Bank of Commerce Holdings - FORM 10-Q

Attached files

file	filename
EX-32.0 - EXHIBIT 32.0 - Bank of Commerce Holdings	ex_111718.htm
EX-31.2 - EXHIBIT 31.2 - Bank of Commerce Holdings	ex_111717.htm
EX-31.1 - EXHIBIT 31.1 - Bank of Commerce Holdings	ex_111716.htm
EX-10.4 - EXHIBIT 10.4 - Bank of Commerce Holdings	ex_112244.htm
EX-10.3 - EXHIBIT 10.3 - Bank of Commerce Holdings	ex_112243.htm
EX-10.2 - EXHIBIT 10.2 - Bank of Commerce Holdings	ex_112242.htm
EX-10.1 - EXHIBIT 10.1 - Bank of Commerce Holdings	ex_112245.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 March 31, 2018

Commission file number 0-25135

Bank of Commerce Holdings

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

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

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

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated

filer ☐

Accelerated

filer ☒

Non-accelerated filer (Do not check if a

smaller reporting company)☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Yes ☐ No ☒

Outstanding shares of Common Stock, no par value, as of April 23, 2018: 16,315,402

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q

Part I. FINANCIAL INFORMATION
	Item 1. Financial Statements	3
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	32
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	54
	Item 4. Controls and Procedures	54

Part II. OTHER INFORMATION
	Item 1. Legal Proceedings	55
	Item 1a. Risk Factors	55
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
	Item 3. Defaults Upon Senior Securities	55
	Item 4. Mine Safety Disclosures	55
	Item 5. Other Information	55
	Item 6. Exhibits	55

SIGNATURES		56

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)

March 31, 2018 and December 31, 2017

	March 31,			December 31,
(Amounts in thousands, except share information)	2018			2017
Assets:
Cash and due from banks	$	16,247		$	17,979
Interest-bearing deposits in other banks		17,376			48,991
Total cash and cash equivalents		33,623			66,970

Securities available-for-sale, at fair value		255,917			267,954

Loans, net of deferred fees and costs		902,133			881,545
Allowance for loan and lease losses		(12,295	)		(11,925	)
Net loans		889,838			869,620

Premises and equipment, net		14,214			14,748
Other real estate owned		60			35
Life insurance		22,027			21,898
Deferred tax asset, net		7,523			6,505
Goodwill and core deposit intangible, net		1,975			2,030
Other assets		20,398			19,661
Total assets	$	1,245,575		$	1,269,421

Liabilities and shareholders' equity:
Liabilities:
Demand - noninterest-bearing	$	301,981		$	305,650
Demand - interest-bearing		462,551			496,990
Savings		107,986			110,837
Certificates of deposit		176,233			189,255
Total deposits		1,048,751			1,102,732

Term debt:
Federal Home Loan Bank of San Francisco borrowings		30,000			—
Other borrowings		16,196			17,096
Less unamortized debt issuance costs		(127	)		(138	)
Net term debt		46,069			16,958

Junior subordinated debentures		10,310			10,310
Other liabilities		12,723			12,157
Total liabilities		1,117,853			1,142,157

Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized: issued and outstanding - 16,315,402 as of March 31, 2018 and 16,271,563 as of December 31, 2017		51,959			51,830
Retained earnings		78,507			75,700
Accumulated other comprehensive loss, net of tax		(2,744	)		(266	)
Total shareholders' equity		127,722			127,264
Total liabilities and shareholders' equity	$	1,245,575		$	1,269,421

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

For the three months ended March 31, 2018 and 2017

	For the Three Months Ended
	March 31,
(Amounts in thousands, except per share information)	2018		2017
Interest income:
Interest and fees on loans	$	10,729	$	9,384
Interest on taxable securities		1,209		789
Interest on tax-exempt securities		463		530
Interest on interest-bearing deposits in other banks		129		114
Total interest income		12,530		10,817
Interest expense:
Interest on demand deposits		221		148
Interest on savings deposits		59		47
Interest on certificates of deposit		495		529
Interest on Federal Home Loan Bank of San Francisco borrowings		47		—
Interest other borrowings		281		293
Interest on junior subordinated debentures		82		66
Total interest expense		1,185		1,083
Net interest income		11,345		9,734
Provision for loan and lease losses		—		200
Net interest income after provision for loan and lease losses		11,345		9,534
Noninterest income:
Service charges on deposit accounts		176		127
ATM and point of sale fees		266		266
Fees on payroll and benefit processing		169		191
Life insurance		129		646
Gain on sale of investment securities, net		36		66
Federal Home Loan Bank of San Francisco dividends		80		103
Gain (loss) on sale of OREO		16		(71	)
Other income		110		143
Total noninterest income		982		1,471
Noninterest expense:
Salaries and related benefits		4,855		4,858
Premises and equipment		1,071		1,048
Federal Deposit Insurance Corporation insurance premium		96		48
Data processing fees		432		406
Professional service fees		345		384
Telecommunications		216		211
Other expenses		1,018		1,035
Total noninterest expense		8,033		7,990
Income before provision for income taxes		4,294		3,015
Provision for income taxes		1,053		763
Net income	$	3,241	$	2,252

Earnings per share - basic	$	0.20	$	0.17
Weighted average shares - basic		16,225		13,416
Earnings per share - diluted	$	0.20	$	0.17
Weighted average shares - diluted		16,310		13,521

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

For the three months ended March 31, 2018 and 2017

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2018			2017
Net income	$	3,241		$	2,252

Available-for-sale securities:
Unrealized (losses) gains arising during the period		(3,407	)		518
Income taxes		1,007			(213	)
Change in unrealized (losses) gains, net of tax		(2,400	)		305

Reclassification adjustment for realized gains included in net income		(36	)		(66	)
Income taxes		10			27
Realized gains, net of tax		(26	)		(39	)

Net (decrease) increase in unrealized gains on available-for-sale securities		(2,426	)		266

Held-to-maturity securities:
Amortization of held-to-maturity fair value adjustment		—			(17	)
Income taxes		—			7
Net change in fair value adjustment on held-to-maturity securities		—			(10	)

Other comprehensive (loss) income		(2,426	)		256
Comprehensive income – Bank of Commerce Holdings	$	815		$	2,508

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, 2017 and three months ended March 31, 2018 (Unaudited)

								Accumulated
								Other
			Common					Comprehensive
	Common		Stock		Retained			(Loss) Income
(Amounts in thousands except per share information)	Shares		Amount		Earnings			Net of Tax			Total
Balance at January 1, 2017		13,373	$	24,547	$	70,218		$	(659	)	$	94,106
Net income		—		—		7,344			—			7,344
Other comprehensive income, net of tax		—		—		—			393			393
Comprehensive income		—		—		—			—			7,737
Dividend on common stock ($0.12 per share)		—		—		(1,862	)		—			(1,862	)
Stock issued pursuant to public offering, net of underwriting discounts and expenses of $1.7 million		2,738		26,778		—			—			26,778
Stock compensation grants		4		41		—			—			41
Common stock issued under employee plans		30		—		—			—			—
Stock options exercised		52		245		—			—			245
Compensation expense associated with stock options		—		23		—			—			23
Compensation expense associated with restricted stock, net of cash paid when directly withholding shares for tax-withholding purposes		—		196		—			—			196
Balance at December 31, 2017⁽¹⁾		16,197	$	51,830	$	75,700		$	(266	)	$	127,264

⁽¹⁾Excludes 74 unvested restricted shares

									Accumulated
									Other
			Common						Comprehensive
	Common		Stock			Retained			(Loss)
(Amounts in thousands except per share information)	Shares		Amount			Earnings			Net of Tax			Total
Balance at January 1, 2018		16,197	$	51,830		$	75,700		$	(266	)	$	127,264
Net income		—		—			3,241			—			3,241
Reclassification of accumulated other comprehensive income due to tax rate change		—		—			52			(52	)		—
Other comprehensive loss, net of tax		—		—			—			(2,426	)		(2,426	)
Comprehensive income		—		—			—			—			815
Dividend on common stock ($0.03 per share)		—		—			(486	)		—			(486	)
Stock compensation grants		4		45			—			—			45
Common stock issued under employee plans		21		—			—			—			—
Stock options exercised		19		113			—			—			113
Compensation expense associated with stock options		—		3			—			—			3
Compensation expense associated with restricted stock, net of cash paid when directly withholding shares for tax-withholding purposes		—		(32	)		—			—			(32	)
Balance at March 31, 2018 ⁽¹⁾		16,241	$	51,959		$	78,507		$	(2,744	)	$	127,722

⁽¹⁾Excludes 74 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 three months ended March 31, 2018 and March 31, 2017

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2018			2017
Cash flows from operating activities:
Net income	$	3,241		$	2,252
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		—			200
Provision for depreciation and amortization		506			529
Amortization of core deposit intangible		55			56
Amortization of debt issuance costs		11			11
Compensation expense associated with stock options		3			5
Compensation expense associated with restricted stock		71			65
Tax benefits from vesting of restricted stock		(31	)		—
Net gain on sale or call of securities		(36	)		(66	)
Amortization of investment premiums and accretion of discounts, net		511			471
Amortization of held-to-maturity fair value adjustments		—			(17	)
(Gain) on disposal of fixed assets		(5	)		—
(Gain) loss on sale of OREO		(16	)		71
Increase in cash surrender value of life insurance		(129	)		(144	)
Life insurance death benefit		—			(502	)
(Decrease) increase in deferred compensation and salary continuation plans		(1	)		18
Increase in deferred loan fees and costs		(3	)		(122	)
Decrease in other assets		488			1,233
Increase (decrease) in other liabilities		682			(164	)
Net cash provided by operating activities		5,347			3,896

Cash flows from investing activities:
Proceeds from maturities and payments of available-for-sale securities		7,910			4,317
Proceeds from sale of available-for-sale securities		19,398			13,927
Purchases of available-for-sale securities		(20,334	)		(24,623	)
Investment in qualified affordable housing partnerships		(31	)		(7	)
Loan originations, net of principal repayments		(23,136	)		(7,837	)
Net repayment on loan pools		2,861			1,630
Purchase of premises and equipment		(48	)		(206	)
Proceeds from the sale of other real estate owned		51			—
Proceeds from life insurance policy		—			2,249
Net cash used in investing activities		(13,329	)		(10,550	)

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2018			2017
Cash flows from financing activities:
Net (decrease) increase in demand deposits and savings accounts	$	(40,959	)	$	1,658
Net decrease in certificates of deposit		(13,022	)		(1,834	)
Advances on term debt		70,000			—
Repayment of term debt		(40,900	)		(250	)
Proceeds from stock options exercised		113			218
Cash paid when directly withholding shares for tax-withholding purposes		(111	)		(85	)
Cash dividends paid on common stock		(486	)		(401	)
Net cash used in financing activities		(25,365	)		(694	)

Net decrease in cash and cash equivalents		(33,347	)		(7,348	)
Cash and cash equivalents at beginning of year		66,970			68,407
Cash and cash equivalents at end of period	$	33,623		$	61,059

See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)

For the three months ended March 31, 2018 and March 31, 2017

	For the Three Months Ended
	March 31,
(Amounts in thousands)	2018			2017
Supplemental disclosures of cash flow activity:
Cash paid during the period for:
Interest	$	1,043		$	924
Supplemental disclosures of non cash investing activities:
Transfer of loans to other real estate owned	$	60		$	121

Unrealized (loss) gain on investment securities available-for-sale	$	(3,443	)	$	452
Changes in net deferred tax asset related to changes in unrealized loss (gain) on investment securities available-for-sale		1,017			(186	)
Changes in accumulated other comprehensive income due to changes in unrealized (loss) gain on investment securities available-for-sale	$	(2,426	)	$	266

Accretion of held-to-maturity investment securities from other comprehensive income to interest income	$	—		$	(17	)
Changes in deferred tax related to accretion of held-to-maturity investment securities		—			7
Changes in accumulated other comprehensive income due to accretion of held-to-maturity investment securities	$	—		$	(10	)

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

Supplemental disclosures of non cash financing activities:
Stock issued under employee plans	$	45		$	42
Cash dividend declared on common shares and payable after period-end	$	486		$	404

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 Sacramento, 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) and for Bank of Commerce Mortgage (inactive). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust II. The consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 are derived from the unaudited interim consolidated financial statements and audited consolidated financial statements and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. The Company believes that all adjustments (all of which are normal and recurring in nature) considered necessary for a fair presentation have been included and the disclosures made are adequate to make the information not misleading.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with prevailing practices within the banking and securities industries. In preparing such consolidated financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the Balance Sheets and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the valuation of investments and impairments of securities, the determination of the allowance for loan and lease losses (“ALLL”), income taxes, the valuation of goodwill and Other Real Estate Owned (“OREO”), and fair value measurements. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation. The results of reclassifications are not considered material and have no effect on previously reported net income or shareholders' equity. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2017 Annual Report on Form 10-K. The consolidated results of operations and cash flows for the 2018 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 March 31, 2018 and December 31, 2017, 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.

