Bank of Commerce Holdings - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Bank of Commerce Holdings	Financial_Report.xls
EX-31.2 - EX-31.2 - Bank of Commerce Holdings	f59162exv31w2.htm
EX-31.1 - EX-31.1 - Bank of Commerce Holdings	f59162exv31w1.htm
EX-32.0 - EX-32.0 - Bank of Commerce Holdings	f59162exv32w0.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-25135

Bank of Commerce Holdings


California		94-2823865

(State or jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1901 Churn Creek Road Redding, California		96002

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (530) 722-3955

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

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 þ No o

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 þ No o

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

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller Reporting company o

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

Yes o No þ

Outstanding shares of Common Stock, no par value, as of June 30, 2011: 16,991,495

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q


		PAGE NUMBER

PART I	FINANCIAL INFORMATION

Item 1	Financial Statements
	Condensed Consolidated Balance Sheets June 30, 2011, and December 31, 2010		3
	Condensed Consolidated Statements of Income Three and six months ended June 30, 2011, and June 30, 2010		4
	Condensed Consolidated Statements of Stockholders’ Equity Twelve and six months ended December 31, 2010 and June 30, 2011		5
	Condensed Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2011, and June 30, 2010		6
	Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2011 and June 30, 2010		7
	Notes to Unaudited Condensed Consolidated Financial Statements Six months ended June 30, 2011, and June 30, 2010		8
Item 2	Management’s Discussion and Analysis Of Financial Condition and Results of Operations		32
Item 3	Quantitative and Qualitative Disclosure about Market Risk		56
Item 4	Controls and Procedures		58

PART II.	OTHER INFORMATION

Item 1	Legal Proceedings		59
Item 1a	Risk Factors		59
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3	Defaults Upon Senior Securities		59
Item 4	(Removed and Reserved)		59
Item 5	Other Information		59
Item 6	Exhibits		59

	SIGNATURE PAGE		60
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EX-31.2
EX-32.0
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010


(Dollars in thousands)
	June 30, 2011		December 31, 2010
	(Unaudited)
ASSETS

Cash and due from banks	$	19,091	$	23,786
Interest bearing due from banks		29,225		39,470

Cash and cash equivalents		48,316		63,256
Securities available-for-sale, at fair value (including pledged collateral of $79.1 million at June 30, 2011, and $101.2 million at December 31, 2010)		162,184		189,235
Portfolio loans, net of the allowance for loan losses of $13.4 million at June 30, 2011, and $12.8 million at December 31, 2010		582,418		587,865
Mortgage loans held for sale		26,067		42,995
Bank premises and equipment, net		9,691		9,697
Goodwill		3,695		3,695
Other real estate owned		1,793		2,288
Other assets		34,358		40,102


TOTAL ASSETS	$	868,522	$	939,133


LIABILITIES AND STOCKHOLDERS’ EQUITY

Demand — noninterest bearing	$	87,643	$	91,025
Demand — interest bearing		149,917		162,258
Savings accounts		93,698		83,652
Certificates of deposit		294,173		311,767

Total deposits		625,431		648,702

Securities sold under agreements to repurchase		15,353		13,548
Federal Home Loan Bank borrowings		91,000		141,000
Mortgage warehouse lines of credit		4,236		4,983
Junior subordinated debentures		15,465		15,465
Other liabilities		8,843		11,708

Total Liabilities		760,328		835,406
Commitments and contingencies
Stockholders’ Equity:
Preferred stock (liquidation preference of $1,000 per share; issued 2008) 2,000,000 authorized; 17,000 shares issued and outstanding on June 30, 2011 and December 31, 2010		16,776		16,731
Common stock , no par value, 50,000,000 shares authorized; 16,991,495 shares issued and outstanding on June 30, 2011, and December 31, 2010		42,773		42,755
Common stock warrant		449		449
Retained earnings		43,383		41,722
Accumulated other comprehensive income (loss), net of tax		2,252		(509	)

