1.4 million. This compared to income tax expense of $3.0 million for the same period a year ago. Net income per share available to common shareholders was $0.22 – diluted for the nine months ended September 30, 2016 compared to net income available to common shareholders per share of $0.49 - diluted for the same period a year ago.

We continued our quarterly cash dividends of $0.03 per share during the nine months ended September 30, 2016. In determining the amount of dividend to be paid, management considers capital preservation objectives, expected asset growth, projected earnings, the overall dividend pay-out ratio, and the dividend yield.

Return on Average Assets, Average Total Equity and Common Shareholders' Equity

The following table presents the returns on average assets, average total equity and average common shareholders' equity for the nine months ended September 30, 2016 and 2015. For each of the periods presented, the table includes the calculated ratios based on reported net income and net income available to common shareholders as shown in the Consolidated Statements of Operations incorporated in this document.

	For the Nine Months Ended
	September 30, 2016			September 30, 2015
Return on average assets:
Net income		0.37	%		0.91	%
Income available to common shareholders		0.37	%		0.89	%
Return on average total equity:
Net income		4.30	%		8.46	%
Income available to common shareholders		4.30	%		8.27	%
Return on average common shareholders’ equity:
Net income		4.30	%		10.41	%
Income available to common shareholders		4.30	%		10.18	%

NET INTEREST INCOME AND NET INTEREST MARGIN

For the three months ended September 30, 2016 compared to the same period a year ago:

	●	Net interest income increased $821 thousand
	●	Interest income increased $598 thousand or 6% to $10.3 million

	o	Interest and fees on loans increased $650 thousand due to increased average loan balances
	o	Interest on interest bearing deposits due from banks increased $42 thousand
	o	Interest on securities decreased $94 thousand

●

Interest expense decreased $223 thousand or 17% to $1.1 million

	o	Interest on Federal Home Loan Bank of San Francisco term debt decreased $474 thousand
	o	Interest on $20.0 million of senior and subordinated term debt increased $289 thousand
	o	Interest on interest bearing deposits decreased $52 thousand. Interest bearing deposits increased $104.0 million however, the rate paid on all interest bearing deposits decreased by 10 basis points
	o	Interest on junior subordinated debentures and other borrowings increased $14 thousand

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

For the nine months ended September 30, 2016 compared to the same period a year ago:

	●	Net interest income increased $1.4 million
	●	Interest income increased $1.5 million or 5% to $30.5 million

	o	Interest and fees on loans increased $1.7 million due to increased average loan balances
	o	Interest on interest bearing deposits due from banks increased $55 thousand
	o	Interest on securities decreased $267 thousand due to decreased securities balances and decreased yield on the portfolio

●

Interest expense increased $92 thousand or 3% to $3.7 million

	o	Interest on Federal Home Loan Bank of San Francisco term debt decreased $702 thousand. During the first quarter of 2016 all Federal Home Loan Bank of San Francisco term debt was repaid and an interest rate hedge associated with $75.0 million of that debt was terminated
	o	Interest on $20.0 million of senior and subordinated term debt increased $879 thousand. The senior and subordinated term debt was issued during the fourth quarter of 2015 to redeem $20.0 million of preferred stock
	o	Interest on interest bearing deposits decreased $119 thousand. Interest bearing deposits increased $104.0 million compared to the prior year however, the rate paid on all interest bearing deposits decreased by 8 basis points
	o	Interest on junior subordinated debentures and other borrowings increased $34 thousand

The net interest margin was 3.62% for the current quarter and the same period a year ago. The 14 basis point decrease in yield on average earning assets has been offset by a 14 basis point decrease in interest expense to fund average earning assets. The decrease in interest expense resulted from our acquisition of low cost core deposits and our ability to restructure our balance sheet.

The net interest margin was 3.60% for the nine months ended September 30, 2016 a decrease of eight basis points compared to the same period a year ago. The decrease was due to a ten basis point decrease in yield on average earning assets partially offset by a two basis point decrease in interest expense to fund average earning assets.

Deposit balances increased $171.8 million compared December 31, 2015. The increase in deposit balances results from the recent branch acquisition and strong organic growth. Our overall cost of total deposits decreased to 0.32% for the nine months ended September 30, 2016 from 0.40% for the same period a year ago.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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

The following tables present condensed average balance sheet information, together with interest income and yields earned on average interest earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30, 2016							Three Months Ended September 30, 2015
	Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate			Balance		Interest⁽¹⁾		Yield/ Rate
Interest-earning assets:
Net loans ⁽²⁾	$	769,354	$	9,007		4.66	%	$	705,762	$	8,357		4.70	%
Taxable securities		114,578		689		2.39	%		115,165		743		2.56	%
Tax-exempt securities		73,952		552		2.97	%		76,190		592		3.08	%
Interest-bearing deposits in other banks		61,346		82		0.53	%		30,430		40		0.52	%
Average interest-earning assets		1,019,230		10,330		4.03	%		927,547		9,732		4.17	%
Cash and due from banks		17,018							11,355
Premises and equipment, net		15,941							11,265
Other assets		41,729							41,867
Average total assets	$	1,093,918						$	992,034

Interest-bearing liabilities:
Interest-bearing demand	$	390,895		136		0.14	%	$	284,508		116		0.16	%
Savings deposits		107,210		43		0.16	%		93,230		53		0.23	%
Certificates of deposit		221,078		524		0.94	%		235,551		586		0.99	%
Net term debt		19,610		292		5.92	%		86,359		475		2.18	%
Junior subordinated debentures		10,310		59		2.28	%		10,310		47		1.81	%
Average interest-bearing liabilities		749,103		1,054		0.56	%		709,958		1,277		0.71	%
Noninterest-bearing demand		240,418							158,232
Other liabilities		11,159							16,140
Shareholders’ equity		93,238							107,704
Average liabilities and shareholders’ equity	$	1,093,918						$	992,034
Net interest income and net interest margin ⁽⁴⁾			$	9,276		3.62	%			$	8,455		3.62	%
Tax equivalent net interest margin ⁽³⁾						3.73	%						3.75	%

⁽¹⁾	Interest income on loans is reduced by net fee expense of approximately $289 thousand and $109 thousand for the three months ended September 30, 2016 and 2015, respectively.

⁽²⁾	Average nonaccrual loans of $10.5 million and $16.6 million for the three months ended September 30, 2016 and 2015 are included, respectively.