Revenue from Contracts with Customers

We record revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, we must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) we satisfy the performance obligations. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

Our primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. We fully satisfy our performance obligations on our contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

Application of new accounting guidance

ASU No. 2014-09

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 was initially effective for the Company's reporting period beginning on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defers the effective date by one year. For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption. The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Our non-interest income is recognized in the period it is earned under contracts with very short terms. We adopted the standard on January 1, 2018, which resulted in no adjustment.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

ASU No. 2016-01

Description - In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. We adopted the standard on January 1, 2018, adoption of the standard also resulted in the use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 9 – Fair Values for further information regarding the valuation of these loans.

ASU No. 2018-02

In February 2018, FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from retained earnings to accumulated other comprehensive income for stranded tax effects resulting from the Tax Cuts and Jobs Act. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period. The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We elected the early adoption of ASU 2018-02 as of January 1, 2018 and reclassified $52 thousand from accumulated other comprehensive income to retained earnings.

NOTE 2. COMMON STOCK OUTSTANDING AND EARNINGS PER SHARE

On May 10, 2017, the Company announced the closing of its underwritten public offering, at the public offering price of $10.50 per share. The total number of shares of common stock sold by the Company was 2,738,096. Net proceeds raised in the offering, after underwriting discounts and expenses of the offering, were $26.8 million.

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted stock awards which do not have voting rights or share in dividends. Diluted earnings per share reflects the potential dilution that 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.

The following is a computation of basic and diluted earnings per share for the three months ended March 31, 2018 and 2017.

	For the Three Months Ended
(Amounts in thousands, except per share information)	March 31,
Earnings Per Share	2018		2017
Numerators:
Net income	$	3,241	$	2,252
Denominators:
Weighted average number of common shares outstanding - basic⁽¹⁾		16,225		13,416
Effect of potentially dilutive common shares ⁽²⁾		85		105
Weighted average number of common shares outstanding - diluted		16,310		13,521
Earnings per common share:
Basic	$	0.20	$	0.17
Diluted	$	0.20	$	0.17
Anti-dilutive options not included in diluted earnings per share calculation		—		—
Anti-dilutive restricted shares not included in diluted earnings per share calculation		41,915		33,068

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3. SECURITIES

The following table presents the amortized costs, unrealized gains, unrealized losses and estimated fair values of our investment securities as of March 31, 2018, and December 31, 2017.

As of March 31, 2018

Gross

Amortized

Unrealized

Estimated

(Amounts in thousands)

Cost

Gain

Loss

Fair Value

Available-for-sale securities:

U.S. government & agencies

41,261

270

(352

)

41,179

Obligations of state and political subdivisions

58,832

1,387

(811

)

59,408

Residential mortgage-backed securities and collateralized mortgage obligations

129,111

(3,562

)

125,567

Corporate securities

4,065

(114

)

3,958

Commercial mortgage-backed securities

26,261

(753

)

25,520

Other asset-backed securities

282

—

285

Total

259,812

1,697

(5,592

)

255,917

As of December 31, 2017

Gross

Amortized

Unrealized

Estimated

(Amounts in thousands)

Cost

Gain

Loss

Fair Value

Available-for-sale securities:

U.S. government & agencies

40,319

196

(146

)

40,369

Obligations of state and political subdivisions

77,412

1,910

(478

)

78,844

Residential mortgage-backed securities and collateralized mortgage obligations

116,061

(1,538

)

114,592

Corporate securities

5,079

(105

)

4,992

Commercial mortgage-backed securities

26,995

(378

)

26,641

Other asset-backed securities

2,540

(28

)

2,516

Total

268,406

2,221

(2,673

)

267,954

The following table presents the expected maturities of investment securities at March 31, 2018.

	Available-For-Sale
(Amounts in thousands)	Amortized Cost		Fair Value
Amounts maturing in:
One year or less	$	110	$	112
After one year through five years		84,710		83,229
After five years through ten years		88,333		86,912
After ten years		86,659		85,664
Total	$	259,812	$	255,917

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

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2018 and December 31, 2017 securities with a fair value of $61.6 million and $62.6 million, respectively, were pledged as collateral to secure public fund deposits, Federal Home Loan Bank of San Francisco borrowings and for other purposes as required by law.

The following table presents the cash proceeds from sales of securities and the associated gross realized gains and gross realized losses that have been included in earnings for the three months ended March 31, 2018 and 2017.

	Three Months Ended March 31,
(Amounts in thousands)	2018			2017
Proceeds from sales of securities	$	19,398		$	13,927

Gross realized gains on sales of securities:
Obligations of state and political subdivisions	$	152		$	51
Residential mortgage-backed securities and collateralized mortgage obligations		—			17
Corporate securities		—			1
Total gross realized gains on sales of securities		152			69

Gross realized losses on sales of securities:
Obligations of state and political subdivisions		(71	)		—
Corporate securities		—			(3	)
Other asset-backed securities		(45	)		—
Total gross realized losses on sales of securities		(116	)		(3	)
Gain on investment securities, net	$	36		$	66

Investment securities that were in an unrealized loss position as of March 31, 2018 and December 31, 2017 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.

As of March 31, 2018

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:

U.S. government & agencies

15,195

(286

)

2,003

(66

)

17,198

(352

)

Obligations of states and political subdivisions

17,412

(534

)

5,809

(277

)

23,221

(811

)

Residential mortgage-backed securities and collateralized mortgage obligations

88,513

(2,288

)

31,013

(1,274

)

119,526

(3,562

)

Corporate securities

—

2,920

(114

)

2,920

(114

)

Commercial mortgage-backed securities

13,965

(409

)

9,684

(344

)

23,649

(753

)

Total temporarily impaired securities

135,085

(3,517

)

51,429

(2,075

)

186,514

(5,592

)

As of December 31, 2017

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Amounts in thousands)

Value

Loss

Value

Loss

Value

Loss

Available-for-sale securities:

U.S. government & agencies

18,140

(102

)

2,131

(44

)

20,271

(146

)

Obligations of states and political subdivisions

15,030

(255

)

8,368

(223

)

23,398

(478

)

Residential mortgage-backed securities and collateralized mortgage obligations

75,323

(827

)

31,036

(711

)

106,359

(1,538

)

Corporate securities

—

2,934

(105

)

2,934

(105

)

Commercial mortgage-backed securities

11,162

(151

)

10,026

(227

)

21,188

(378

)

Other asset-backed securities

2,167

(28

)

—

2,167

(28

)

Total temporarily impaired securities

121,822

(1,363

)

54,495

(1,310

)

176,317

(2,673

)

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2018 and December 31, 2017, the number of securities that were in an unrealized loss position was 155 and 138, respectively. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. Our Investment Policy requires that at the time of purchase, securities are rated A3/A- or higher by Moody’s, S&P and Fitch rating agencies. Management monitors the published credit ratings of our investment portfolio for material rating or outlook changes. For all private-label securities collateralized by mortgages, management also monitors the credit characteristics of the underlying mortgages to identify potential credit losses, if any, in the portfolio. Because the decline in fair value is not due to credit quality concerns, and because we have no plans to sell the securities before the recovery of their amortized cost, and we believe the bank has the ability to hold the securities to maturity these investments are not considered other-than-temporarily impaired.

The following table presents the characteristics of our securities that are in unrealized loss positions at March 31, 2018 and December 31, 2017.

		Characteristics of securities in unrealized loss positions at
Available-for-sale securities:		**March 31, 2018 and December 31, 2017**
U.S. government & agencies		Direct obligations of the U.S. Government or obligations guaranteed by U.S. Government agencies.
Obligations of states and political subdivisions		General obligation issuances or revenue securities secured by revenues from specific sources issued by municipalities and political subdivisions located within the U.S.
Residential mortgage-backed securities and collateralized mortgage obligations		Obligations of U.S. government sponsored entities or non-governmental entities collateralized by high quality mortgages on residential properties. Issuances by non-governmental entities usually include good credit enhancements. Of the residential mortgage-backed securities and collateralized mortgage obligations that we owned at March 31, 2018 and December 31, 2017, 61% and 56% were issued or guaranteed by U.S. government sponsored entities, respectively.
Corporate securities		Debt obligations generally issued or guaranteed by large U.S. corporate institutions.
Commercial mortgage-backed securities		Obligations of U.S. government sponsored entities or non-governmental entities collateralized by high quality mortgages on commercial properties. Issuances by non-governmental entities usually include good credit enhancements. Of the commercial mortgage-backed securities that we owned at March 31, 2018 and December 31, 2017, 90% were issued or guaranteed by U.S. government sponsored entities, respectively.
Other asset-backed securities		Obligations secured by high quality loans with good credit enhancements issued by non-governmental issuers.

NOTE 4. LOANS

Outstanding loan balances consisted of the following at March 31, 2018, and December 31, 2017.

(Amounts in thousands)	March 31,			December 31,
Loan Portfolio	2018			2017
Commercial	$	137,870		$	142,405
Commercial real estate:
Real estate - construction and land development		14,723			15,902
Real estate - commercial non-owner occupied		405,192			377,668
Real estate - commercial owner occupied		193,286			192,023
Residential real estate:
Real estate - residential - Individual Tax Identification Number (“ITIN”)		40,425			41,188
Real estate - residential - 1-4 family mortgage		30,247			30,377
Real estate - residential - equity lines		30,520			30,347
Consumer and other		48,157			49,925
Gross loans		900,420			879,835
Deferred fees and costs		1,713			1,710
Loans, net of deferred fees and costs		902,133			881,545
Allowance for loan and lease losses		(12,295	)		(11,925	)
Net loans	$	889,838		$	869,620

Certain loans are pledged as collateral with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank. Pledged loans totaled $445.3 million and $420.0 million at March 31, 2018 and December 31, 2017, respectively.

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

When we purchase loans they are typically purchased at a discount to enhance yield and compensate for credit risk. Gross loan balances in the table above include net purchase discounts of $2.8 million as of March 31, 2018, and December 31, 2017.

Past Due Loans

An age analysis of past due loans (gross), segregated by class, as of March 31, 2018, and December 31, 2017, 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
March 31, 2018	Due		Due		Due		Due		Current		Total		Accruing
Commercial	$	133	$	—	$	—	$	133	$	137,737	$	137,870	$	—
Commercial real estate:
Real estate - construction and land development		—		—		—		—		14,723		14,723		—
Real estate - commercial non-owner occupied		—		—		—		—		405,192		405,192		—
Real estate - commercial owner occupied		—		—		—		—		193,286		193,286		—
Residential real estate:
Real estate - residential - ITIN		670		70		428		1,168		39,257		40,425		—
Real estate - residential - 1-4 family mortgage		—		—		—		—		30,247		30,247		—
Real estate - residential - equity lines		140		7		—		147		30,373		30,520		—
Consumer and other		225		35		—		260		47,897		48,157		—
Total	$	1,168	$	112	$	428	$	1,708	$	898,712	$	900,420	$	—

Greater

Recorded

(Amounts in thousands)

30-59

60-89

Than 90

Investment >

Past Due Loans at

Days Past

Total Past

90 Days and

December 31, 2017

Due

Current

Total

Accruing

Commercial

—

142,405

—

Commercial real estate:

Real estate - construction and land development

—

15,902

—

Real estate - commercial non-owner occupied

—

377,668

—

Real estate - commercial owner occupied

142

—

142

191,881

192,023

—

Residential real estate:

Real estate - residential - ITIN

555

122

462

1,139

40,049

41,188

—

Real estate - residential - 1-4 family mortgage

290

173

—

463

29,914

30,377

—

Real estate - residential - equity lines

141

—

141

30,206

30,347

—

Consumer and other

281

123

—

404

49,521

49,925

—

Total

1,409

418

462

2,289

877,546

879,835

—

Nonaccrual Loans

Nonaccrual loans, segregated by loan class, were as follows as of March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31,		December 31,
Nonaccrual Loans	2018		2017
Commercial	$	1,109	$	1,603
Commercial real estate:
Real estate - commercial owner occupied		—		600
Residential real estate:
Real estate - residential - ITIN		2,839		2,909
Real estate - residential - 1-4 family mortgage		188		606
Real estate - residential - equity lines		45		45
Consumer and other		35		36
Total	$	4,216	$	5,799

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Had nonaccrual loans performed in accordance with their contractual terms, we would have recognized additional interest income, net of tax, of approximately $43 thousand and $104 thousand for the three months ended March 31, 2018 and 2017, respectively.

Impaired Loans

The following tables summarize impaired loans by loan class as of March 31, 2018, and December 31, 2017.

