Note 5 - Loans

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 5. LOANS

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

, and December 31, 2015, respectively.

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

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

	As of September 30, 2016
			Unpaid
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,728	$	2,562	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		1,196		1,196		—
Real estate - commercial owner occupied		800		847		—
Residential real estate:
Real estate - residential - ITIN		6,252		7,881		—
Real estate - residential - 1-4 family mortgage		1,798		2,585		—
Real estate - residential - equity lines		1,085		1,411		—
Consumer and other		222		225		—
Total with no related allowance recorded	$	13,081	$	16,707	$	—
With an allowance recorded:
Commercial	$	707	$	707	$	74
Commercial real estate:
Real estate - commercial non-owner occupied		811		811		24
Real estate - commercial owner occupied		341		341		64
Residential real estate:
Real estate - residential - ITIN		2,420		2,465		481
Real estate - residential - equity lines		543		543		271
Consumer and other		30		30		11
Total with an allowance recorded	$	4,852	$	4,897	$	925
By loan class:
Commercial	$	2,435	$	3,269	$	74
Commercial real estate		3,148		3,195		88
Residential real estate		12,098		14,885		752
Consumer and other		252		255		11
Total impaired loans	$	17,933	$	21,604	$	925

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

	As of December 31, 2015
(Amounts in thousands)	Recorded		Principal		Related
Impaired Loans	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,282	$	1,519	$	—
Commercial real estate:
Real estate - commercial non-owner occupied		5,488		6,226		—
Real estate - commercial owner occupied		1,071		1,794		—
Residential real estate:
Real estate - residential - ITIN		7,063		8,662		—
Real estate - residential - 1-4 family mortgage		1,775		2,775		—
Real estate - residential - equity lines		142		142		—
Consumer and other		—		—		—
Total with no related allowance recorded	$	16,821	$	21,118	$	—
With an allowance recorded:
Commercial	$	761	$	820	$	122
Commercial real estate:
Real estate - commercial non-owner occupied		824		824		35
Real estate - commercial owner occupied		350		350		62
Residential real estate:
Real estate - residential - ITIN		2,044		2,089		321
Real estate - residential - equity lines		558		558		279
Consumer and other		32		32		13
Total with an allowance recorded	$	4,569	$	4,673	$	832
By loan class:
Commercial	$	2,043	$	2,339	$	122
Commercial real estate		7,733		9,194		97
Residential real estate		11,582		14,226		600
Consumer and other		32		32		13
Total impaired loans	$	21,390	$	25,791	$	832

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

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

The impaired loans for which these interest income amounts were recognized primarily relate to accruing troubled debt restructured loans.

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

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

In order for a restructured loan to be on accrual status, the loan’s collateral coverage must generally be greater than or equal to 100% of the loan balance, the loan payments must be current, and the borrower must demonstrate the ability to make payments from a verified source of cash flow. We had no obligation to lend additional funds on any restructured loans as of September 30, 2016 or December 31, 2015.

As of

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Rate

– A modification in which the interest rate is modified.

Maturity

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

Payment deferral

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

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

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

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

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

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

We define a performing loan as a loan where any installment of principal or interest is not 90 days or more past due, and management believes the ultimate collection of original contractual principal and interest is likely. We define a nonperforming loan as an impaired loan, which may be on nonaccrual, 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms, and our ultimate collection of original contractual principal and interest is uncertain. The foundation or primary factor in determining the appropriate credit quality indicators is the degree of a debtor’s willingness and ability to perform as agreed.

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

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

In conjunction with evaluating the performing versus nonperforming nature of our loan portfolio, management evaluates the following credit risk and other relevant factors in determining the appropriate credit quality indicator (rating) for each loan class:

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

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

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

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

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

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

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

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

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

● Volatile or deteriorating collateral

● Management decisions may be called into question

● Delinquencies in bank credits or other financial/trade creditors

● Frequent overdrafts

● Significant change in management/ownership

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

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

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

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

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

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

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

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

● Sustained or substantial deteriorating financial trends,

● Unresolved management problems,

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

● Unanticipated and severe decline in market values,

● High reliance on secondary source of repayment,

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

● Fraud committed by the borrower,

● IRS liens that take precedence,

● Forfeiture statutes for assets involved in criminal activities,

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

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

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

● Proposed merger(s),

● Acquisition or liquidation procedures,

● Capital injection,

● Perfecting liens on additional collateral,

● Refinancing plans.

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

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

Other Liabilities

in the

Consolidated Balance Sheets

at September 30, 2016 and December 31, 2015 was $695 thousand.

The ALLL is based upon estimates of loan and lease losses and is maintained at a level considered adequate to provide for probable losses inherent in the outstanding loan portfolio. Our ALLL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan and lease losses and risks inherent in the loan portfolio in accordance with ASC Topic 450

Contingencies

and ASC Topic 310

Receivables.

The allowance is increased by provisions charged to expense and reduced by net charge offs. In periodic evaluations of the adequacy of the allowance balance, management considers past loan and lease loss experience by type of credit, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, current economic conditions and other factors. We formally assess the adequacy of the ALLL on a monthly basis. These assessments include the periodic re-grading of classified loans based on changes in their individual credit characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the interest rate environment and other factors as warranted. Loans are initially rated when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, a formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem loans, an allowance factor for categories of credits and allowances for changing environmental factors (e.g., portfolio trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific analysis of individual credits. Loss estimation factors for loan categories are based on analysis of local economic factors applicable to each loan category. Allowances for changing environmental factors are management’s best estimate of the probable impact these changes have had on the loan portfolio as a whole.

We believe that the ALLL was adequate as of September 30, 2016. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Company, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.

As of September 30, 2016, approximately 76% of our gross loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the ALLL. Deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

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

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

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

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

Commercial Loans

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

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

Commercial Real Estate (“CRE”) Loans

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

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

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Consumer Loans

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

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

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

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

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