⁽³⁾	Tax-exempt income has been adjusted to a tax equivalent basis at a 34% tax rate. The amount of such adjustments was an addition to recorded income of approximately $284 thousand and $305 thousand for the three months ended September 30, 2016 and 2015, respectively.

⁽⁴⁾	Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

	Nine Months Ended September 30, 2016							Nine Months Ended September 30, 2015
	Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate			Balance		Interest⁽¹⁾		Yield/ Rate
Interest-earning assets:
Net loans ⁽²⁾	$	744,370	$	26,254		4.71	%	$	694,082	$	24,572		4.73	%
Taxable securities		119,541		2,281		2.55	%		124,199		2,489		2.68	%
Tax-exempt securities		76,315		1,734		3.04	%		76,755		1,793		3.12	%
Interest-bearing deposits in other banks		52,930		222		0.56	%		28,021		167		0.80	%
Average interest-earning assets		993,156		30,491		4.10	%		923,057		29,021		4.20	%
Cash and due from banks		15,455							10,832
Premises and equipment, net		14,657							11,738
Other assets		40,942							42,676
Average total assets	$	1,064,210						$	988,303

Interest-bearing liabilities:
Interest-bearing demand	$	365,917		388		0.14	%	$	276,446		339		0.16	%
Savings deposits		102,427		129		0.17	%		92,565		162		0.23	%
Certificates of deposit		222,286		1,636		0.98	%		242,569		1,771		0.98	%
Net term debt		43,435		1,369		4.21	%		91,941		1,187		1.73	%
Junior subordinated debentures		10,310		172		2.23	%		10,310		143		1.85	%
Average interest-bearing liabilities		744,375		3,694		0.66	%		713,831		3,602		0.67	%
Noninterest-bearing demand		214,540							151,567
Other liabilities		13,336							16,719
Shareholders’ equity		91,959							106,186
Average liabilities and shareholders’ equity	$	1,064,210						$	988,303
Net interest income and net interest margin ⁽⁴⁾			$	26,797		3.60	%			$	25,419		3.68	%
Tax equivalent net interest margin ⁽³⁾						3.72	%						3.82	%

⁽¹⁾	Interest income on loans is reduced by net fee expense of approximately $956 thousand and $231 thousand for the nine months ended September 30, 2016 and 2015, respectively.

⁽²⁾	Average nonaccrual loans of $10.7 million and $18.1 million for the nine months ended September 30, 2016 and 2015 are included, respectively.

⁽³⁾	Tax-exempt income has been adjusted to a tax equivalent basis at a 34% tax rate. The amount of such adjustments was an additional to recorded income of approximately $893 thousand and $924 thousand for the nine months ended September 30, 2016 and 2015, respectively.

⁽⁴⁾	Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Analysis of Changes in Net Interest Income

The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume variance) and changes in average rates (rate variance) for the three and nine months ended September 30, 2016 and 2015. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.

	Three Months Ended September 30, 2016 Over Three Months Ended September 30, 2015
(Amounts in thousands)	Volume			Rate			Total
Increase (decrease) in interest income:
Net loans	$	743		$	(93	)	$	650
Taxable securities		(4	)		(50	)		(54	)
Tax-exempt securities ⁽¹⁾		(26	)		(35	)		(61	)
Interest-bearing deposits in other banks		41			1			42
Total increase (decrease)		754			(177	)		577

Increase (decrease) in interest expense:
Interest-bearing demand		33			(13	)		20
Savings deposits		10			(20	)		(10	)
Certificates of deposit		(35	)		(27	)		(62	)
Net term debt		(366	)		183			(183	)
Junior subordinated debentures		—			12			12
Total increase (decrease)		(358	)		135			(223	)
Net increase	$	1,112		$	(312	)	$	800

⁽¹⁾ Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.

	Nine Months Ended September 30, 2016 Over Nine Months Ended September 30, 2015
(Amounts in thousands)	Volume			Rate			Total
Increase (decrease) in interest income:
Net loans	$	1,773		$	(91	)	$	1,682
Taxable securities		(91	)		(117	)		(208	)
Tax-exempt securities ⁽¹⁾		(16	)		(74	)		(90	)
Interest-bearing deposits in other banks		83			(28	)		55
Total increase (decrease)		1,749			(310	)		1,439

Increase (decrease) in interest expense:
Interest-bearing demand		84			(35	)		49
Savings deposits		20			(53	)		(33	)
Certificates of deposit		(150	)		15			(135	)
Net term debt		(105	)		287			182
Junior subordinated debentures		—			29			29
Total (decrease) increase		(151	)		243			92
Net increase (decrease)	$	1,900		$	(553	)	$	1,347

⁽¹⁾ Tax-exempt income has been adjusted to tax equivalent basis at a 34% tax rate.

PROVISION FOR LOAN AND LEASE LOSSES

We made no provision for loan and lease losses during the nine months ended September 30, 2016 and 2015. See Note 5 - Loans in the Notes to Consolidated Financial Statements for further discussion.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

NONINTEREST INCOME

Noninterest income for the nine months ended September 30, 2016 was $2.3 million, a decrease of $198 thousand, or 8%, compared to the same period a year ago. The following table presents the key components of noninterest income for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,										Nine Months Ended September 30,
					Change			Change								Change			Change
(Amounts in thousands)	2016		2015		Amount			Percent			2016			2015		Amount			Percent
Noninterest income:
Service charges on deposit accounts	$	133	$	52	$	81			156	%	$	293		$	153	$	140			92	%
ATM and point of sale fees		287		96		191			199	%		714			279		435			156	%
Payroll and benefit processing fees		133		138		(5	)		(4	)%		432			416		16			4	%
Earnings on cash surrender value – life insurance		152		158		(6	)		(4	)%		461			482		(21	)		(4	)%
Gain on investment securities, net		70		137		(67	)		(49	)%		192			413		(221	)		(54	)%
Other than temporary impairment on investment securities		—		—		—			—	%		(546	)		—		(546	)		100	%
Other		184		227		(43	)		(19	)%		799			800		(1	)		(0	)%
Total noninterest income	$	959	$	808	$	151			19	%	$	2,345		$	2,543	$	(198	)		(8	)%

Changes in noninterest income included the following:

For the three months ended September 30, 2016 compared to the same period a year ago:

	●	Service charges on deposit accounts increased $81 thousand due to the branch acquisition completed in the first quarter of 2016.
	●	As a result of the branch and offsite ATM acquisition completed in the first quarter of 2016, ATM and point of sale fees increased $191 thousand for the quarter ended September 30, 2016 compared to the same period a year ago.