As of March 31, 2018

Unpaid

(Amounts in thousands)

Recorded

Principal

Related

Impaired Loans

Investment

Balance

Allowance

With no related allowance recorded:

Commercial

—

Residential real estate:

Real estate - residential - ITIN

6,047

7,702

—

Real estate - residential - 1-4 family mortgage

188

224

—

Real estate - residential - equity lines

—

Total with no related allowance recorded

6,363

8,071

—

With an allowance recorded:

Commercial

2,542

2,614

614

Commercial real estate:

Real estate - commercial non-owner occupied

800

121

Residential real estate:

Real estate - residential - ITIN

1,346

1,382

155

Real estate - residential - equity lines

376

188

Consumer and other

Total with an allowance recorded

5,099

5,207

1,089

By loan class:

Commercial

2,625

2,711

614

Commercial real estate

800

121

Residential real estate

8,002

9,732

343

Consumer and other

Total impaired loans

11,462

13,278

1,089

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

As of December 31, 2017

(Amounts in thousands)

Recorded

Principal

Related

Impaired Loans

Investment

Balance

Allowance

With no related allowance recorded:

Commercial

672

1,205

—

Commercial real estate:

Real estate - commercial owner occupied

600

665

—

Residential real estate:

Real estate - residential - ITIN

5,895

7,516

—

Real estate - residential - 1-4 family mortgage

414

897

—

Real estate - residential - equity lines

—

Consumer and other

—

Total with no related allowance recorded

7,626

10,332

—

With an allowance recorded:

Commercial

2,482

2,540

690

Commercial real estate:

Real estate - commercial non-owner occupied

803

Residential real estate:

Real estate - residential - ITIN

1,628

1,678

199

Real estate - residential - 1-4 family mortgage

192

226

Real estate - residential - equity lines

380

190

Consumer and other

Total with an allowance recorded

5,521

5,663

1,169

By loan class:

Commercial

3,154

3,745

690

Commercial real estate

1,403

1,468

Residential real estate

8,554

10,746

391

Consumer and other

Total impaired loans

13,147

15,995

1,169

The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2018 and 2017.

Three Months Ended

March 31, 2018

March 31, 2017

Average

Interest

Average

Interest

(Amounts in thousands)

Recorded

Income

Recorded

Income

Average Recorded Investment and Interest Income

Investment

Recognized

Investment

Recognized

Commercial

2,589

3,396

Commercial real estate:

Real estate - commercial non-owner occupied

802

2,004

Real estate - commercial owner occupied

—

809

Residential real estate:

Real estate - residential - ITIN

7,425

8,272

Real estate - residential - 1-4 family mortgage

326

—

1,728

—

Real estate - residential - equity lines

422

1,361

Consumer and other

—

175

—

Total

11,599

17,745

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

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructurings

At March 31, 2018 and December 31, 2017, impaired loans of $7.2 million and $7.3 million, respectively, were classified as performing restructured loans.

For a restructured loan to be on accrual status, the loan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. As of March 31, 2018 and December 31, 2017, we had one restructured commercial line of credit in nonaccrual status that had $295 thousand and $33 thousand in available credit, respectively.

As of March 31, 2018, we had $10.5 million in troubled debt restructurings compared to $10.9 million as of December 31, 2017. As of March 31, 2018, we had 113 loans that qualified as troubled debt restructurings, of which 108 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.16% of gross loans as of March 31, 2018, compared to 1.24% at December 31, 2017.

During the three months ended March 31, 2018 and March 31, 2017, there were no newly restructured loans or loans where the contractual terms have been restructured.

There were no loans modified as troubled debt restructuring during the 12 months ended March 31, 2018 and 2017, for which there was a subsequent payment default during the three months ended March 31, 2018 and 2017.Performing and Nonperforming Loans

We define a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and does not comply with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain.

Performing and nonperforming loans, segregated by loan portfolio, were as follows at March 31, 2018 and December 31, 2017.

(Amounts in thousands)

March 31, 2018

Performing and Nonperforming Loans

Performing

Nonperforming

Total

Commercial

136,761

1,109

137,870

Commercial real estate:

Real estate - construction and land development

14,723

—

14,723

Real estate - commercial non-owner occupied

405,192

—

405,192

Real estate - commercial owner occupied

193,286

—

193,286

Residential real estate:

Real estate - residential - ITIN

37,586

2,839

40,425

Real estate - residential - 1-4 family mortgage

30,059

188

30,247

Real estate - residential - equity lines

30,475

30,520

Consumer and other

48,122

48,157

Total

896,204

4,216

900,420

(Amounts in thousands)

December 31, 2017

Performing and Nonperforming Loans

Performing

Nonperforming

Total

Commercial

140,802

1,603

142,405

Commercial real estate:

Real estate - construction and land development

15,902

—

15,902

Real estate - commercial non-owner occupied

377,668

—

377,668

Real estate - commercial owner occupied

191,423

600

192,023

Residential real estate:

Real estate - residential - ITIN

38,279

2,909

41,188

Real estate - residential - 1-4 family mortgage

29,771

606

30,377

Real estate - residential - equity lines

30,302

30,347

Consumer and other

49,889

49,925

Total

874,036

5,799

879,835

Credit Quality Ratings

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

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

●

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

●

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

●

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 pledged 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,

●

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),

Table of Contents

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

●

Acquisition or liquidation procedures,

●

Capital injection,

●

Perfecting liens on additional collateral,

●

Refinancing plans.

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

The following table summarizes loans by internal risk grades and by loan class as of March 31, 2018 and December 31, 2017.

As of March 31, 2018

Special

(Amounts in thousands)

Pass

Watch

Mention

Substandard

Doubtful

Total

Commercial

108,907

24,023

2,627

2,313

—

137,870

Commercial real estate:

Real estate - construction and land development

13,583

—

1,140

—

14,723

Real estate - commercial non-owner occupied

396,829

5,452

1,543

1,368

—

405,192

Real estate - commercial owner occupied

173,616

12,467

6,066

1,137

—

193,286

Residential real estate:

Real estate - residential - ITIN

34,222

—

6,203

—

40,425

Real estate - residential - 1-4 family mortgage

29,276

784

—

187

—

30,247

Real estate - residential - equity lines

28,699

1,500

—

321

—

30,520

Consumer and other

48,120

—

48,157

Total

833,252

44,226

10,238

12,704

—

900,420

As of December 31, 2017

Special

(Amounts in thousands)

Pass

Watch

Mention

Substandard

Doubtful

Total

Commercial

117,087

22,213

3,065

—

142,405

Commercial real estate:

Real estate - construction and land development

14,762

—

1,140

—

15,902

Real estate - commercial non-owner occupied

364,230

9,160

2,900

1,378

—

377,668

Real estate - commercial owner occupied

171,005

15,198

3,907

1,913

—

192,023

Residential real estate:

Real estate - residential - ITIN

34,923

—

6,265

—

41,188

Real estate - residential - 1-4 family mortgage

28,981

791

—

605

—

30,377

Real estate - residential - equity lines

28,457

1,501

326

—

30,347

Consumer and other

49,887

—

49,925

Total

809,332

48,863

8,052

13,588

—

879,835

The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $308 thousand at March 31, 2018.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Allowance for Loan and Lease Losses

The following tables summarize the ALLL by portfolio for the three months ended March 31, 2018 and 2017.

For the Three Months Ended March 31, 2018

(Amounts in thousands)

Commercial

Residential

ALLL by Loan Portfolio

Commercial

Real Estate

Consumer

Unallocated

Total

Beginning balance

2,397

6,514

1,169

1,435

410

11,925

Charge-offs

—

(114

)

(276

)

—

(390

)

Recoveries

453

—

246

—

760

Provision

(552

)

384

(152

)

253

—

Ending balance

2,298

6,898

1,149

1,473

477

12,295

For the Three Months Ended March 31, 2017

(Amounts in thousands)

Commercial

Residential

ALLL by Loan Portfolio

Commercial

Real Estate

Consumer

Unallocated

Total

Beginning balance

2,849

5,578

1,716

955

446

11,544

Charge-offs

(51

)

—

(169

)

(227

)

—

(447

)

Recoveries

199

—

344

Provision

(348

)

358

(132

)

303

200

Ending balance

2,649

5,963

1,490

1,074

465

11,641

The following tables summarize the ALLL and the recorded investment in loans and leases as of March 31, 2018 and December 31, 2017.

As of March 31, 2018

Commercial

Residential

(Amounts in thousands)

Commercial

Real Estate

Consumer

Unallocated

Total

ALLL:

Individually evaluated for impairment

614

121

343

—

1,089

Collectively evaluated for impairment

1,684

6,777

806

1,462

477

11,206

Total

2,298

6,898

1,149

1,473

477

12,295

Gross loans:

Individually evaluated for impairment

2,625

800

8,002

—

11,462

Collectively evaluated for impairment

135,245

612,401

93,190

48,122

—

888,958

Total gross loans

137,870

613,201

101,192

48,157

—

900,420

As of December 31, 2017

Commercial

Residential

(Amounts in thousands)

Commercial

Real Estate

Consumer

Unallocated

Total

ALLL:

Individually evaluated for impairment

690

391

—

1,169

Collectively evaluated for impairment

1,707

6,437

778

1,424

410

10,756

Total

2,397

6,514

1,169

1,435

410

11,925

Gross loans:

Individually evaluated for impairment

3,154

1,403

8,554

—

13,147

Collectively evaluated for impairment

139,251

584,190

93,358

49,889

—

866,688

Total gross loans

142,405

585,593

101,912

49,925

—

879,835

The ALLL totaled $12.3 million or 1.37% of total gross loans at March 31, 2018 and $11.9 million or 1.36% at December 31, 2017. As of March 31, 2018 and December 31, 2017, we had commitments to extend credit of $232.9 million and $227.7 million, respectively. The reserve for unfunded commitments recorded in Other Liabilities in the Consolidated Balance Sheets at March 31, 2018 and December 31, 2017 was $695 thousand.

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

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 March 31, 2018. 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 March 31, 2018, approximately 80% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. Deterioration in economic conditions particularly in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

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

The unallocated portion of the ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of March 31, 2018 and December 31, 2017, the unallocated allowance amount represented 4% and 3% of the ALLL, respectively.

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 change.

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

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

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

We maintain an independent loan review program that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to the Board of Directors and Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provides the foundation for the three major components of the ALLL: (1) historical valuation allowances established in accordance with ASC 450, Contingencies (“ASC 450”) for groups of similarly situated loan pools; (2) general valuation allowances established in accordance with ASC 450 that are based on qualitative credit risk factors; and (3) specific valuation allowances established in accordance with ASC 310, Receivables (“ASC 310”) that are based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the ALLL; while portions of the allowance may be allocated to specific credits, the allowance net of specific reserves is available for the remaining credits that management deems as “loss.” It is our policy to classify a credit as loss with a concurrent charge-off when management considers the credit uncollectible and of such little value that its continuance as a bankable asset is not warranted. A loss classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer recognizing the likely credit loss of a valueless asset even though partial recovery may occur in the future.

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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 5. QUALIFIED AFFORDABLE HOUSING PARTNERSHIP INVESTMENTS

Our investments in Qualified Affordable Housing Partnerships that generate Low Income Housing Tax Credits (“LIHTC”) and deductible operating losses totaled $3.4 million at March 31, 2018. These investments are recorded in Other Assets with a corresponding funding obligation of $330 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 3% and 6% over the life of the investment. The investments in LIHTC partnerships are being accounted for using the proportional amortization method, under which we amortize the initial cost of an investment in proportion to the amount of the tax credits and other tax benefits received, and recognize the net investment performance in the Consolidated Statements of Income as a component of income tax expense.

The following table presents our original investment in LIHTC partnerships, the current recorded investment balance, and the unfunded liability balance of each investment at March 31, 2018 and December 31, 2017. 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 three months ended March 31, 2018 and the year ended December 31, 2017.

	At March 31, 2018						For the Three Months Ended March 31, 2018
	Original		Current		Unfunded		Tax Credits		Amortization		Net
(Amounts in thousands)	Investment		Recorded		Liability		and		of		Income Tax
Qualified Affordable Housing Partnerships	Value		Investment		Obligation		Benefits		Investments		Benefit
Raymond James California Housing Opportunities Fund II	$	2,000	$	1,138	$	15	$	50	$	44	$	6
WNC Institutional Tax Credit Fund 38, L.P.		1,000		563		—		32		26		6
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,420		315		56		56		—
California Affordable Housing Fund		2,454		270		—		8		12		(4	)
Total	$	7,954	$	3,391	$	330	$	146	$	138	$	8

	At December 31, 2017						For the Three Months Ended March 31, 2017
	Original		Current		Unfunded		Tax Credits		Amortization		Net
(Amounts in thousands)	Investment		Recorded		Liability		and		of		Income Tax
Qualified Affordable Housing Partnerships	Value		Investment		Obligation		Benefits		Investments		Benefit
Raymond James California Housing Opportunities Fund II	$	2,000	$	1,182	$	20	$	56	$	45	$	11
WNC Institutional Tax Credit Fund 38, L.P.		1,000		589		—		35		26		9
Merritt Community Capital Corporation Fund XV, L.P.		2,500		1,476		341		68		56		12
California Affordable Housing Fund		2,454		282		—		44		44		—
Total	$	7,954	$	3,529	$	361	$	203	$	171	$	32

The following table presents our generated tax credits and tax benefits from investments in qualified affordable housing partnerships for the three months ended March 31, 2018 and 2017.