Total Equity — Bank of Commerce Holdings		105,633		101,148
Noncontrolling interest in subsidiary		2,561		2,579

Total Stockholders’ Equity		108,194		103,727


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	868,522	$	939,133

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Income
Three and six months ended June 30, 2011 and June 30, 2010 (Unaudited)


	For the three months				For the six months ended
	ended June 30,				June 30,
(Amounts in thousands)	2011		2010		2011			2010
Interest income:
Interest and fees on loans	$	8,958	$	9,511	$	17,991		$	18,689
Interest on tax-exempt securities		478		381		1,010			703
Interest on U.S. government securities		633		507		1,311			945
Interest on other securities		577		342		1,228			615

Total interest income		10,646		10,741		21,540			20,952

Interest expense:
Interest on demand deposits		204		226		430			456
Interest on savings deposits		229		221		475			440
Interest on certificates of deposit		1,272		1,554		2,585			3,315
Securities sold under agreements to repurchase		13		15		27			27
Interest on FHLB borrowings		148		138		312			267
Interest on other borrowings		263		406		529			719

Total interest expense		2,129		2,560		4,358			5,224

Net interest income		8,517		8,181		17,182			15,728
Provision for loan losses		2,580		1,600		4,980			3,850

Net interest income after provision for loan losses		5,937		6,581		12,202			11,878

Noninterest income:
Service charges on deposit accounts		52		62		102			144
Payroll and benefit processing fees		102		100		230			228
Earnings on cash surrender value — Bank owned life insurance		119		107		230			215
Net gain on sale of securities available-for-sale		655		133		913			1,064
Merchant credit card service income, net		33		64		303			117
Mortgage banking revenue, net		2,550		2,776		5,083			5,336
Other income		114		85		216			137

Total noninterest income		3,625		3,327		7,077			7,241

Noninterest expense:
Salaries and related benefits		4,068		3,365		8,321			7,076
Occupancy and equipment expense		800		924		1,528			1,853
Write down of other real estate owned		370		1,064		557			1,245
FDIC insurance premium		363		254		735			505
Data processing fees		91		64		190			153
Professional service fees		595		543		1,169			943
Director deferred fee compensation plan		131		122		258			240
Stationery and supplies		88		96		139			176
Postage		44		45		90			87
Directors’ expense		67		68		141			152
Goodwill impairment		—		32		—			32
Other expenses		1,237		932		2,372			2,234

Total noninterest expense		7,854		7,509		15,500			14,696

Income before provision for income taxes		1,708		2,399		3,779			4,423
Provision for income taxes		216		750		647			1,494

Net Income		1,492		1,649		3,132			2,929
Less: Net income (loss) attributable to noncontrolling interest		6		144		(18	)		(111	)
Net income attributable to Bank of Commerce Holdings	$	1,486	$	1,505	$	3,150		$	3,040

Less: preferred dividend and accretion on preferred stock		235		236		470			471
Income available to common shareholders	$	1,251	$	1,269	$	2,680		$	2,569

Basic earnings per share	$	0.07	$	0.08	$	0.16		$	0.20
Weighted average shares — basic		16,991		16,837		16,991			12,877
Diluted earnings per share	$	0.07	$	0.08	$	0.16		$	0.20
Weighted average shares — diluted		16,991		16,837		16,991			12,877
Cash dividends declared	$	0.03	$	0.06	$	0.06		$	0.12

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
Twelve months ended December 31, 2010 and six months ended June 30, 2011 (Unaudited)


(Dollars in thousands)	Preferred Amount		Warrant		Common Shares		Stock Amount		Retained Earnings			Accumulated Other Comp- Income (Loss), net of tax			Subtotal Bank of Commerce Holdings			Noncontrolling Interest in Subsidiary		Total

Balance at January 1, 2010	$	16,641	$	449		8,711	$	9,730	$	39,004		$	658		$	66,482		$	2,325	$	68,807
Net Income										6,220						6,220			254		6,474
Other comprehensive income, net of tax													(1,167	)		(1,167	)				(1,167	)