For the nine months ended September 30, 2016 compared to the same period a year ago:

	●	Service charges on deposit accounts increased $140 thousand due to the branch acquisition completed in the first quarter of 2016.
	●	We recorded net gains on sale of available-for-sale investment securities of $192 thousand compared to net gains of $413 thousand for the same period a year ago. During the nine months ended September 30, 2016, we purchased 46 securities with weighted average yields of 2.11%. During the same period, we sold 39 securities with weighted average yields 2.61%.
	●	During the second quarter of 2016 we recorded a $546 thousand other-than-temporary impairment on an investment security. See Note 4 Securities in the Notes to Consolidated Financial Statements in our June 30, 2016 Form 10-Q for further detail on other-than-temporary impairment.
	●	As a result of the branch and offsite ATM acquisition completed in the first quarter of 2016, ATM and point of sale fees increased $435 thousand for the nine months ended September 30, 2016 compared to the same period a year ago.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

NONINTEREST EXPENSE

The following table presents the key elements of noninterest expense for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,										Nine Months Ended September 30,
					Change			Change							Change			Change
(Amounts in thousands)	2016		2015		Amount			Percent			2016		2015		Amount			Percent
Noninterest expense:
Salaries & related benefits	$	3,873	$	3,208	$	665			21	%	$	12,188	$	10,693	$	1,495			14	%
Premises & equipment		1,071		714		357			50	%		2,847		2,157		690			32	%
Federal Deposit Insurance Corporation insurance premium		176		159		17			11	%		513		544		(31	)		(6	)%
Data processing fees		464		243		221			91	%		1,142		736		406			55	%
Professional service fees		303		337		(34	)		(10	)%		1,209		1,167		42			4	%
Telecommunications		199		116		83			72	%		545		335		210			63	%
Branch acquisition costs		—		—		—			—	%		580		—		580			100	%
Loss on cancellation of interest rate swap		—		—		—			—	%		2,325		—		2,325			100	%
Other		1,039		797		242			30	%		3,445		2,657		788			30	%
Total noninterest expense	$	7,125	$	5,574	$	1,551			28	%	$	24,794	$	18,289	$	6,505			36	%

Noninterest expense for the three and nine months ended September 30, 2016 increased $1.6 million and $6.5 million respectively, compared to the same periods a year ago. The increase was primarily driven by balance sheet reconfiguration costs and increased costs to operate the five newly acquired branches and three offsite ATM locations.

For the three months ended September 30, 2016 compared to the same period a year ago:

	●	Salaries and related benefits expense for the three months ended September 30, 2016 were $3.9 million, an increase of $665 thousand or 21% compared to the same period a year ago. The increase in salaries and related benefits included costs directly related to the newly acquired branch locations of $402 thousand.
	●	Premises and equipment expense for the three months ended September 30, 2016 were $1.1 million, an increase of $357 thousand or 50% compared to the same period a year ago. The increase in premises and equipment expenses included costs directly related to the newly acquired branch locations of $215 thousand.
	●	Data processing fees were $464 thousand, an increase of $221 thousand or 91% compared to the same period a year ago. The increase in data processing fees is directly related to costs for the newly acquired branches.

For the nine months ended September 30, 2016 compared to the same period a year ago:

●

Noninterest expenses for the nine months ended September 30, 2016 were impacted by the following expenses totaling $3.0 million related to the acquisition of five Bank of America branches and the execution of our plans to reconfigure our Balance Sheet using liquidity provided by those branches:

	o	$2.3 million loss on termination of interest rate hedge.
	o	$580 thousand of branch acquisition transition costs.
	o	$57 thousand prepayment penalty on early repayment of $75.0 million Federal Home Loan Bank of San Francisco hedged term debt.

	●	Salaries and related benefits increased $970 thousand due to increased group insurance costs and investment in our Sacramento marketplace commercial banking group
	●	Salaries and related benefits costs directly related to the newly acquired branch locations totaled $916 thousand
	●	Premise and equipment expense increased $690 thousand including premises and equipment expense directly related to the newly acquired branch and offsite ATM locations of $429 thousand

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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 September 30,						For the Nine Months Ended September 30,
(Amounts in thousands)	2016			2015			2016			2015
Provision for income taxes	$	744		$	1,164		$	1,386		$	2,957
Effective tax rate		23.92	%		31.55	%		31.88	%		30.57	%
Provision for income taxes - excluding DTA write-off	$	744		$	1,164		$	1,023		$	2,957
Effective tax rate - excluding DTA write-off		23.92	%		31.55	%		23.53	%		30.57	%

During the nine months ended September 30, 2016, we recorded an income tax expense of $1.0 million (23.53% of pretax income) and wrote-off a $363 thousand deferred tax asset; a net expense of $1.4 million (31.88% of pretax income). This compared to income tax expense of $3.0 million (30.57% of pretax income) for the same period a year ago. The Company’s 2016 effective tax rate excluding the deferred tax write-off has declined as a result of increased permanent deductions arising from investments in affordable housing partnerships.

The $363 thousand deferred tax asset written off during the first quarter of 2016 was associated with our investment in affordable housing partnerships. The deferred tax asset represented the timing difference between the book amortization of the investments and the Bank’s share of the tax deductible losses incurred by the projects reported on the partnerships’ Schedule K-1. In accordance with ASC 323, deferred tax treatment for these items is not permissible under the proportional amortization method of accounting.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

FINANCIAL CONDITION

CONSOLIDATED BALANCE SHEETS

As of September 30, 2016, we had total consolidated assets of $1.1 billion, gross loans of $779.0 million, allowance for loan and lease losses (“ALLL”) of $11.8 million, total deposits of $975.5 million, and shareholders’ equity of $94.3 million.

We continued to maintain a strong liquidity position during the reporting period. As of September 30, 2016, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $19.7 million. We also held interest-bearing deposits in the amount of $65.4 million.

Available-for-sale investment securities totaled $156.4 million at September 30, 2016, compared to $159.0 million at December 31, 2015. Our available-for-sale investment portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations and wholesale loan purchases.