	For the Three Months Ended
	March 31, 2018				March 31, 2017
(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	$	42	$	8	$	44	$	12
WNC Institutional Tax Credit Fund 38, L.P.		28		4		28		7
Merritt Community Capital Corporation Fund XV, L.P.		48		8		54		14
California Affordable Housing Fund		1		7		32		12
Total	$	119	$	27	$	158	$	45

The tax credits and benefits were partially offset by the amortization of the principal investment balances of $138 thousand and $171 thousand for the three months ended March 31, 2018 and March 31, 2017 respectively.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table reflects the anticipated net income tax benefit at March 31, 2018 that is expected to be recognized over the remaining life of the investments.

(Amounts in thousands)
Qualified Affordable Housing Partnerships:	Raymond James		WNC Institutional		Merritt Community		California			Total Net
Anticipated net income tax benefit less	California Housing		Tax Credit		Capital Corporation		Affordable			Income Tax
amortization of investments	Opportunities Fund II		Fund 38, L.P.		Fund XV, L.P		Housing Fund			Benefit
2018	$	17	$	15	$	2	$	(12	)	$	22
2019		23		18		3		(14	)		30
2020		22		17		4		(14	)		29
2021		22		16		4		(14	)		28
2022 and thereafter		41		42		9		(43	)		49
Total	$	125	$	108	$	22	$	(97	)	$	158

NOTE 6. TERM DEBT

Term debt at March 31, 2018 and December 31, 2017 consisted of the following.

(Amounts in thousands)	March 31, 2018			December 31, 2017
Federal Home Loan Bank of San Francisco borrowings	$	30,000		$	—
Senior debt		6,196			7,096
Unamortized debt issuance costs		(6	)		(6	)
Subordinated debt		10,000			10,000
Unamortized debt issuance costs		(121	)		(132	)
Net term debt	$	46,069		$	16,958

Future contractual maturities of term debt at March 31, 2018 are as follows.

(Amounts in thousands)

2018

2019

2020

2021

2022

Thereafter

Total

Federal Home Loan Bank of San Francisco borrowings

30,000

—

30,000

Senior debt

750

1,000

4,446

—

6,196

Subordinated debt

—

10,000

Total future maturities

30,750

1,000

4,446

—

10,000

46,196

Federal Home Loan Bank of San Francisco Borrowings

We have an available line of credit with the Federal Home Loan Bank of San Francisco of $326.6 million subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The line of credit is secured by an investment in Federal Home Loan Bank of San Francisco stock, certain real estate mortgage loans that have been specifically pledged to the Federal Home Loan Bank of San Francisco pursuant to collateral requirements, and certain pledged securities held in the Bank’s investment securities portfolio.

The Bank had outstanding secured lines of credit from the Federal Home Loan Bank of San Francisco at March 31, 2018 of $30.0 million and no outstanding advances at December 31, 2017. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the three months ended March 31, 2018 and year ended December 31, 2017 was $12.4 million and $302 thousand respectively. The maximum amount outstanding from the Federal Home Loan Bank of San Francisco under term advances at any month end during the three months ended March 31, 2018 and year ended December 31, 2017 was $30.0 million and $10.0 million respectively. The weighted average interest rate on Federal Home Loan Bank of San Francisco borrowings at March 31, 2018 was 1.89%.

As of March 31, 2018, the Bank was required to hold an investment in Federal Home Loan Bank of San Francisco stock of $4.5 million recorded in Other Assets in the Consolidated Balance Sheets. Our investments in Federal Home Loan Bank of San Francisco stock are restricted investment securities, carried at cost, evaluated for impairment, and excluded from securities accounted for under ASC Topic 320 and ASC Topic 321.

We have pledged $412.1 million of our commercial and real estate mortgage loans as collateral for the line of credit with the Federal Home Loan Bank of San Francisco. As of March 31, 2018, we also pledged $27.0 million in securities to the Federal Home Loan Bank of San Francisco.

Senior Debt

In December of 2015, the Holding Company entered into a senior debt loan agreement to borrow $10.0 million from another financial institution. The original loan terms required monthly principal installments of $83 thousand, plus accrued and unpaid interest, commencing on January 1, 2016, continuing to, and including December 10, 2020 and a final scheduled payment of $5.0 million due on the maturity date of December 10, 2020. The loan 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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.

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.

Other lines of credit

Federal Funds

We have entered into nonbinding federal funds line of credit agreements with three financial institutions to support short-term liquidity needs. The lines totaled $35.0 million at March 31, 2018 and had interest rates ranging from 1.89% to 2.56%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions. The credit arrangements are reviewed and renewed annually.

Federal Reserve Bank

We have an available line of credit with the Federal Reserve Bank totaling $23.6 million subject to collateral requirements, namely the amount of certain pledged loans.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Lease Commitments

We lease nine sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based on predetermined escalation schedules. Substantially all of the leases include the option to extend the lease term one or more times following expiration of the initial term.

The following table sets forth rent expense and rent income for the three months ended March 31, 2018 and 2017

	Three Months Ended March 31,
(Amounts in thousands)	2018		2017
Rent income ⁽¹⁾	$	—	$	22
Rent expense		231		183
Net rent expense	$	231	$	161

⁽¹⁾Rental income is derived from OREO properties.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth, as of March 31, 2018, the future minimum lease payments under non-cancelable operating leases.

(Amounts in thousands)
Amounts due in:
2018	$	638
2019		866
2020		884
2021		899
2022		807
Thereafter		1,367
Total	$	5,461

Financial Instruments with Off-Balance Sheet Risk

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

The following table presents a summary of our commitments and contingent liabilities at March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31, 2018		December 31, 2017
Commitments to extend credit	$	222,851	$	217,714
Standby letters of credit		6,692		6,692
Affordable housing grants		3,338		3,338
Total commitments and contingent liabilities	$	232,881	$	227,744

We were not required to perform on any financial guarantees during the three months ended March 31, 2018, or during the year ended December 31, 2017. At March 31, 2018 approximately $6.3 million of standby letters of credit expire within one year, and $375 thousand expire thereafter.

Affordable Housing Grants

In fulfilling our CRA responsibilities, we are a sponsor for various nonprofit organizations that receive cash grants from the Federal Home Loan Bank of San Francisco. Those grants require the nonprofit organization to comply with stipulated conditions of the grant over specified periods of time which typically vary from 10 to 15 years. If the nonprofit organization fails to comply, Federal Home Loan Bank of San Francisco can require us to refund the amount of the grant to Federal Home Loan Bank of San Francisco. To mitigate this contingent credit risk, Credit Administration underwrites the financial strength of the nonprofit organization and reviews their systems of internal control to determine, as best as possible, that they will not fail to comply with the conditions of the grant.

Reserve For Unfunded Commitments

The reserve for unfunded commitments, which is included in Other Liabilities on the Consolidated Balance Sheets, was $695 thousand at March 31, 2018 and December 31, 2017. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic conditions. When necessary, the provision expense is recorded in other noninterest expense in the Consolidated Statements of Income.

Death Benefit Agreement

The Company has entered into agreements with certain employees to pay a cash benefit to designated beneficiaries following the death of the employee. The payment will be made only if, at the time of death, the deceased employee was employed by the Bank and the Bank owned a life insurance policy on the employee’s life. Depending on specific facts and circumstances, the payment amount can vary up to a maximum of $225,000 per employee and may be taxable to the recipient. Neither the employee nor the designated recipient has a claim against the Bank’s life insurance policy on the employee’s life.

Legal Proceedings

We are involved in various pending and threatened legal actions arising in the ordinary course of business. 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 80% and 77% of our gross loan portfolio at March 31, 2018 and December 31, 2017.

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 8. ACCUMULATED OTHER COMPREHENSIVE (LOSS)

The following table presents activity in accumulated other comprehensive loss from unrealized losses on securities for the three months ended March 31, 2018.

	Accumulated Other
	Comprehensive
(Amounts in thousands)	Loss
Accumulated other comprehensive loss as of December 31, 2017	$	(266	)
Comprehensive loss three months ended March 31, 2018		(2,426	)
Reclassification of accumulated other comprehensive income due to tax rate change		(52	)
Accumulated other comprehensive loss as of March 31, 2018	$	(2,744	)

The following table presents activity in accumulated other comprehensive (loss) from unrealized gains (losses) on securities for the three months ended March 31, 2017.

	Accumulated Other
	Comprehensive
(Amounts in thousands)	(Loss) Income
Accumulated other comprehensive (loss) as of December 31, 2016	$	(659	)
Comprehensive income three months ended March 31, 2017		256
Accumulated other comprehensive (loss) as of March 31, 2017	$	(403	)

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

NOTE 9. FAIR VALUES

The following table presents estimated fair values of our financial instruments as of March 31, 2018 and December 31, 2017, 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. The prior period fair values for loans disclosed are not determined in a manner consistent with the current period fair values disclosed because of a change in the methodology.

(Amounts in thousands)

Carrying

Fair Value Measurements Using

March 31, 2018

Amounts

Level 1

Level 2

Level 3

Financial assets

Cash and cash equivalents

33,623

—

Securities available-for-sale

255,917

—

255,917

—

Net loans

889,838

—

889,945

Federal Home Loan Bank of San Francisco stock

4,536

—

Financial liabilities

Deposits

1,048,751

—

1,046,581

—

Term debt

46,069

—

46,115

—

Junior subordinated debenture

10,310

—

10,405

—

(Amounts in thousands)

Carrying

Fair Value Measurements Using

December 31, 2017

Amounts

Level 1

Level 2

Level 3

Financial assets

Cash and cash equivalents

66,970

—

Securities available-for-sale

267,954

—

267,954

—

Net loans

869,620

—

873,660

Federal Home Loan Bank of San Francisco stock

4,536

—

Financial liabilities

Deposits

1,102,732

—

1,101,523

—

Term debt

16,958

—

16,918

—

Junior subordinated debenture

10,310

—

10,206

—

Fair Value Hierarchy

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

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

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

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

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

The 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 March 31, 2018 and December 31, 2017.

(Amounts in thousands)

Fair Value at March 31, 2018

Recurring Basis

Total

Level 1

Level 2

Level 3

Available-for-sale securities

U.S. government and agencies

41,179

—

41,179

—

Obligations of states and political subdivisions

59,408

—

59,408

—

Residential mortgage-backed securities and collateralized mortgage obligations

125,567

—

125,567

—

Corporate securities

3,958

—

3,958

—

Commercial mortgage-backed securities

25,520

—

25,520

—

Other asset-backed securities

285

—

285

—

Total assets measured at fair value

255,917

—

255,917

—

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(Amounts in thousands)

Fair Value at December 31, 2017

Recurring Basis

Total

Level 1

Level 2

Level 3

Available-for-sale securities

U.S. government and agencies

40,369

—

40,369

—

Obligations of states and political subdivisions

78,844

—

78,844

—

Residential mortgage-backed securities and collateralized mortgage obligations

114,592

—

114,592

—

Corporate securities

4,992

—

4,992

—

Commercial mortgage-backed securities

26,641

—

26,641

—

Other investment securities ⁽¹⁾

2,516

—

2,516

—

Total assets measured at fair value

267,954

—

267,954

—

⁽¹⁾ Principally consists of asset-backed securities and CRA qualified mutual fund investments.

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.

Transfers Between Fair Value Hierarchy Levels

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2018 or the year ended December 31, 2017.

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 three tables present information about our assets and liabilities at March 31, 2018 and December 31, 2017 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 March 31, 2018
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Other real estate owned	$	60	$	—	$	—	$	60
Total assets measured at fair value	$	60	$	—	$	—	$	60

(Amounts in thousands)	Fair Value at December 31, 2017
Nonrecurring basis	Total		Level 1		Level 2		Level 3
Collateral dependent impaired loans	$	60	$	—	$	—	$	60
Other real estate owned		35		—		—		35
Total assets measured at fair value	$	95	$	—	$	—	$	95

The following table presents the losses resulting from nonrecurring fair value adjustments for the three months ended March 31, 2018 and 2017 related to assets outstanding at March 31, 2018 and 2017.