Comprehensive income																5,053					5,307
Accretion on preferred stock		90								(90	)					—					—
Common cash dividend ($0.18 per share)										(2,562	)					(2,562	)				(2,562	)
Preferred stock dividend										(850	)					(850	)				(850	)
Compensation expense associated with stock options								54								54					54
Issuance of new shares, net of issuance costs ($4.25 per share)						8,280		32,971								32,971					32,971

Balance at December 31, 2010	$	16,731	$	449		16,991	$	42,755	$	41,722		$	(509	)	$	101,148		$	2,579	$	103,727


(Dollars in thousands)	Preferred Amount		Warrant		Common Shares		Stock Amount		Retained Earnings			Accumulated Other Comp- Income (Loss), net of tax			Subtotal Bank of Commerce Holdings			Noncontrolling Interest in Subsidiary			Total

Balance at January 1, 2011	$	16,731	$	449		16,991	$	42,755	$	41,722		$	(509	)	$	101,148		$	2,579		$	103,727
Net Income										3,150						3,150			(18	)		3,132
Other comprehensive income, net of tax													2,761			2,761						2,761

Comprehensive income																5,911						5,893
Accretion on preferred stock		45								(45	)					—						—
Common cash dividend ($0.03 per share)										(1,019	)					(1,019	)					(1,019	)
Preferred stock dividend										(425	)					(425	)					(425	)
Compensation expense associated with stock options								18								18						18

Balance at June 30, 2011	$	16,776	$	449		16,991	$	42,773	$	43,383		$	2,252		$	105,633		$	2,561		$	108,194

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2011 and June 30, 2010 (Unaudited)


	Three months ended						Six months ended
(Dollars in thousands)	June 30,						June 30,
	2011			2010			2011			2010
Net income (loss)	$	1,492		$	1,649		$	3,132		$	2,929
Available-for-sale securities:
Unrealized gains arising during the period		2,786			285			4,793			699
Reclassification adjustments for net gains realized in earnings, net of tax		(308	)		(79	)		(452	)		(627	)
Income tax expense related to unrealized gains		(1,142	)		(117	)		(1,968	)		(288	)

Net change in unrealized gains		1,336			89			2,373			(216	)
Derivatives:
Unrealized gains arising during the period		—			—			659			—
Reclassification adjustment for net gains realized in earnings		—			—			—			—
Income tax expense related to unrealized gains		—			—			(271	)		—

Net change in unrealized gains		—			—			388			—

Total other comprehensive income, net of tax		2,828			1,738			5,893			2,713
Less: Other comprehensive income noncontrolling interest		6			144			(18	)		(111	)

Total other comprehensive income — Bank of Commerce Holdings	$	2,822		$	1,594		$	5,911		$	2,824

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2011 and 2010


	June 30,			June 30,
(Dollars in thousands)	2011			2010
Cash flows from operating activities:
Net income	$	3,132		$	2,929
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,980			3,850
Provision for depreciation and amortization		439			473
Goodwill impairment		—			32
Compensation expense associated with stock options		18			27
Gain on sale of loans		(5,662	)		(6,582	)
Gross proceeds from sales of loans held for sale		275,425			298,271
Gross originations of loans held for sale		(252,835	)		(291,276	)
Gain on sale of securities available-for-sale		(913	)		(1,064	)
Amortization of investment premiums and accretion of discounts, net		567			42
Loss on sale of other real estate owned		365			84
Write down of other real estate owned		557			1,249
Increase in deferred income taxes		(547	)		(861	)
Increase in cash surrender value of bank owned life insurance policies		(576	)		(184	)
Effect of changes in:
Decrease (increase) in other assets		2,602			(3,086	)
Deferred compensation		244			240
Decrease in deferred loan fees		(39	)		(15	)
(Decrease) increase in other liabilities		(3,111	)		322