During the first nine months of 2016, we purchased 46 securities with a par value of $67.8 million and weighted average yield of 2.11% and sold 39 securities with a par value of $44.4 million and weighted average yield of 2.61%. The sales activity on available-for-sale securities and calls on two held-to-maturity securities resulted in $192 thousand in net realized gains for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we also received $25.7 million and $4.3 million in proceeds from principal payments, calls and maturities within the available-for-sale and held-to-maturity investment securities portfolios, respectively.

At September 30, 2016, our net unrealized gains on available-for-sale investment securities were $2.3 million compared to $1.6 million at December 31, 2015. The increase in net unrealized gains is primarily due to interest rate declines during the past nine months.

We recorded gross loan balances of $779.0 million at September 30, 2016, compared to $716.6 million at December 31, 2015; an increase of $62.4 million. The increase in gross loans occurred primarily in the Bank’s Sacramento marketplace and is the result of investments in our SBA division and in our expanded Sacramento commercial banking group.

The ALLL at September 30, 2016 increased $669 thousand to $11.8 million compared to $11.2 million at December 31, 2015. During the nine months ended September 30, 2016 and 2015 there were no provisions for loan and lease losses. Net loan loss recoveries were $669 thousand during the nine months ended September 30, 2016, compared to net loan loss recoveries of $71 thousand during the same period a year previous. At September 30, 2016, 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 possibly 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, decreased by $4.0 million to $10.1 million, or 1.3% of gross loans, as of September 30, 2016, compared to $14.1 million, or 1.97% of gross loans as of December 31, 2015. Past due loans as of September 30, 2016 decreased $6.0 million to $5.2 million, compared to $11.2 million as of December 31, 2015. The decrease in past due loans was primarily attributable to the repayment of $5.5 million on two commercial real estate loans and repayment of $475 thousand on a commercial loan. We believe that risk grading for past due loans appropriately reflects the risk associated with the past due loans. See Note 5 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 $15.9 million at September 30, 2016 an increase of $4.8 million compared to $11.1 million at December 31, 2015. The increase in premises and equipment is due to the recent branch acquisition, which includes a $2.4 million positive fair value adjustment on the purchased properties.

Our OREO balance at September 30, 2016 was $793 thousand compared to $1.4 million at December 31, 2015. For the nine months ended September 30, 2016, we transferred two foreclosed properties in the amount of $110 thousand to OREO and we sold eight properties with balances of $664 thousand for a net loss of $119 thousand. During the nine months ended September 30, 2016, we recognized a write-down for three properties totaling $76 thousand. We remain committed to working with customers who are experiencing financial difficulties to find potential solutions.

Bank-owned life insurance increased $461 thousand during the nine months ended September 30, 2016 to $22.9 million compared to $22.5 million at December 31, 2015. Our net deferred tax assets were $8.2 million at September 30, 2016 compared to $9.8 million at December 31, 2015. As part of the branch acquisition, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. Other assets which include the Bank’s investment in low income housing tax credit partnerships and investment in Federal Home Loan Bank of San Francisco stock totaled $19.2 million at September 30, 2016 compared to $18.3 million at December 31, 2015.

Total deposits at September 30, 2016, increased $171.8 million or 21% to $975.5 million compared to December 31, 2015. Total non-maturing deposits increased $208.1 million or 38% compared to the same date a year ago and increased $179.5 million or 31% compared to December 31, 2015. Certificates of deposit decreased $12.2 million or 5% compared to the same date a year ago and decreased $7.7 million or 3% compared to December 31, 2015.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

During the first quarter of 2016, the branch acquisition provided an additional $149.0 million of deposits and we called and redeemed $17.5 million of brokered certificates of deposit. At September 30, 2016, the deposits in the acquired branches totaled $140.3 million.

During the first quarter of 2016, we paid off $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and terminated the interest rate hedge associated with that debt eliminating future contractual interest payments on $75.0 million at 2.64% for the period from payoff to August 1, 2016; and at 3.22% for the period August 1, 2016 to August 1, 2017.

Other liabilities which include the Bank’s supplemental executive retirement plan, and funding obligation for investments in qualified affordable housing partnerships decreased $4.4 million to $11.8 million as of September 30, 2016 compared to $16.2 million at December 31, 2015. The decrease in other liabilities is primarily caused by a $2.3 million decrease related to the termination of interest rate swaps.

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:

●

Mitigates interest rate risk;

●

Mitigates a portion of 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;

●

Can be used as collateral for certain public funds.

Available-for-sale investment securities totaled $156.4 million at September 30, 2016, compared to $159.0 million at December 31, 2015. During the third quarter of 2016, net sales and maturities of available-for-sale investment securities provided additional liquidity to fund loan growth.

Our held-to-maturity investment portfolio is generally utilized to hold longer term securities that may have greater price risk many of which are pledged as collateral for our local agency deposit program. This portfolio includes securities with longer durations and higher coupons than securities held in the available-for-sale securities portfolio. Held-to-maturity investment securities had amortized costs of $31.8 million at September 30, 2016, compared to $35.9 million at December 31, 2015. There were no held-to-maturity securities sold or purchased during the nine months ended September 30, 2016. There was $4.3 million in book value of held to maturity securities called during the nine months ended September 30, 2016.

The following table presents the carrying value of the investment securities portfolio by classification and major type as of September 30, 2016 and December 31, 2015.

	September 30,		December 31,
(Amounts in thousands)	2016		2015
Available-for-sale securities: ⁽¹⁾
U.S. government & agencies	$	—	$	3,943
Obligations of state and political subdivisions		59,952		61,104
Mortgage backed securities and collateralized mortgage obligations		54,046		32,137
Corporate securities		16,346		33,778
Commercial mortgage backed securities		16,254		12,769
Other asset backed securities		9,842		15,299
Total	$	156,440	$	159,030
Held-to-maturity securities: ⁽¹⁾
Obligations of state and political subdivisions	$	31,771	$	35,899

⁽¹⁾Available-for-sale securities are reported at fair value, and held-to-maturity securities are reported at amortized cost.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table presents information regarding the amortized cost, maturity structure and average yield of the investment portfolio at September 30, 2016.