(Amounts in thousands)	Three Months Ended March 31,
Fair value adjustments	2018		2017
Other real estate owned	$	113	$	122
Total	$	113	$	122

During the three months ended March 31, 2018, three OREO properties with an aggregate carrying value of $173 thousand outstanding at period end were written down to its fair value of $60 thousand, resulting in a $113 thousand adjustment to the ALLL.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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 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 that are based off the adjusted fair value are between 34% and 63%. 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.

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. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

NOTE 10. PURCHASE OF FINANCIAL ASSETS

We have an ongoing agreement to purchase a maximum par value of $50.0 million in unsecured consumer home improvement loans from a third party originator. The loans are purchased without recourse or servicing rights. As we receive principal payments on these purchased loans, new loans are purchased and the outstanding par value remains at approximately $50.0 million. Under this agreement, through March 31, 2018, we have paid aggregate cash totaling $122.3 million, and received aggregate cash repayments of $77.3 million for $45.0 million in net loans outstanding. We record the acquired loans at fair value at the time of the purchase.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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

Forward Looking Statements and Risk Factors

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

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

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

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

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

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

●	Volatility in the capital or credit markets;

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

●	Our concentration in real estate lending;
●	Our reliance on a third party originator to supply us with consumer loans;

●

Developments and changes in laws and regulations, including the recent federal Tax Cuts and Jobs Act and increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the California Department of Business Oversight;

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

●	Changes in consumer spending, borrowing and savings habits;

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

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

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

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

●	The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

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

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

●

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

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

●	Inability to attract deposits and other sources of liquidity at acceptable costs;

●	Changes in the competitive environment among financial and bank holding companies and other financial service providers;

●	Consolidation in the financial services industry in the Company's markets resulting in the creation of larger financial institutions that may have greater resources could change the competitive landscape and the influx of fintech companies competing for business;

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

●	A natural disaster, such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic processes;

●	A natural disaster outside California, could negatively impact our purchased loan portfolio or our third party loan servicers;

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

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

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

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

If our assumptions regarding one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this document and in the information incorporated by reference in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake any obligation to publicly correct, revise, or update any forward-looking statement if we later become aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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, 2017 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, 2017 to March 31, 2018. Also discussed are significant trends and changes in the Company’s results of operations for the three months ended March 31, 2018, compared to the same period in 2017. 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) and Bank of Commerce Mortgage (inactive). 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 we now operate nine full service facilities and three free standing remote ATMs in northern California. We also operate a full service “cyber office” as identified in our summary of deposits reporting filed with the FDIC. We provide a wide range of financial services and products for business and retail customers, which are competitive with those traditionally offered by banks of similar size in California.

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

EXECUTIVE OVERVIEW

Financial highlights for the first quarter of 2018 compared to the same quarter a year ago:

Performance

●

Net income of $3.2 million or $0.20 per share – diluted for the three months ended March 31, 2018 was an increase of $989 thousand (44%) from $2.3 million or $0.17 per share – diluted earned during the same period in the prior year. The increase in earnings per share compared to the same quarter a year ago was 18% and reflects the impact of 2,738,096 shares of common stock sold in the second quarter of 2017 and the benefit of the reduction in corporate income tax rates provided by the Tax Cuts and Jobs Act of 2017.

●	Net interest income increased $1.6 million (17%) to $11.3 million for the three months ended March 31, 2018 compared to $9.7 million for the same period in the prior year.

●	Return on average assets improved to 1.05% for the three months ended March 31, 2018 compared to 0.80% for the same period in the prior year.

●	Return on average equity improved to 10.34% for the three months ended March 31, 2018 compared to 9.63% for the same period in the prior year.

●	Average loans for the three months ended March 31, 2018 totaled $883.9 million, an increase of $77.1 million (10%) compared to average loans for the same period in the prior year.

●	Average earning assets totaled $1.2 billion for the three months ended March 31, 2018, an increase of $106.8 million (10%) compared to average earning assets for the same period in the prior year.

●	Average deposits for the three months ended March 31, 2018 totaled $1.1 billion, an increase of $58.3 million (6%) compared to average deposits for the same period in the prior year.

●	The Company’s efficiency ratio was 65.17% for the three months ended March 31, 2018 compared to 71.31% for the same period in the prior year.

●	Book value per common share was $7.83 at March 31, 2018 compared to $7.14 at March 31, 2017.

●

Tangible book value per common share was $7.71 at March 31, 2018 compared to $6.97 at March 31, 2017. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

Credit Quality

●	Nonperforming assets at March 31, 2018 totaled $4.3 million or 0.34% of total assets, a decrease of $6.5 million (60%) compared to March 31, 2017.

●	Net loan recoveries were $370 thousand in the first quarter of 2018 compared with net charge-offs of $103 thousand for the same period in 2017.

Financial highlights for the first quarter of 2018 compared to the prior quarter:

Performance

●

A comparison of current quarter and prior quarter net earnings information is not particularly meaningful and is not provided because the prior period included the impact of the Tax Cuts and Jobs Act of 2017, which reduced net income in that period to $7 thousand, and reduced the effective tax rate for the first quarter of 2018.

●	Net interest income increased $476 thousand (18% annualized) to $11.3 million for the first quarter of 2018 compared to $10.9 million for the prior quarter.

●	Average loans for the three months ended March 31, 2018 totaled $883.9 million, an increase of $44.9 million (22% annualized) compared to average loans for the prior quarter.

●	Average earning assets for the three months ended March 31, 2018 totaled $1.2 billion, an increase of $3.8 million (1% annualized) compared to average earning assets for the prior quarter.

●	Average deposits for the three months ended March 31, 2018 totaled $1.1 billion, a decrease of $12.6 million (5% annualized) compared to average deposits for the prior quarter.

●	The Company’s efficiency ratio was 65.17% for the first quarter of 2018 compared to 64.94% during the prior quarter.

●	Book value per common share was $7.83 at March 31, 2018 compared to $7.82 at December 31, 2017.

●

Tangible book value per common share was $7.71 at March 31, 2018 compared to $7.70 at December 31, 2017. Tangible book value per share is computed by dividing total shareholders’ equity less goodwill and core deposit intangible, net by shares outstanding. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

Credit Quality

●	Nonperforming assets at March 31, 2018 totaled $4.3 million or 0.34% of total assets, a decrease of $1.6 million since December 31, 2017.

●	Net loan recoveries were $370 thousand in the first quarter of 2018 compared with net charge-offs of $217 thousand for the prior quarter.

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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, 2017 filed with the SEC on March 9, 2018. 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 to identify changes in quality. During the fourth quarter of 2017, we reclassified the entire HTM securities portfolio to AFS. As a result of this transfer we are precluded from classifying any investment securities as held-to-maturity for two years from the date of the transfer.

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

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

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

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

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

Allowance for Loan and Lease Losses

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

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

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Income Taxes

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

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

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

Fair Value Measurements

We use fair value measurements to record fair value adjustments to certain assets and liabilities, and to determine fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available-for-sale 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 9 Fair Values in the Notes to Consolidated Financial Statements incorporated in this document.

RECENT ACCOUNTING PRONOUNCEMENTS

ASU No. 2016-13

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

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.

The ASU requires enhanced disclosures to help investors and other financial statement users to better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

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

Expected financial statement impact – We are currently evaluating the provisions of the ASU and have formed a committee for the purpose of developing a model that is compliant with the requirements under the ASU. The committee is also gathering pertinent data, consulting with outside professionals and evaluating our IT systems. Management expects to recognize a one–time cumulative effect adjustment to the allowance for loan and lease losses as of the first reporting period in which the new standard is effective. An estimate of the magnitude of the one-time adjustment or the overall impact of this standard has not yet been determined.

ASU No. 2016-02

Description - In February of 2016, the FASB issued 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.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Methods and timing of adoption – For public companies, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Expected financial statement impact – Although an estimate of the impact of the new leasing standard has not yet been determined, the Company expects a significant new lease asset and related lease liability on the balance sheet due to the number of leased properties the Company currently has that are accounted for under current operating lease guidance.

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. Net interest income is impacted by many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory agencies, the Federal Reserve Board in particular. 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 neutral to slightly liability sensitive, which could negatively impact earnings in a rapidly 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 on our earning 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.

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

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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

First Quarter of 2018 Compared With First Quarter of 2017

Net income for the first quarter of 2018 increased $989 thousand compared to the first quarter of 2017. In the current quarter, net interest income was $1.6 million higher and provision for loan and lease losses was $200 thousand lower. These positive changes were offset by noninterest income that was $489 thousand lower, noninterest expense that was $43 thousand higher and a provision for income tax that was $290 thousand higher.

Return on Average Assets and Average Total Equity

The following table presents the returns on average assets and average total equity for the three months ended March 31, 2018 and 2017. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the Consolidated Statements of Income incorporated in this document.

	For the Three Months Ended
	March 31, 2018			March 31, 2017
Return on average assets		1.05	%		0.80	%
Return on average total equity		10.34	%		9.63	%

NET INTEREST INCOME AND NET INTEREST MARGIN

For the three months ended March 31, 2018 compared to the same period a year ago:

Net interest income increased $1.6 million compared to the same period a year ago.

Interest income for the three months ended March 31, 2018 increased $1.7 million or 16% to $12.5 million. Interest and fees on loans increased $1.3 million due to a $77.1 million increase in average loan balances and a 20 basis point increase in the average yield on the loan portfolio. Interest on securities increased $353 thousand due to a $54.0 million increase in average securities balances and a two basis point increase in the average yield on the securities portfolio. Interest on interest-bearing deposits due from banks increased $15 thousand primarily due to a 78 basis point increase in average yield resulting from increased fed funds rates.

Interest expense for the first quarter of 2018 increased $102 thousand or 9% to $1.2 million. The net increase was due to the following:

●

Interest expense on interest bearing deposits increased $51 thousand. Average interest-bearing demand and savings deposit balances increased $47.1 million, while average certificate of deposit balances decreased $33.3 million. The average rate paid on interest-bearing deposits increased two basis points.

●

Interest expense on other interest bearing liabilities increased $51 thousand primarily due to increased borrowing from the Federal Home Loan Bank of San Francisco.

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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 table presents condensed average balance sheet information, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three months ended March 31, 2018 and 2017.

	Three Months Ended March 31, 2018							Three Months Ended March 31, 2017
	Average							Average
(Amounts in thousands)	Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾			Balance		Interest⁽¹⁾		Yield/ Rate⁽⁵⁾
Interest-earning assets:
Net loans ⁽²⁾	$	883,876	$	10,729		4.92	%	$	806,793	$	9,384		4.72	%
Taxable securities		205,302		1,209		2.39	%		137,582		789		2.33	%
Tax-exempt securities		59,789		463		3.14	%		73,524		530		2.92	%
Interest-bearing deposits in other banks		32,890		129		1.59	%		57,140		114		0.81	%
Average interest-earning assets		1,181,857		12,530		4.30	%		1,075,039		10,817		4.08	%
Cash and due from banks		17,666							16,873
Premises and equipment, net		14,557							16,165
Other assets		34,483							40,228
Average total assets	$	1,248,563						$	1,148,305

Interest-bearing liabilities:
Interest-bearing demand	$	470,440		221		0.19	%	$	420,416		148		0.14	%
Savings deposits		110,725		59		0.22	%		113,647		47		0.17	%
Certificates of deposit		181,901		495		1.10	%		215,202		529		1.00	%
Federal Home Loan Bank of San Francisco borrowings		12,444		47		1.53	%		—		—		—	%
Other borrowings		16,528		281		6.90	%		18,598		293		6.39	%
Junior subordinated debentures		10,310		82		3.23	%		10,310		66		2.60	%
Average interest-bearing liabilities		802,348		1,185		0.60	%		778,173		1,083		0.56	%
Noninterest-bearing demand		307,397							262,881
Other liabilities		11,749							12,431
Shareholders’ equity		127,069							94,820
Average liabilities and shareholders’ equity	$	1,248,563						$	1,148,305
Net interest income and net interest margin⁽⁴⁾			$	11,345		3.89	%			$	9,734		3.67	%
Tax equivalent net interest margin ⁽³⁾						3.94	%						3.78	%

⁽¹⁾	Interest income on loans is net of deferred fees and costs of approximately $137 thousand and $197 thousand for the three months ended March 31, 2018 and 2017, respectively.
⁽²⁾	Net loans includes average nonaccrual loans of $4.8 million and $10.9 million for the three months ended March 31, 2018 and 2017, respectively.
⁽³⁾	Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate for 2018 and at a 34% tax rate for 2017. The amount of such adjustments was an addition to recorded income of approximately $123 thousand and $273 thousand for the three months ended March 31, 2018 and 2017, respectively.
⁽⁴⁾	Net interest margin is net interest income expressed as a percentage of average interest-earning assets.
⁽⁵⁾	Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively, and annualizing the result.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Analysis of Changes in Net Interest Income

The following table sets forth a summary of the changes in 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 months ended March 31, 2018 and 2017. 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 March 31, 2018 Over Three Months Ended March 31, 2017
(Amounts in thousands)	Volume			Rate			Net Change
Increase (decrease) in interest income:
Net loans	$	923		$	422		$	1,345
Taxable securities		398			22			420
Tax-exempt securities⁽¹⁾		(140	)		(77	)		(217	)
Interest-bearing deposits in other banks		(12	)		27			15
Total increase		1,169			394			1,563

Increase (decrease) in interest expense:
Interest-bearing demand		19			54			73
Savings deposits		(1	)		13			12
Certificates of deposit		(110	)		76			(34	)
Federal Home Loan Bank of San Francisco borrowings		47			—			47
Other borrowings		(42	)		30			(12	)
Junior subordinated debentures		—			16			16
Total (decrease) increase		(87	)		189			102
Net increase	$	1,256		$	205		$	1,461

⁽¹⁾ Tax-exempt income has been adjusted to tax equivalent basis at a 21% tax rate for 2018 and 34% for 2017.