Net cash provided by operating activities		24,646			4,451

Cash flows from investing activities:
Proceeds from maturities and payments of available-for-sale securities		15,061			14,808
Proceeds from sales of available-for-sale securities		76,883			24,205
Purchases of available-for-sale securities		(60,514	)		(134,296	)
Purchases of home equity loan portfolio		—			(14,801	)
Loan origination, net of principal repayments		(1,999	)		1,050
Purchases of premises and equipment, net		(438	)		(551	)
Proceeds from the sales of other real estate owned		2,078			175
Proceeds from the termination of interest rate swaps		3,000			—

Net cash provided by (used in) investing activities		34,071			(109,410	)

Cash flows from financing activities:
Net (decrease) increase in demand deposits and savings accounts		(5,677	)		9,673
Net decrease in certificates of deposit		(17,594	)		(7,112	)
Net increase in securities sold under agreement to repurchase		1,805			3,823
Advances on term debt		239,253			1,234,000
Repayment of term debt		(290,000	)		(1,159,000	)
Cash dividends paid on common stock		(1,019	)		(1,045	)
Cash dividends paid on preferred stock		(425	)		(426	)
Net proceeds from issuance of common stock		—			33,113

Net cash (used in) provided by financing activities		(73,657	)		113,026
Net increase (decrease) in cash and cash equivalents		(14,940	)		8,067
Cash and cash equivalents, beginning of period		63,256			68,240

	$	48,316		$	76,307

Supplemental disclosures of cash flow activity:
Cash paid during the period for:
Income taxes	$	2,018			2,382
Interest		4,364			4,848
Supplemental disclosures of non cash investing activities:
Transfer of loans to other real estate owned		2,506			667
Changes in unrealized (loss) gain on investment securities available-for-sale		4,033			(366	)
Changes in deferred tax asset related to changes in unrealized (loss) gain on investment securities		(1,660	)		150

Changes in accumulated other comprehensive income due to changes in unrealized (loss) gain on investment securities		2,373			(216	)

See accompanying notes to condensed consolidated financial statements.

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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Bank of Commerce Holdings (the “Holding Company”) is a financial services company providing banking, investments and mortgage banking through branch locations, the internet and other distribution channels. The unaudited condensed consolidated financial statements include the accounts of the Holding Company and its wholly owned subsidiaries Redding Bank of Commerce™ and Roseville Bank of Commerce™, a division of Redding Bank of Commerce (“BOC” or the “Bank”) and its majority owned subsidiary, Bank of Commerce Mortgage™ (collectively the “Company”). All significant inter-company balances and transactions have been eliminated. The following condensed balance sheet as of December 31, 2010, which has been derived from audited financial statements, and the unaudited interim condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading.

The financial information contained in this report reflects all adjustments that in the opinion of management are necessary for a fair presentation of the results of the interim periods. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current financial statement presentation with no effect on previously reported equity and net income.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Material estimates that are particularly susceptible to significant change including the determination of the allowance for loan losses (ALL), the valuation of other real estate owned (OREO), other-than-temporary impairment of investment securities, accounting for income taxes, and fair value measurements are discussed in the notes to consolidated financial statements. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2010 Annual Report on Form 10-K. The results of operations and cash flows for the 2011 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase agreements. Federal funds are sold for a one-day period and securities purchased under agreements to resell are for no more than a 90-day period. Balances held in federal funds sold may exceed FDIC insurance limits.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of this Update is not expected to have a significant effect on the Company’s reported consolidated financial position and results of operations.

FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. G AAP and IFRSs. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the expected impact of the new standard on consolidated reported financial position and results of operations.

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

FASB ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.

All entities that report items of other comprehensive income, in any period presented, will be affected by the changes in this Update. Under the amendments to Topic 220, FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. In this Update an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this Update should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. As this ASU is disclosure related only, the adoption of this ASU will not impact consolidated reported financial position or results of operations.