						Over One Through					Over Five Through
	Within One Year					Five Years					Ten Years					Over Ten Years					Total
(Amounts in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available-for-sale securities:
Obligations of state and political subdivisions	$	827		2.93	%	$	7,569		2.55	%	$	23,498		2.93	%	$	26,043		2.46	%	$	57,937		2.67	%
Mortgage backed securities and collateralized mortgage obligations		1,106		1.33	%		44,618		2.33	%		7,514		2.71	%		669		3.98	%		53,907		2.38	%
Corporate securities		3,013		1.19	%		9,502		2.66	%		1,000		2.00	%		2,675		2.56	%		16,190		2.33	%
Commercial mortgage backed securities		—		—	%		1,221		1.27	%		1,443		1.69	%		13,627		2.49	%		16,291		2.33	%
Other asset backed securities		—		—	%		—		—	%		120		2.85	%		9,706		2.37	%		9,826		2.38	%
Total	$	4,946		1.52	%	$	62,910		2.38	%	$	33,575		2.80	%	$	52,720		2.48	%	$	154,151		2.48	%
Held-to-maturity securities:
Obligations of state and political subdivisions	$	—		—	%	$	4,575		3.27	%	$	13,435		2.91	%	$	13,760		3.42	%	$	31,771		3.18	%

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Loan Portfolio

Loan Concentrations

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

The following table presents the composition of the loan portfolio as of September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30,						December 31,
Loan Portfolio	2016			%			2015			%
Commercial	$	136,235			17	%	$	132,805			19	%
Commercial real estate:
Real estate - construction and land development		48,365			6			28,319			4
Real estate - commercial non-owner occupied		281,977			37			243,374			33
Real estate - commercial owner occupied		160,474			21			156,299			22
Residential real estate:
Real estate - residential - ITIN		46,458			6			49,106			7
Real estate - residential - 1-4 family mortgage		10,770			1			11,390			2
Real estate - residential - equity lines		42,363			5			45,473			6
Consumer and other		52,377			7			49,873			7
Gross loans		779,019			100	%		716,639			100	%
Deferred loan fees		1,155						870
Loans, net of deferred fees and costs		780,174						717,509
Allowance for loan and lease losses		(11,849	)					(11,180	)
Net loans	$	768,325					$	706,329

The following table sets forth the maturity and re-pricing distribution of our gross loans outstanding as of September 30, 2016, which, based on remaining scheduled repayments of principal, were due within the periods indicated.

			After One
	Within One		Through		After Five
(Amounts in thousands)	Year		Five Years		Years		Total
Commercial	$	33,927	$	52,370	$	49,938	$	136,235
Commercial real estate:
Real estate - construction and land development		8,802		21,469		18,094		48,365
Real estate - commercial non-owner occupied		1,796		43,390		236,791		281,977
Real estate - commercial owner occupied		7,528		21,087		131,859		160,474
Residential real estate:
Real estate - residential - ITIN		—		—		46,458		46,458
Real estate - residential - 1-4 family mortgage		—		2,706		8,064		10,770
Real estate - residential - equity lines		931		5,200		36,232		42,363
Consumer and other		48,371		997		3,009		52,377
Gross loans	$	101,355	$	147,219	$	530,445	$	779,019
Loans due after one year with:
Fixed rates			$	65,245	$	170,023	$	235,268
Variable rates				81,974		360,422		442,396
Total			$	147,219	$	530,445	$	677,664

Loans with unique credit characteristics

In April of 2009, we completed a loan ‘swap’ transaction, which included the purchase of a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN loans are made to legal United States residents who do not possess a social security number, and are geographically dispersed throughout the United States. The ITIN loan portfolio is serviced through third parties. 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 are forced to foreclose and service these ITIN properties ourselves, we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.

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Purchased Loans

In addition to loans we have originated, the loan portfolio includes purchased loan pools and purchased participations. Purchased loans are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an ALLL is not recorded at the acquisition date. Additional information regarding the individual purchased loan pools can be found in Note 15 Purchase of Financial Assets in the Notes to Consolidated Financial Statements in this document.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table presents the recorded investment in purchased loans at September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30, 2016					December 31, 2015
Purchased Loans	Balance		% of Gross Loan Portfolio			Balance		% of Gross Loan Portfolio
Commercial	$	113		—	%	$	—		—	%
Commercial real estate		35,799		5			46,999		7
Residential real estate		54,342		7			58,471		8
Consumer and other		49,812		6			46,783		7
Total purchased loans	$	140,066		18	%	$	152,253		22	%

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 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 six to 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 certain 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 loss or charge offs from the date they become known.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Loans are classified as nonaccrual when collection of principal or interest is doubtful; generally these are loans that are past due as to maturity or payment of principal or interest by 90 days or more, unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for nonaccrual status. Loans placed on nonaccrual will typically remain 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 begin to receive offers or indications of interest, we will analyze the price and 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. 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. In addition, we obtain updated appraisals on OREO property every six to twelve months. Increases in 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. Unless a current appraisal is available, an appraisal will be ordered prior to a loan migrating to OREO.

The following table summarizes our nonperforming assets as of September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30,			December 31,
Nonperforming Assets	2016			2015
Commercial	$	1,710		$	1,994
Commercial real estate:
Real estate - commercial non-owner occupied		1,196			5,488
Real estate - commercial owner occupied		800			1,071
Total commercial real estate		1,996			6,559
Residential real estate:
Real estate - residential - ITIN		3,392			3,649
Real estate - residential - 1-4 family mortgage		1,798			1,775
Real estate - residential - equity lines		942			—
Total residential real estate		6,132			5,424
Consumer and other		252			32
Total nonaccrual loans		10,090			14,009
90 days past due and still accruing		—			88
Total nonperforming loans		10,090			14,097
Other real estate owned		793			1,423
Total nonperforming assets	$	10,883		$	15,520
Nonperforming loans to loans, net of deferred fees and costs		1.29	%		1.96	%
Nonperforming assets to total assets		0.98	%		1.53	%

We are continually performing extensive reviews of the commercial real estate portfolio, including stress testing. These reviews are being performed on both our non-owner and owner occupied credits. These reviews are being 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 our lending teams are effectively managing the risks in this portfolio. There can be no assurance that any further 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. These impairment reserves are recognized as a specific component to be provided for in the ALLL.