PROVISION FOR LOAN AND LEASE LOSSES

As a result of improved asset quality and net loan loss recoveries, no provision for loan and lease losses was necessary during the three months ended March 31, 2018. We recorded a $200 thousand provision for loan and lease losses during the three months March 31, 2017. See Note 4 Loans in the Notes to Consolidated Financial Statements for further discussion.

NONINTEREST INCOME

The following table presents the key components of noninterest income for the three months ended March 31, 2018 and 2017.

	Three Months Ended March 31,
						Change			Change
(Amounts in thousands)	2018		2017			Amount			Percent
Noninterest income:
Service charges on deposit accounts	$	176	$	127		$	49			39	%
ATM and point of sale		266		266			—			—	%
Payroll and benefit processing fees		169		191			(22	)		(12	%)
Life insurance		129		646			(517	)		(80	%)
Gain on investment securities, net		36		66			(30	)		(45	%)
Federal Home Loan Bank of San Francisco dividends		80		103			(23	)		(22	%)
Gain (loss) on sale of OREO		16		(71	)		87			123	%
Other		110		143			(33	)		(23	%)
Total noninterest income	$	982	$	1,471		$	(489	)		(33	%)

Noninterest income for the three months ended March 31, 2018 decreased $489 thousand compared to the first quarter for 2017. During the first quarter of 2017 we recognized income from life insurance death benefit proceeds of $502 thousand.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

NONINTEREST EXPENSE

The following table presents the key components of noninterest expense for the three months ended March 31, 2018 and 2017.

	Three Months Ended March 31,
					Change			Change
(Amounts in thousands)	2018		2017		Amount			Percent
Noninterest expense:
Salaries & related benefits	$	4,855	$	4,858	$	(3	)		(0	%)
Premises & equipment		1,071		1,048		23			2	%
Federal Deposit Insurance Corporation insurance premium		96		48		48			100	%
Data processing fees		432		406		26			6	%
Professional service fees		345		384		(39	)		(10	%)
Telecommunications		216		211		5			2	%
Other		1,018		1,035		(17	)		(2	%)
Total noninterest expense	$	8,033	$	7,990	$	43			1	%

Noninterest expense for the three months ended March 31, 2018 increased only $43 thousand compared to the same period a year previous.

INCOME TAXES

Our provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to our income before taxes. The following table reflects our tax provision and the related effective tax rate for the periods indicated.

	For the Three Months Ended March 31,
(Amounts in thousands)	2018			2017
Income before provision for income taxes	$	4,294		$	3,015
Provision for income taxes	$	1,053		$	763
Effective tax rate		24.52	%		25.31	%

For the three months ended March 31, 2018, our income tax provision of $1.1 million on pre-tax income of $4.3 million was an effective tax rate of 24.52%. The current quarter effective tax rate reflects the benefits of the Tax Cuts and Jobs Act of 2017 which reduced the federal corporate tax rate from a graduated rate of 35% to a flat rate of 21%. The tax provision for the first quarter of the prior year was $763 thousand on pre-tax income of $3.0 million for an effective tax rate of 25.31%. Life insurance death benefits of $502 thousand recorded during the first quarter of 2017 were not subject to income tax, and if excluded from pretax income, the effective tax rate would have been 30.36%.

Amended Tax Returns

In September of 2016, we filed amended federal and state tax returns for tax years 2011, 2012, 2013, and 2014. The amendments were filed to properly recognize tax events in years 2011 and 2013 that were improperly recognized in years 2011 through 2014. The IRS rejected the 2011 amended tax return citing the statute for assessment had expired. Accordingly, $988 thousand of taxes due to the taxing authorities pursuant to the 2011 amended federal tax return was returned to us. As of March 31, 2018 we continue to recognize 100% of the tax liability relating to our 2011 amended federal tax return because we believe it is more likely than not, our tax position would be sustained upon reexamination by the IRS or through the litigation process. We do not expect to reconsider or reverse our tax position until the statute of limitations expires on the 2014 amended federal tax return in September of 2018, and until we believe it is more likely than not that the taxes due cannot be recouped. If we reverse our tax position, we will recognize the $988 thousand in our provision for income taxes and our effective tax rate will be reduced.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

FINANCIAL CONDITION

CONSOLIDATED BALANCE SHEETS

As of March 31, 2018, we had total consolidated assets of $1.2 billion, gross loans of $900.4 million, allowance for loan and lease losses (“ALLL”) of $12.3 million, total deposits of $1.0 billion, and shareholders’ equity of $127.7 million.

As of March 31, 2018, we maintained noninterest-bearing cash positions at the Federal Reserve Bank and correspondent banks in the amount of $16.2 million. We also held interest-bearing deposits in the amount of $17.4 million.

Available-for-sale investment securities totaled $255.9 million at March 31, 2018, compared to $268.0 million at December 31, 2017. Our investment portfolio provides a secondary source of liquidity to fund other higher yielding asset opportunities, such as loan originations.

During the first three months of 2018, we purchased 12 securities with a par value of $19.6 million and weighted average yield of 3.11% and sold 29 securities with a par value of $18.7 million and weighted average yield of 2.27%. The sales activity on available-for-sale securities resulted in $36 thousand in net realized gains for the three months ended March 31, 2018. During the three months ended March 31, 2018, we also received $7.9 million in proceeds from principal payments, calls and maturities within the available-for-sale securities portfolio.

At March 31, 2018, our net unrealized losses on available-for-sale investment securities were $3.9 million compared to net unrealized losses of $452 thousand at December 31, 2017. The unrealized losses arising during the three months ended March 31, 2018 were driven by significant changes in market interest rates.

We recorded gross loan balances of $900.4 million at March 31, 2018, compared to $879.8 million at December 31, 2017; an increase of $20.6 million. The increase in gross loans was driven by organic loan originations by our SBA division and by our expanded Sacramento commercial banking group.

The ALLL at March 31, 2018 increased $370 thousand to $12.3 million compared to $11.9 million at December 31, 2017. At March 31, 2018, relying on our ALLL methodology, which uses criteria such as risk weighting and historical loss rates, and given the ongoing improvements in asset quality, we believe the ALLL is adequate. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could result in additional charges to the provision for loan and lease losses.

Nonperforming loans, which include nonaccrual loans and accruing loans past due over 90 days, decreased by $1.6 million to $4.2 million, or 0.47% of gross loans, as of March 31, 2018, compared to $5.8 million, or 0.66% of gross loans as of December 31, 2017. The decrease in nonperforming loans was primarily due to the repayment of a nonaccrual commercial loan for $572 thousand and a nonaccrual commercial real estate loan for $600 thousand.

Past due loans as of March 31, 2018 decreased $581 thousand to $1.7 million, compared to $2.3 million as of December 31, 2017.The decrease in past due loans was primarily due to the sale of two residential real estate loans for $290 thousand. We believe that risk grading for past due loans appropriately reflects the risk associated with the past due loans. See Note 4 Loans in the Notes to Consolidated Financial Statements in this document for further detail on the ALLL and the loan portfolio.

Premises and equipment totaled $14.2 million at March 31, 2018 a decrease of $500 thousand compared to $14.7 million at December 31, 2017.

Our OREO balance at March 31, 2018 was $60 thousand compared to $35 thousand at December 31, 2017. For the three months ended March 31, 2018, we transferred three foreclosed properties in the amount of $60 thousand to OREO. During the three months ended March 31, 2018, we sold one property with a balance of $51 thousand for a net gain of $16 thousand.

Bank-owned life insurance increased $100 thousand during the three months ended March 31, 2018 to $22.0 million compared to $21.9 million at December 31, 2017.

Other assets which include the Bank’s investment qualified zone academy bonds, Federal Home Loan Bank of San Francisco stock and low income housing tax credit partnerships totaled $20.4 million at March 31, 2018 compared to $19.7 million at December 31, 2017.

Total deposits at March 31, 2018, decreased $54.0 million or 20% annualized to $1.0 billion compared to December 31, 2017.

●

Total non-maturing deposits increased $81.6 million or 10% compared to the same date a year ago and decreased $41.0 million or 18% annualized compared to December 31, 2017.

●

Certificates of deposit decreased $37.3 million or 17% compared to the same date a year ago and decreased $13.0 million or 28% annualized compared to December 31, 2017.

In late December 2017, deposit balances increased more significantly than at prior year-ends and then were withdrawn in early 2018. Average balances more clearly illustrate deposit balance trends. Average non-maturity deposits totaled $888.6 million in the first quarter of 2018 compared to $888.1 million in the prior quarter. Average certificates of deposit totaled $181.9 million in the first quarter of 2018 compared to $194.9 million in the prior quarter.

Other liabilities which include the Bank’s income tax liabilities, supplemental executive retirement plan and funding obligation for investments in qualified affordable housing partnerships decreased $566 thousand to $12.7 million as of March 31, 2018 compared to $12.2 million at December 31, 2017.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

Investment Securities

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

The investment securities portfolio also:

●

Partially mitigates interest rate risk;

●

Diversifies the credit risk inherent in the loan portfolio;

●

Provides a vehicle for the investment of excess liquidity;

●

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

●

Is used as collateral for certain public funds.

The carrying value of our available-for-sale investment securities totaled $255.9 million at March 31, 2018, compared to $268.0 million at December 31, 2017. The following table presents the carrying value of the investment securities portfolio by classification and major type as of March 31, 2018 and December 31, 2017.

	March 31,		December 31,
(Amounts in thousands)	2018		2017
Available-for-sale securities: ⁽¹⁾
U.S. government & agencies	$	41,179	$	40,369
Obligations of state and political subdivisions		59,408		78,844
Residential mortgage-backed securities and collateralized mortgage obligations		125,567		114,592
Corporate securities		3,958		4,992
Commercial mortgage-backed securities		25,520		26,641
Other asset-backed securities		285		2,516
Total	$	255,917	$	267,954

⁽¹⁾ Available-for-sale securities are reported at fair value.

The following table presents information regarding the amortized cost, maturity structure and average yield of the investment portfolio at March 31, 2018.

						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:⁽¹⁾
U.S. government & agencies	$	—		—	%	$	—		—	%	$	3,506		2.34	%	$	37,755		2.43	%	$	41,261		2.43	%
Obligations of state and political subdivisions		97		6.87	%		14,006		3.37	%		22,374		3.30	%		22,355		3.13	%		58,832		3.26	%
Residential mortgage-backed securities and collateralized mortgage obligations		13		2.33	%		67,639		2.59	%		56,677		2.91	%		4,782		2.78	%		129,111		2.74	%
Corporate securities		—		—	%		3,065		3.34	%		1,000		2.12	%		—		—	%		4,065		3.04	%
Commercial mortgage-backed securities		—		—	%		—		—	%		4,776		2.22	%		21,485		2.50	%		26,261		2.45	%
Other asset-backed securities		—		—	%		—		—	%		—		—	%		282		5.65	%		282		5.65	%
Total	$	110		6.36	%	$	84,710		2.75	%	$	88,333		2.94	%	$	86,659		2.66	%	$	259,812		2.79	%

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

Loan Portfolio

Loan Concentrations

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table presents the composition of the loan portfolio as of March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31,						December 31,
Loan Portfolio	2018			%			2017			%
Commercial	$	137,870			15	%	$	142,405			16	%
Commercial real estate:
Real estate - construction and land development		14,723			2			15,902			2
Real estate - commercial non-owner occupied		405,192			46			377,668			43
Real estate - commercial owner occupied		193,286			22			192,023			22
Residential real estate:
Real estate - residential - ITIN		40,425			4			41,188			5
Real estate - residential - 1-4 family mortgage		30,247			3			30,377			3
Real estate - residential - equity lines		30,520			3			30,347			3
Consumer and other		48,157			5			49,925			6
Gross loans		900,420			100	%		879,835			100	%
Deferred loan fees and costs		1,713						1,710
Loans, net of deferred fees and costs		902,133						881,545
Allowance for loan and lease losses		(12,295	)					(11,925	)
Net loans	$	889,838					$	869,620

The following table sets forth the maturity and fixed or variable rate distribution of our gross loans outstanding as of March 31, 2018.