FASB ASU No. 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. This amendment applies to all creditors, both public and nonpublic, that restructure receivables that fall within the scope of Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, the Company will apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Additional disclosures will be required to disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies—Loss Contingencies. The Company will be required to disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No.2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. The Company is currently evaluating the expected impact of the new standard on consolidated reported financial position and results of operations.

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

NOTE 3. EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. 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 entity. Net income available to common stockholders is based on the net income attributable to Bank of Commerce Holdings adjusted for dividend payments and accretion associated with preferred stock.

During late first and early second quarter of 2010, through a successful Offering, the Company issued 8.3 million shares of their common stock. In accordance to the Offering, average common shares outstanding increased for the six months ended June 30, 2011 compared to the same period in 2010.

The following table displays the computation of earnings per share for the three months and six months ended June 30, 2011 and 2010.

(Dollars in thousands, except per share data)


	Three months ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
Earnings Per Share	2011		2010		2011		2010

Basic EPS Calculation:
Net income attributable to Bank of Commerce Holdings	$	1,486	$	1,505	$	3,150	$	3,040
Less: dividend on preferred stock		212		213		425		426
Less: accretion on preferred stock		23		23		45		45

Numerator: earnings available to common shareholders	$	1,251	$	1,269	$	2,680	$	2,569

Denominator (average common shares outstanding)		16,991,495		16,837,209		16,991,495		12,876,357
Basic earnings per share	$	0.07	$	0.08	$	0.16	$	0.20

Diluted EPS Calculation:
Net income	$	1,486	$	1,505	$	3,150	$	3,040
Less: dividend on preferred stock		212		213		425		426
Less: accretion on preferred stock		23		23		45		45

Numerator: earnings available to common shareholders	$	1,251	$	1,269	$	2,680	$	2,569

Denominator:
Average common shares outstanding		16,991,495		16,837,209		16,991,495		12,876,357
Plus incremental shares from assumed conversions
Stock options		—		—		—		—
Warrants		—		—		—		—

		16,991,495		16,837,209		16,991,495		12,876,357


Diluted earnings per share	$	0.07	$	0.08	$	0.16	$	0.20
Anti-dilutive options not included in EPS calculation		256,580		282,080		256,580		282,080
Anti-dilutive warrants not included in EPS calculation		435,410		405,405		435,410		405,405

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

NOTE 4. SECURITIES

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at June 30, 2011 and December 31, 2010:


(Dollars in thousands)			As of June 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
Available-for-sale securities	Costs		Gains		Losses			Fair Value

U.S. Treasury and agencies	$	21,959	$	84	$	(61	)	$	21,982
Obligations of state and political subdivisions		57,337		854		(310	)		57,881
Residential mortgage backed securities and collateralized mortgage obligations		39,080		318		(89	)		39,309
Corporate securities		23,342		191		(101	)		23,432
Other asset backed securities		19,656		26		(102	)		19,580

Total	$	161,374	$	1,473	$	(663	)	$	162,184


(Dollars in thousands)			As of December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
Available-for-sale securities	Costs		Gains		Losses			Fair Value

U.S. Treasury and agencies	$	26,814	$	6	$	(489	)	$	26,331
Obligations of state and political subdivisions		67,004		82		(2,935	)		64,151
Residential mortgage backed securities and collateralized mortgage obligations		65,052		446		(251	)		65,247
Corporate securities		29,019		28		(90	)		28,957
Other asset backed securities		4,569		—		(20	)		4,549

Total	$	192,458	$	562	$	(3,785	)	$	189,235

The amortized cost and estimated fair value of available-for-sale securities as of June 30, 2011 are shown below.


(Dollars in thousands)	Available-for-sale
	Amortized Cost		Fair Value

AMOUNTS MATURING IN:
One year or less	$	248	$	249
One year through five years		25,562		25,531
Five years through ten years		60,370		60,907
After ten years		75,194		75,497

	$	161,374	$	162,184

The amortized cost and fair value of collateralized mortgage obligations and mortgage backed securities are presented by their expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual.