As of September 30, 2016, we had $11.2 million in troubled debt restructurings compared to $15.9 million as of December 31, 2015. As of September 30, 2016, we had 119 restructured loans that qualified as troubled debt restructurings, of which 110 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.43% of gross loans as of September 30, 2016, compared to 2.22% at December 31, 2015.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

At September 30, 2016 and December 31, 2015, impaired loans of $7.4 million and $6.9 million were classified as accruing troubled debt restructurings, respectively. The restructured loans on accrual status represent the majority of impaired loans accruing interest at each respective date. In order for a restructured loan to be on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. We had no obligation to lend additional funds on the restructured loans as of September 30, 2016.

The following table sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30,			December 31,
Troubled Debt Restructurings	2016			2015
Accruing troubled debt restructurings
Commercial	$	726		$	49
Commercial real estate:
Real estate - commercial non-owner occupied		811			824
Residential real estate:
Real estate - residential - ITIN		5,280			5,458
Real estate - residential - equity lines		543			558
Total accruing troubled debt restructurings	$	7,360		$	6,889
Nonaccruing troubled debt restructurings
Commercial	$	1,090		$	863
Commercial real estate:
Real estate - commercial non-owner occupied		—			4,292
Real estate - commercial owner occupied		—			1,071
Residential real estate:
Real estate - residential - ITIN		2,476			2,538
Real estate - residential - 1-4 family mortgage		199			219
Consumer and other		30			32
Total nonaccruing troubled debt restructurings	$	3,795		$	9,015
Total troubled debt restructurings
Commercial	$	1,816		$	912
Commercial real estate:
Real estate - commercial non-owner occupied		811			5,116
Real estate - commercial owner occupied		—			1,071
Residential real estate:
Real estate - residential - ITIN		7,756			7,996
Real estate - residential - 1-4 family mortgage		199			219
Real estate - residential - equity lines		543			558
Consumer and other		30			32
Total troubled debt restructurings	$	11,155		$	15,904

Total troubled debt restructurings to gross loans outstanding at period end		1.43	%		2.22	%

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

The ALLL at September 30, 2016 increased $669 thousand to $11.8 million compared to $11.2 million at December 31, 2015. During the nine months ended September 30, 2016 and the year ended December 31, 2015 there were no provisions for loan and lease losses.

We recorded net loan loss recoveries of $669 thousand for the nine months ended September 30, 2016 compared to net loan loss recoveries of $360 thousand for the year ended December 31, 2015. The recoveries occurred primarily from one commercial real estate loan relationship of $2.5 million and were partially offset by charge-offs of $1.4 million from two commercial loan relationships and one residential real estate loan relationship. During the first nine months of 2016, net loan loss recoveries combined with continuing improved asset quality resulted in no provision for loan and lease losses. Our ALLL as a percentage of gross loans was 1.52% and 1.56% as of September 30, 2016 and December 31, 2015, respectively.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table summarizes the ALLL roll forward for the nine months ended September 30, 2016, twelve months ended December 31, 2015 and the nine months ended September 30, 2015. The table also includes impaired loan information at September 30, 2016, December 31, 2015 and September 30, 2015.

	For The Nine Months Ended			For The Twelve Months Ended			For The Nine Months Ended
	September 30,			December 31,			September 30,
(Amounts in thousands)	2016			2015			2015
Beginning balance ALLL	$	11,180		$	10,820		$	10,820
Provision for loan and lease loss charged to expense		—			—			—
Loans charged off		(2,398	)		(2,376	)		(1,669	)
Loan and lease loss recoveries		3,067			2,736			1,740
Ending balance ALLL	$	11,849		$	11,180		$	10,891

		At September 30, 2016			At December 31, 2015			At September 30, 2015
Nonaccrual loans:
Commercial	$	1,710		$	1,994		$	2,506
Real estate - commercial non-owner occupied		1,196			5,488			5,154
Real estate - commercial owner occupied		800			1,071			1,928
Real estate - residential - ITIN		3,392			3,649			4,228
Real estate - residential - 1-4 family mortgage		1,798			1,775			1,669
Real estate - residential - equity lines		942			—			23
Consumer and other		252			32			33
Total nonaccrual loans		10,090			14,009			15,541
Accruing troubled-debt restructured loans:
Commercial		726			49			56
Real estate - commercial non-owner occupied		811			824			828
Real estate - commercial owner occupied		—			—			—
Real estate - residential - ITIN		5,280			5,458			5,423
Real estate - residential - equity lines		543			558			563
Total accruing restructured loans		7,360			6,889			6,870

All other accruing impaired loans		483			492			494
Total impaired loans	$	17,933		$	21,390		$	22,905

Gross loans outstanding	$	779,019		$	716,639		$	718,533

Ratio of ALLL to gross loans outstanding		1.52	%		1.56	%		1.52	%
Nonaccrual loans to gross loans outstanding		1.30	%		1.95	%		2.16	%

As of September 30, 2016, impaired loans totaled $17.9 million, of which $10.1 million were in nonaccrual status. Of the total impaired loans, $8.7 million or 117 were ITIN loans with an average balance of approximately $74 thousand. The remaining impaired loans consist of seven commercial loans, five commercial real estate loans, six residential mortgages, 11 home equity loans and two consumer loans.

At September 30, 2016, impaired loans had a corresponding valuation allowance of $925 thousand. The valuation allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table sets forth the allocation of the ALLL and percent of loans in each category to gross loans as of September 30, 2016 and December 31, 2015.

(Amounts in thousands)	September 30, 2016					December 31, 2015
ALLL	Amount		% Loan Category			Amount		% Loan Category
Commercial	$	2,405		20	%	$	2,493		23	%
Commercial real estate:
Real estate - construction and land development		422		4			246		2
Real estate - commercial non-owner occupied		3,842		32			3,262		29
Real estate - commercial owner occupied		2,277		19			2,276		20
Residential real estate:
Real estate - residential - ITIN		1,170		10			998		9
Real estate - residential - 1-4 family mortgage		84		1			93		1
Real estate - residential - equity lines		550		5			486		4
Consumer and other		726		6			770		7
Unallocated		373		3			556		5
Total ALLL	$	11,849		100	%	$	11,180		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 impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of September 30, 2016, the unallocated allowance amount represented 3% of the ALLL, compared to 5% at December 31, 2015. While the ALLL composition is an indication of specific amounts or loan categories in which future charge offs may occur, actual amounts may differ.