			After One
	Within One		Through		After Five
(Amounts in thousands)	Year		Five Years		Years		Total
Commercial	$	40,987	$	53,845	$	43,038	$	137,870
Commercial real estate:
Real estate - construction and land development		5,252		2,549		6,922		14,723
Real estate - commercial non-owner occupied		10,241		86,224		308,727		405,192
Real estate - commercial owner occupied		11,099		20,719		161,468		193,286
Residential real estate:
Real estate - residential - ITIN		—		—		40,425		40,425
Real estate - residential - 1-4 family mortgage		502		2,414		27,331		30,247
Real estate - residential - equity lines		45		3,646		26,829		30,520
Consumer and other		402		45,842		1,913		48,157
Gross loans	$	68,528	$	215,239	$	616,653	$	900,420
Loans due after one year with:
Fixed rates			$	145,557	$	201,051	$	346,608
Variable rates				69,682		415,602		485,284
Total			$	215,239	$	616,653	$	831,892

Loans with unique characteristics

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

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. Additional information regarding the individual purchased loan pools can be found in Note 10 Purchase of Financial Assets in the Notes to Consolidated Financial Statements in this document.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table presents the recorded investment in purchased loans at March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31, 2018					December 31, 2017
Loan Type	Balance		% of Gross Loan Portfolio			Balance		% of Gross Loan Portfolio
Commercial	$	109		—	%	$	108		—	%
Commercial real estate		29,907		3	%		30,195		3	%
Residential real estate		55,698		6	%		56,735		6	%
Consumer and other		46,299		5	%		47,836		5	%
Total purchased loans	$	132,013		14	%	$	134,874		14	%

Many of the loans that we have acquired from third party originators are made to borrowers who are located throughout the United States, other than in California. Some of those borrowers were impacted by the hurricanes which caused destruction in Texas, Florida, Georgia and Puerto Rico during the third quarter of 2017. As part of our discussion of the ALLL elsewhere in this document, we have provided the information we have about these loans.

Asset Quality

Nonperforming Assets

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

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

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

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

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

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

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

The following table summarizes our nonperforming assets as of March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31,			December 31,
Nonperforming Assets	2018			2017
Commercial	$	1,109		$	1,603
Commercial real estate:
Real estate - commercial owner occupied		—			600
Total commercial real estate		—			600
Residential real estate:
Real estate - residential - ITIN		2,839			2,909
Real estate - residential - 1-4 family mortgage		188			606
Real estate - residential - equity lines		45			45
Total residential real estate		3,072			3,560
Consumer and other		35			36
Total nonaccrual loans		4,216			5,799
90 days past due and still accruing		—			—
Total nonperforming loans		4,216			5,799
Other real estate owned		60			35
Total nonperforming assets	$	4,276		$	5,834
Nonperforming loans to gross loans		0.47	%		0.66	%
Nonperforming assets to total assets		0.34	%		0.46	%

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

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

As of March 31, 2018, we had $10.5 million in troubled debt restructurings compared to $10.9 million as of December 31, 2017. As of March 31, 2018, we had 113 restructured loans that qualified as troubled debt restructurings, of which 108 loans were performing according to their restructured terms. Troubled debt restructurings represented 1.16% of gross loans as of March 31, 2018, compared to 1.24% at December 31, 2017.

Impaired loans of $7.2 million and $7.3 million were classified as accruing troubled debt restructurings at March 31, 2018 and December 31, 2017, respectively. For a restructured loan to be on accrual status, the loan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. As of March 31, 2018 and December 31, 2017, we had one restructured commercial line of credit in nonaccrual status that had $295 thousand and $33 thousand in available credit, 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 sets forth a summary of our restructured loans that qualify as troubled debt restructurings as of March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31,			December 31,
Troubled Debt Restructurings	2018			2017
Accruing troubled debt restructurings
Commercial	$	1,516		$	1,551
Commercial real estate:
Real estate - commercial non-owner occupied		800			803
Residential real estate:
Real estate - residential - ITIN		4,554			4,614
Real estate - residential - equity lines		376			380
Total accruing troubled debt restructurings	$	7,246		$	7,348

Nonaccruing troubled debt restructurings
Commercial	$	971		$	863
Residential real estate:
Real estate - residential - ITIN		2,241			2,396
Real estate - residential - 1-4 family mortgage		—			296
Consumer and other		25			26
Total nonaccruing troubled debt restructurings	$	3,237		$	3,581
Total troubled debt restructurings

Commercial	$	2,487		$	2,414
Commercial real estate:
Real estate - commercial non-owner occupied		800			803
Residential real estate:
Real estate - residential - ITIN		6,795			7,010
Real estate - residential - 1-4 family mortgage		—			296
Real estate - residential - equity lines		376			380
Consumer and other		25			26
Total troubled debt restructurings	$	10,483		$	10,929

Total troubled debt restructurings to gross loans outstanding at period end		1.16	%		1.24	%

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

The ALLL at March 31, 2018 increased $370 thousand to $12.3 million compared to $11.9 million at December 31, 2017. As a result of improved asset quality and net loan recoveries, no provision for loan and lease losses was deemed necessary during the three months ended March 31, 2018. During the year ended December 31, 2017, we recorded a $950 thousand provision for loan and lease losses.

We recorded net loan loss recoveries of $370 thousand for the three months ended March 31, 2018 compared to net loan charge-offs of $569 thousand for the year ended December 31, 2017. Recoveries of $760 thousand during the three months ended March 31, 2018 occurred primarily from one commercial loan and three residential real estate loans offset by charge-offs of $390 thousand primarily due to purchased consumer loans. Our ALLL as a percentage of gross loans was 1.37% and 1.36% as of March 31, 2018 and December 31, 2017.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The following table summarizes the ALLL roll forward for the three months ended March 31, 2018, twelve months ended December 31, 2017 and the three months ended March 31, 2017. This table also includes impaired loan information at March 31, 2018, December 31, 2017 and March 31, 2017.

	For The Three Months Ended			For The Twelve Months Ended			For The Three Months Ended
(Amounts in thousands)	March 31, 2018			December 31, 2017			March 31, 2017
Beginning balance ALLL	$	11,925		$	11,544		$	11,544
Provision for loan and lease loss charged to expense		—			950			200
Loans charged off		(390	)		(1,502	)		(447	)
Loan and lease loss recoveries		760			933			344
Ending balance ALLL	$	12,295		$	11,925		$	11,641

	At March 31, 2018			At December 31, 2017			At March 31, 2017
Nonaccrual loans:
Commercial	$	1,109		$	1,603		$	2,534
Real estate - commercial non-owner occupied		—			—			1,196
Real estate - commercial owner occupied		—			600			654
Real estate - residential - ITIN		2,839			2,909			3,331
Real estate - residential - 1-4 family mortgage		188			606			1,337
Real estate - residential - equity lines		45			45			906
Consumer and other		35			36			39
Total nonaccrual loans		4,216			5,799			9,997
Accruing troubled-debt restructured loans:
Commercial		1,516			1,551			741
Real estate - commercial non-owner occupied		800			803			808
Real estate - residential - ITIN		4,554			4,614			4,761
Real estate - residential - equity lines		376			380			450
Total accruing restructured loans		7,246			7,348			6,760

All other accruing impaired loans		—			—			—
Total impaired loans	$	11,462		$	13,147		$	16,757

Gross loans outstanding	$	900,420		$	879,835		$	810,194

Ratio of ALLL to gross loans outstanding		1.37	%		1.36	%		1.44	%
Nonaccrual loans to gross loans outstanding		0.47	%		0.66	%		1.23	%

As of March 31, 2018, impaired loans totaled $11.5 million, of which $4.2 million were in nonaccrual status. Of the total impaired loans, $7.4 million or 109 were ITIN loans with an average balance of approximately $68 thousand. The remaining impaired loans consist of seven commercial loans, one commercial real estate loan, one residential mortgage, eight home equity loans and two consumer loans.

At March 31, 2018, impaired loans had a corresponding specific allowance of $1.1 million. The specific allowance on impaired loans represents the impairment reserves on performing restructured loans, other accruing loans, and nonaccrual loans.

The following table sets forth the allocation of the ALLL as of March 31, 2018 and December 31, 2017.

(Amounts in thousands)	March 31, 2018					December 31, 2017
ALLL	Amount		% Loan Category			Amount		% Loan Category
Commercial	$	2,298		19	%	$	2,397		20	%
Commercial real estate:
Real estate - construction and land development		94		1			82		1
Real estate - commercial non-owner occupied		5,062		41			4,698		40
Real estate - commercial owner occupied		1,742		14			1,734		15
Residential real estate:
Real estate - residential - ITIN		549		4			602		5
Real estate - residential - 1-4 family mortgage		150		1			151		1
Real estate - residential - equity lines		450		4			416		3
Consumer and other		1,473		12			1,435		12
Unallocated		477		4			410		3
Total ALLL	$	12,295		100	%	$	11,925		100	%

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk grading-based component, or in the specific reserve component of the ALLL, and acknowledges the inherent imprecision of all loss prediction models. As of March 31, 2018, the unallocated allowance amount represents 4% of the ALLL, compared to 3% at December 31, 2017. While the ALLL composition is an indication of specific amounts or loan categories in which future charge-offs may occur, actual amounts may differ.

Natural Disasters

Wildfires

We have extended credit to borrowers in California's Napa and Sonoma counties where devastating fires caused widespread destruction in 2017. In those two counties we have made ten commercial real estate loans totaling $12.2 million. None of the real estate collateralizing our loans was burned. We have not seen any significant economic impact from the fires on the general economy of the region or our borrower’s specifically.

Hurricanes

Many of the loans that we have acquired from third party originators were made to borrowers who are located throughout the United States, other than in California. Some of those borrowers reside in portions of Texas, Florida, Georgia and Puerto Rico where hurricanes caused severe damage during the third quarter of 2017. The loans that were affected are primarily ITIN loans which are secured by 1^st deeds of trust and consumer home improvement loans which are unsecured. These loans are not serviced by us and we are dependent on third party servicers for collection efforts, processing payment deferral requests and obtaining loss information. In accordance with disaster relief guidelines, extensions have been granted to 27 borrowers with loans totaling $396 thousand and we have increased our ALLL for purchased loan pools through increases to the qualitative factors in our ALLL calculation by $372 thousand.

Deposits

Total deposits as of March 31, 2018 were $1.0 billion compared to $1.1 billion at December 31, 2017, a decrease of $54.0 million or 20% annualized. The reduction in cash and cash equivalents from December 31, 2017 to March 31, 2018 reflects the seasonal decline in deposits which, in 2018, has been greater than it was in the prior two years. The following table presents the deposit balances by major category as of March 31, 2018, and December 31, 2017.

(Amounts in thousands)	March 31, 2018					December 31, 2017
Deposits	Amount		Percentage			Amount		Percentage
Noninterest-bearing demand	$	301,981		29	%	$	305,650		28	%
Interest-bearing demand		229,681		22			260,221		24
Money market accounts		232,870		22			236,769		21
Savings		107,986		10			110,837		10
Certificates of deposit, $100,000 or greater		137,483		13			148,438		13
Certificates of deposit, less than $100,000		38,750		4			40,817		4
Total	$	1,048,751		100	%	$	1,102,732		100	%

The following table sets forth the distribution of our year-to-date average daily balances and their respective average rates for the three months ended March 31, 2018, and the year ended December 31, 2017.

	For the Three Months Ended March 31, 2018					For the Year Ended December 31, 2017
(Amounts in thousands)	Average Balance		Rate			Average Balance		Rate
Interest-bearing demand	$	234,269		0.15	%	$	209,792		0.13	%
Money market accounts		236,171		0.23	%		224,913		0.21	%
Savings		110,725		0.22	%		111,376		0.18	%
Certificates of deposit		181,901		1.10	%		205,648		1.06	%
Interest-bearing deposits		763,066		0.41	%		751,729		0.42	%
Noninterest-bearing demand		307,397					289,735
Average total deposits	$	1,070,463		0.29	%	$	1,041,464		0.30	%

Federal Home Loan Bank of San Francisco borrowings	$	12,444		1.53	%	$	—		—	%
Other term debt, net		16,528		6.90	%		18,283		6.39	%
Junior subordinated debentures		10,310		3.23	%		10,310		2.78	%
Average total borrowings	$	39,282		4.23	%	$	28,593		5.09	%

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

Deposit Maturity Schedule

The following table sets forth the maturities of certificates of deposit in amounts of $100,000 or more as of March 31, 2018.