Deposits

Total deposits as of September 30, 2016 were $975.5 million compared to $803.7 million at December 31, 2015, an increase of $171.8 million or 21%. During the first quarter of 2016, the branch acquisition provided an additional $149.0 million of deposits and we called and redeemed $17.5 million of brokered certificates of deposit. The following table presents the deposit balances by major category as of September 30, 2016, and December 31, 2015.

(Amounts in thousands)	September 30, 2016					December 31, 2015
Deposits	Amount		Percentage			Amount		Percentage
Noninterest-bearing demand	$	254,435		26	%	$	169,507		21	%
Interest-bearing demand		174,127		18			165,316		20
Money market accounts		220,398		23			150,342		19
Savings		110,201		11			94,503		12
Certificates of deposit, $100,000 or greater		168,939		17			189,969		24
Certificates of deposit, less than $100,000		47,393		5			34,098		4
Total	$	975,493		100	%	$	803,735		100	%

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table sets forth the distribution of our year-to-date average daily balances and their respective average rates as of September 30, 2016, and December 31, 2015.

	September 30, 2016					December 31, 2015
(Amounts in thousands)	Average Balance		Rate			Average Balance		Rate
Interest-bearing demand	$	168,289		0.12	%	$	145,106		0.16	%
Money market accounts		197,628		0.16	%		137,999		0.17	%
Savings		102,427		0.17	%		92,659		0.23	%
Certificates of deposit		222,286		0.98	%		238,626		0.99	%
Interest-bearing deposits		690,630		0.42	%		614,390		0.49	%
Noninterest-bearing demand		214,540					156,578
Average total deposits	$	905,170				$	770,968

Term debt (1)	$	43,435		4.21	%	$	88,874		1.98	%
Junior subordinated debentures		10,310		2.23	%		10,310		1.89	%
Average total borrowings	$	53,745		3.83	%	$	99,184		1.97	%

(1) Includes impact of interest rate swaps and senior and subordinated term debt. During the first quarter of 2016 all Federal Home Loan Bank of San Francisco term debt was repaid and an interest rate hedge associated with $75.0 million of that debt was terminated. During the fourth quarter of 2015, $20.0 million of senior and subordinated term debt was issued to redeem $20.0 million of preferred stock.

Deposit Maturity Schedule

The following table sets forth the remaining maturities of certificates of deposit in amounts of $100,000 or more as of September 30, 2016.

(Amounts in thousands)	September 30,
Maturing in:	2016
Three months or less	$	24,798
Three through six months		18,080
Six through twelve months		33,217
Over twelve months		92,844
Total	$	168,939

We have an agreement with Promontory Interfinancial Network LLC (“Promontory”) allowing our Bank to provide 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”) 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, that would be fully insured at the Bank. 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 be reciprocal or one-way; and are considered brokered deposits by the FDIC.

In accordance with regulatory Call Report instructions, we filed quarterly Call Reports, which listed brokered deposits of $59.5 million, and $94.4 million at September 30, 2016 and December 31, 2015, respectively. These amounts include deposits obtained through the CDARS and ICS programs of $59.5 million and $76.9 million, respectively.

Borrowings

Term Debt

At September 30, 2016, we had term debt outstanding with a carrying value of $19.1 million compared to $94.7 million at December 31, 2015. Term debt consisted of the following:

Federal Home Loan Bank of San Francisco borrowings

We utilized a portion of the new liquidity from our branch acquisition to repay $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt during the first quarter of 2016. Advances from the Federal Home Loan Bank of San Francisco were $75.0 million at December 31, 2015. See Note 9 Federal Funds Purchased and Lines of Credit in the Notes to Consolidated Financial Statements for information on our Federal Home Loan Bank of San Francisco borrowings and our remaining line of credit.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Senior Debt

In December of 2015, the Holding Company, entered into a senior debt loan agreement to borrow $10.0 million. The debt is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce. At September 30, 2016 the Senior Debt had a balance of $9.2 million at a variable rate of three month LIBOR plus 400 basis points and matures in 2020.

Subordinated Debt

In December of 2015, the Holding Company 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. At September 30, 2016, the Subordinated Debt had a balance of $10.0 million due in 2025.

Capital Lease

In March of 2016, the Bank entered into a capital lease agreement with Bank of America for one of the branch locations. The total obligation under the lease agreement is $172 thousand payable over a four-year period in monthly installments of principal and interest at a 6.0% annual interest rate. The lease may terminate early upon receipt of certification that there are no adverse environmental conditions. Upon termination of the lease agreement, the net present value of the lease becomes due and title will be transferred to the Bank.

Junior Subordinate Debentures

Bank of Commerce Holdings Trust II

During July 2005, the Holding Company participated in a $10.0 million private placement of fixed rate trust preferred securities (the "Trust Preferred Securities") through a newly formed 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 three month LIBOR plus 158 basis points. The effective interest rate at September 30, 2016 was 2.43%.

The final maturity on the Trust Preferred Securities is September 15, 2035, and the covenants allow for redemption at the Holding Company’s option during any quarter until maturity.

The proceeds from the sale of the Trust Preferred Securities were used by the Trust II to purchase from the Holding Company the aggregate principal amount of $10.3 million of the Holding Company’s junior subordinate debentures (the "Notes"). The net proceeds to the Holding Company from the sale of the Notes to the Trust II were partially distributed to the Bank for general corporate purposes, including funding the growth of the Bank’s various financial services. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.

LIQUIDITY AND CASH FLOW

Redding Bank of Commerce

On March 11, 2016, we completed the purchase of five Bank of America branches located in Northern California. The transaction was attractive to us because it provided a new source of low cost core deposits and allowed us to execute our plan to reconfigure our Balance Sheet. The acquisition provided approximately $142.3 million of new liquidity ($149.0 million of new deposits less payments of $6.7 million made to Bank of America). As we previously announced on March 14, 2016, we utilized a portion of that new liquidity to reduce our reliance on wholesale funding sources, repaying $75.0 million of Federal Home Loan Bank of San Francisco hedged term debt and redeeming $17.5 million of brokered time deposits. We are utilizing the remaining liquidity to fund future loan growth.

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 total deposits at September 30, 2016 and 3% of total deposits at December 31, 2015. In addition to liquidity from core deposits, loan repayments and maturities of securities, the Bank can utilize established uncommitted 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 brokered certificates of deposit.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The Bank had the following lines of credit:

	●	Available lines of credit with the Federal Home Loan Bank of San Francisco totaling $312.9 million as of September 30, 2016; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities.
	●	Available lines of credit with the Federal Reserve Bank totaling $26.7 million subject to collateral requirements, namely the amount of certain pledged loans.
	●	Uncommitted federal funds line of credit agreements with additional financial institutions totaling $40.0 million at September 30, 2016. Availability of lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.

Bank of Commerce Holdings

The Holding Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Holding Company's cash flows are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company. As of January 1, 2016, the California Financial Code requires the Bank to obtain regulatory approval for any one dividend or other distribution to the Holding Company exceeding $387 thousand. During 2016, management does not anticipate needing to obtain prior regulatory approval from the California Department of Business Oversight. We believe that such restrictions will not have an adverse impact on the ability of the Holding Company to fund its quarterly cash dividend distributions to common shareholders or to meet its other ongoing cash obligations, which consist principally of debt service on junior subordinated debentures and term debt.

Consolidated Statements of Cash Flows

As disclosed in the Consolidated Statements of Cash Flows, net cash of $6.5 million was provided by operating activities for the nine months ended September 30, 2016. The material differences between cash provided by operating activities and net income was due to a $2.3 million in loss on the cancellation of interest rate swap and non-cash items including depreciation, amortization and increased deferred tax assets were $3.1 million.

Net cash of $81.7 million provided by investing activities consisted principally of $142.4 million from the acquisition of Bank of America branches and $25.7 million in proceeds from maturities and payments of available-for-sale securities. These sources were partially offset by $2.6 million in payments to derivative counterparties for the termination of interest rate swaps, $24.2 million in net purchases of available-for-sale investment securities and $61.7 million in net loan purchases and originations.

Net cash of $54.3 million used for financing activities consisted principally of $75.8 million in net repayment of term debt and $31.9 million decrease in certificates of deposit, partially offset by an increase in demand deposits and savings accounts of $54.6 million.

CAPITAL RESOURCES

We use capital to support organic growth and pay dividends. The objective of effective capital management is to produce above market long term returns by using capital when returns are perceived to be high and issuing capital when costs are perceived to be low. Our potential sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt, senior debt or trust notes.

Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board of Directors on a monthly basis. Our regulators measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. Under the risk-based capital standard, assets reported on our Consolidated Balance Sheets and certain off-balance sheet items are assigned to risk categories, each of which is assigned a risk weight.

This standard characterizes an institution’s capital as being “Tier 1” capital (defined as principally comprising shareholders’ equity) and “Tier 2” capital (defined as principally comprising the qualifying portion of the ALLL). The minimum ratio of total risk-based capital to risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of the total risk-based capital is to be comprised of common equity; the remaining balance may consist of debt securities and a limited portion of the ALLL.

Quantitative measures established by regulation to ensure capital adequacy require the Holding Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes that the Holding Company and the Bank met all capital adequacy requirements to which they are subject, as of September 30, 2016.

On July 2, 2013, the federal banking agencies substantially amended the regulatory risk-based capital rules applicable to the Holding Company and the Bank. Effective January 1, 2015, the new rules create “Tier 1 Common Equity,” a new measure of regulatory capital closer to pure tangible common equity than the present Tier 1 definition; The required minimum risk-based capital ratio for Tier 1 Common Equity is 4.5 percent and with a 2.5 percent capital conservation buffer.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The new capital rules require the Bank to meet the capital conservation buffer requirement by 2019 in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. These new capital rules also change the risk-weights of certain assets for purposes of the risk-based capital ratios and phases out certain instruments as qualifying capital. Based on management’s review and analysis of Basel III, management believes that the Holding Company and the Bank will remain in excess of the "well-capitalized" standards under these new rules.

As of September 30, 2016, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Holding Company and the Bank’s capital amounts and ratios as of September 30, 2016, are presented in the following table.

			Actual			Well Capitalized			Minimum Capital
(Amounts in thousands)	Capital		Ratio			Requirement			Requirement
Holding Company:
Common equity tier 1 capital ratio	$	91,105		9.60	%		n/a			4.50	%
Tier 1 capital ratio	$	101,072		10.65	%		n/a			6.00	%
Total capital ratio	$	122,942		12.96	%		n/a			8.00	%
Tier 1 leverage ratio	$	101,072		9.28	%		n/a			4.00	%

Bank:
Common equity tier 1 capital ratio	$	119,835		12.62	%		6.50	%		4.50	%
Tier 1 capital ratio	$	119,835		12.62	%		8.00	%		6.00	%
Total capital ratio	$	131,714		13.87	%		10.00	%		8.00	%
Tier 1 leverage ratio	$	119,835		11.03	%		5.00	%		4.00	%

Total shareholders’ equity at September 30, 2016 was $94.3 million, compared to shareholder’s equity of $90.5 million reported at December 31, 2015.

As part of the branch acquisition, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. When calculating capital ratios, goodwill and a portion of core deposit intangibles are subtracted from Tier 1 capital. The deduction for core deposit intangibles is subject to a phase in period under the Basel III risk based capital rules. During 2016, 60% of the core deposit intangible will be deducted from Tier 1 capital, 80% for 2017 and 100% thereafter. Both of these intangible assets are subtracted from tangible equity as part of the calculation of tangible book value per share.

Cash Dividends and Payout Ratios per Common Share

During the nine months ended September 30, 2016 and the year ended December 31, 2015, we declared quarterly cash dividends of $0.03 per common share. 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. We expect that 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.

The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Dividends declared per common share	$	0.03		$	0.03		$	0.09		$	0.09
Dividend payout ratio		17	%		17	%		41	%		18	%

OFF-BALANCE SHEET ARRANGEMENTS

Information regarding Off-Balance Sheet Arrangements is included in Note 11, 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 11, Commitments and Contingencies, in the Notes to Consolidated Financial Statements incorporated in this document.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our assessment of market risk as of September 30, 2016 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, 2015.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Report on Internal Control over Financial Reporting

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

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

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

On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer (whom is also our Principal Accounting Officer) of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. As of September 30, 2016, our management, including our Chief Executive Officer, and Principal Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings.

Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that any such changes occurred in the first nine months of 2016 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

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, 2015, filed with the SEC on March 8, 2016.

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

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits


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

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: November 04, 2016			/s/ James A. Sundquist
			James A. Sundquist
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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