(Amounts in thousands)	March 31,
Maturing in:	2018
Three months or less	$	23,471
Three through six months		21,747
Six through twelve months		39,558
Over twelve months		52,707
Total	$	137,483

We have an agreement with Promontory Interfinancial Network LLC (“Promontory”) allowing provision of FDIC deposit insurance to balances in excess of current FDIC deposit insurance limits. Promontory’s Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) 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 $56.7 million, and $66.3 million at March 31, 2018 and December 31, 2017, respectively. These amounts were obtained through the CDARS and ICS programs.

Included in our certificates of deposit balances are $27.6 million of subscription time deposits obtained in years past through online deposit listing services. We no longer utilize online deposit listing services. These legacy deposits are not being renewed as they mature.

Borrowings

Term Debt

At March 31, 2018, we had total term debt outstanding with a carrying value of $46.1 million compared to $17.0 million at December 31, 2017. Term debt consisted of the following:

Federal Home Loan Bank of San Francisco Borrowings

As of March 31, 2018 the Bank had $30.0 million Federal Home Loan Bank of San Francisco advances outstanding. There were no Federal Home Loan Bank of San Francisco advances outstanding at December 31, 2017. The average balance outstanding on Federal Home Loan Bank of San Francisco term advances during the three months ended March 31, 2018 and the year ended December 31, 2017 was $12.4 million and $302 thousand, respectively. See Note 6 Term Debt in the Notes to Consolidated Financial Statements for information on our Federal Home Loan Bank of San Francisco borrowings.

Senior Debt

In December of 2015, we entered into a senior debt loan agreement to borrow $10.0 million. The debt is secured by a pledge from the Holding Company of all of the outstanding stock of Redding Bank of Commerce, matures in 2020, and at March 31, 2018, had a balance of $6.2 million net of unamortized debt issuance costs. Interest on the senior debt is paid at a variable rate equal to three month LIBOR plus 400 basis points resetting monthly. The effective interest rate at March 31, 2018, was 6.22%

Subordinated Debt

In December of 2015, we issued $10.0 million of fixed to floating rate Subordinated Notes. The Subordinated Debt initially bears interest at 6.88% per annum for a five-year term. Thereafter, interest on the Subordinated Debt will be paid at a variable rate equal to three month LIBOR plus 526 basis points resetting quarterly. At March 31, 2018, the Subordinated Debt had a balance of $9.9 million net of unamortized debt issuance costs. The notes are due in 2025.

Junior Subordinated Debentures

Bank of Commerce Holdings Trust II

During July 2005, we participated in a $10.0 million private placement of fixed rate trust-preferred securities (the "Trust-Preferred Securities") through a wholly owned Delaware trust affiliate, Bank of Commerce Holdings Trust II (the "Trust II"). Trust II simultaneously issued $310 thousand common securities to the Holding Company. Rates paid on the Trust-Preferred Securities have transitioned from fixed to floating and are now paid on a quarterly basis at a rate equal to three month LIBOR plus 158 basis points (3.70% at March 31, 2018).

The Trust-Preferred Securities mature on September 15, 2035, and the covenants allow for redemption of the securities at our option during any quarter prior to maturity.

The proceeds from the sale of the Trust-Preferred Securities were used by 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 Trust II were partially distributed to the Bank. The proceeds from the Notes qualify as Tier 1 capital under Federal Reserve Board guidelines.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

LIQUIDITY AND CASH FLOW

Redding Bank of Commerce

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 is public deposits. We may be required to collateralize a portion of public deposits that exceed FDIC insurance limitations based on the state of California’s risk assessment of the Bank. Public deposits represent 2% of our total deposits at March 31, 2018 and December 31, 2017.

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

At March 31, 2018, the Bank had the following credit arrangements:

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We have an available line of credit with the Federal Home Loan Bank of San Francisco of $326.6 million; credit availability is subject to certain collateral requirements, namely the amount of pledged loans and investment securities.

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We have an available line of credit with the Federal Reserve Bank of $23.6 million subject to collateral requirements, namely the amount of pledged loans.

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We have entered into nonbinding federal funds line of credit agreements with three financial institutions. The lines totaled $35.0 million at March 31, 2018 and had interest rates ranging from 1.89% to 2.56%. Advances under the lines are subject to funds availability, continued borrower eligibility, and may have consecutive day usage restrictions.

Bank of Commerce Holdings

The Holding Company is a separate entity from the Bank and must provide for its own liquidity. We currently hold $23.8 million from our May 2017 public offering. Historically, our principal source of cash has been dividends received from the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Holding Company. During the first quarter of 2018, the Bank paid a dividend of $1.5 million to the Holding Company.

Consolidated Statements of Cash Flows

As disclosed in the Consolidated Statements of Cash Flows, net cash of $5.3 million was provided by operating activities during the three months ended March 31, 2018. The primary difference between net income and cash provided by operating activities is non-cash items including depreciation and amortization totaling $572 thousand and net amortization of investment premiums and accretion of discounts of $511 thousand.

Net cash of $13.3 million used in investing activities consisted principally of $20.3 million in purchases of investment securities and $20.3 million in net loan purchases and originations partially offset by $19.4 million in proceeds from sale of investment securities and $7.9 million in proceeds from maturities and payments of investment securities.

Net cash of $25.4 million used in financing activities consisted of a decrease in deposits of $53.0 million partially offset by a $29.1 million increase in net term debt.

CAPITAL RESOURCES

We use equity capital to support growth and pay dividends. The objective of effective capital management is to produce above market long-term returns. Our sources of capital include retained earnings, common and preferred stock issuance, and issuance of subordinated debt or trust notes.

REGULATORY CAPITAL GUIDELINES

Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of bank holding companies and banks. The guidelines are “risk-based,” meaning that they are designed to make capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. On July 2, 2013, the federal banking agencies approved the final rules (the “Final Rules”) implementing the Basel Committee's December 2010 final capital framework (commonly known as Basel III). The Final Rules substantially amended the regulatory risk-based capital rules applicable to the Holding Company and the Bank. The phase-in period for the Final Rules began for the Company on January 1, 2015 with full compliance with the Final Rules phased in by January 1, 2019.

Generally speaking, effective January 1, 2015, the Final Rules did the following:

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Created “Common Equity Tier 1 Capital Ratio,” which is a measure of regulatory capital closer to pure tangible common equity than the previous

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Tier 1 definition;

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Established a required minimum risk-based capital ratio for “Common Equity Tier 1 Capital Ratio” at 4.5%;

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Increased the required minimum risk-based “Tier 1 Capital Ratio” to 6.0%:

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Increased the required minimum risk-based “Total Capital Ratio” to 8.0%;

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Increased the required minimum “Tier 1 Leverage Ratio” to 4.0%;

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

●

Added a 2.50% capital conversation buffer to the minimum “Common Equity Tier 1 Capital Ratio”, “Tier 1 Capital Ratio” and “Total Capital Ratio”; and

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Allowed for permanent grandfathering of non-qualifying instruments, such as our trust-preferred securities, subject to a limit of 25% of Tier 1 capital.

The Final Rules require the Bank and the Company to meet the capital conservation buffer requirement in order to avoid constraints on capital distributions, such as dividends and equity repurchases, and certain bonus compensation for executive officers. The capital conservation buffer of 2.50% is added to the minimum capital ratios and is being phased in between 2016 and 2019. For 2018, the partially phased in buffer is 1.875%.

When the new capital rule is fully phased in, the minimum capital requirements plus the conservation buffer will exceed the well-capitalized thresholds by 0.5 percentage points. This 0.5-percentage-point cushion will allow institutions to dip into a portion of their capital conservation buffer before reaching a status that is considered less than well capitalized for prompt corrective action purposes.

●	a “Common Equity Tier 1 Capital Ratio” of at least 6.5%;

●	a “Tier 1 Capital Ratio” of at least 8%;

●	a “Total Capital Ratio” of at least 10%;

●	a “Tier 1 Leverage Ratio” of at least 5%; and

●	not be subject to any order or written directive requiring a specific capital level.

The FDIC's rules (as amended by the Final Rules) also contain other capital classification categories, such as "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," which are based on an institution's specific capital ratios.

CAPITAL ADEQUACY

Overall capital adequacy is monitored on a day-to-day basis by management and reported to our Board of Directors on a monthly basis. Our regulators measure capital adequacy by using a risk-based capital framework and by monitoring compliance with minimum leverage ratio guidelines. Based on management’s review and analysis of Basel III, management believes that the Holding Company and the Bank will exceed the standards under these new rules.

As of March 31, 2018, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s risk category. The Holding Company and the Bank’s capital amounts and ratios as of March 31, 2018, are presented in the following table.

	March 31, 2018
						Well			Minimum			Applicable			Minimum Capital
			Actual			Capitalized			Capital			2018 Capital			Ratio plus Capital
(Amounts in thousands)	Capital		Ratio			Requirement			Requirement			Conservation Buffer			Conservation Buffer
Holding Company:
Common Equity Tier 1 Capital Ratio	$	128,491		12.35	%		n/a			4.50	%		1.875	%		6.375	%
Tier 1 Capital Ratio	$	138,491		13.31	%		n/a			6.00	%		1.875	%		7.788	%
Total Capital Ratio	$	161,481		15.52	%		n/a			8.00	%		1.875	%		9.875	%
Tier 1 Leverage Ratio	$	138,491		11.11	%		n/a			4.00	%		n/a			n/a

Bank:
Common Equity Tier 1 Capital Ratio	$	131,293		12.62	%		6.50	%		4.50	%		1.875	%		6.375	%
Tier 1 Capital Ratio	$	131,293		12.62	%		8.00	%		6.00	%		1.875	%		7.788	%
Total Capital Ratio	$	144,283		13.87	%		10.00	%		8.00	%		1.875	%		9.875	%
Tier 1 Leverage Ratio	$	131,293		10.51	%		5.00	%		4.00	%		n/a			n/a

On December 10, 2015, the Holding Company issued $10.0 million in aggregate principal amount of Subordinated Notes to certain institutional investors. The Subordinated Notes qualify as Tier 2 Capital under the Final Rules. See Item 1a - Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2017 for further detail on potential risks relating to the Subordinated Notes.

As part of an acquisition in 2016, we recorded a core deposit intangible of $1.8 million and goodwill of $665 thousand. When calculating capital ratios, goodwill and a portion of the 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 2017, 80% of the core deposit intangible was deducted from Tier 1 capital, and 100% in years thereafter. Both of these intangible assets are subtracted from tangible equity as part of the calculation of tangible book value per share.

Capital ratios for the Holding Company include the benefit of $26.8 million net proceeds from the sale of 2,738,096 shares of common stock in the second quarter of 2017.

Cash Dividends and Payout Ratios per Common Share

During the three months ended March 31, 2018 and the year ended December 31, 2017, we declared quarterly cash dividends of $0.03 per common share.

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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

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

These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, capital preservation and expected growth. The dividend rate will be reassessed periodically by the Board of Directors in accordance with the dividend policy. There is no assurance that future cash dividends on common shares will be declared or increased.

The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three months ended March 31, 2018 and 2017.

	Three Months Ended March 31,
	2018			2017
Dividends declared per common share	$	0.03		$	0.03
Dividend payout ratio		15	%		18	%

OFF-BALANCE SHEET ARRANGEMENTS

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

CONCENTRATION OF CREDIT RISK

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our assessment of market risk as of March 31, 2018 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, 2017.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Report on Internal Control over Financial Reporting

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

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

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

On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer (whom is also our Principal Accounting Officer) of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. As of March 31, 2018, our management, including our Chief Executive Officer, and Principal Financial Officer, concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings.

Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that any such changes occurred in the first three months of 2018 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, 2017, filed with the SEC on March 9, 2018.

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

The Holding Company and the Bank entered into amendments to certain employment agreements on May 3, 2018. The amendments to the employment agreements clarify that the change-in-control severance benefit provided for under the employment agreements is triggered by a termination of employment, by the company without cause or by the executive for good reason, within 12 months following the announcement of a prospective change in control or an actual change of control.

Item 6. Exhibits

10.1	Amendment to Amended and Restated Employment Agreement with Randall S. Eslick dated May 3, 2018

10.2	Amendment to Amended and Restated Employment Agreement with James A. Sundquist dated May 3, 2018

10.3	Amendment to Amended and Restated Employment Agreement with Samuel D. Jimenez dated May 3, 2018

10.4	Amendment to Amended and Restated Employment Agreement with Robert H. Muttera dated May 3, 2018

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

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SIGNATURES

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

BANK OF COMMERCE HOLDINGS

(Registrant)

Date: May 4, 2018			/s/ James A. Sundquist
			James A. Sundquist
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

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