As of June 30, 2011, the Company held $79.1 million in securities with safekeeping institutions for pledging purposes. Of this amount, $29.5 million is currently pledged for public funds collateral, collateralized repurchase agreements, and Federal Home Loan Bank (FHLB) borrowings.

The following table presents the cash proceeds from sales of securities and their associated gross realized gains and gross realized losses that have been included in earnings for the three and six months ended June 30, 2011 and 2010:


(Dollars in thousands)	Three months ended						Six months ended
	2011			2010			2011			2010

Proceeds from sales of securities	$	53,835		$	6,047		$	76,883		$	24,205
Gross realized gains on sales of securities	$	719		$	145		$	987		$	1,078
Gross realized losses on sales of securities	$	(64	)	$	(12	)	$	(74	)	$	(14	)

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

Other-Than-Temporarily Impaired Debt Securities

For each security in an unrealized loss position, 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.

For debt securities that are considered other-than-temporarily impaired in which we do not intend and will not be required to sell prior to recovery of our amortized cost basis, impairment is separated 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 the amount due to factors not credit related is recognized in other comprehensive income.

We do intend to sell temporarily impaired securities, and it is more likely than not that we will not have to sell those securities before recovery of the cost basis. Additionally, we have evaluated the credit ratings of our investment securities and their issuers and/or insurers, if applicable. Based on our evaluation, management has determined that no investment security in our investment portfolio is other-than-temporarily impaired.

The following tables present the current fair value and associated unrealized losses on investments with unrealized losses at June 30, 2011 and December 31, 2010. The tables also illustrate whether these securities have had unrealized losses for less than 12 months or for 12 months or longer.


						As of June 30, 2011
	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury and agencies	$	5,948	$	(61	)	$	—	$	—	$	5,948	$	(61	)
Obligations of state and political subdivisions		19,974		(310	)		—		—		19,974		(310	)
Residential mortgage backed securities and collateralized mortgage obligations		11,242		(89	)		—		—		11,242		(89	)
Corporate securities		13,131		(101	)		—		—		13,131		(101	)
Other asset backed securities		14,003		(102	)		—		—		14,003		(102	)
Total temporarily impaired securities	$	64,298	$	(663	)	$	—	$	—	$	64,298	$	(663	)


						As of December 31, 2010
	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses			Value		Losses		Value		Losses
U.S. Treasury and agencies	$	18,829	$	(489	)	$	—	$	—	$	18,829	$	(489	)
Obligations of state and political subdivisions		52,414		(2,935	)		—		—		52,414		(2,935	)
Residential mortgage backed securities and collateralized mortgage obligations		26,477		(251	)		—		—		26,477		(251	)
Corporate securities		14,494		(90	)		—		—		14,494		(90	)
Other asset backed securities		4,549		(20	)		—		—		4,549		(20	)
Total temporarily impaired securities	$	116,763	$	(3,785	)	$	—	$	—	$	116,763	$	(3,785	)

At June 30, 2011 and December 31, 2010, 62 and 159 securities were in an unrealized loss position, respectively.

The unrealized losses associated with debt securities of U.S. government agencies and corporate securities are primarily driven by changes in interest rates and not due to the credit quality of the securities. Furthermore, securities backed by GNMA, FNMA, or FHLMC have the explicit or implicit guarantee of the full faith and credit of the U.S. Federal Government. Obligations of U.S. states and political subdivisions in our portfolio are all investment grade without delinquency history. These securities will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform. As a result, we concluded that these securities were not other-than-temporarily impaired as of June 30, 2011.

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

The unrealized losses associated with asset backed securities and non agency CMO’s were primarily related to securities backed by commercial and residential mortgages. All of these securities were above investment grade at June 30, 2011 and December 31, 2010, as rated by at least one major rating agency. For the CMO’s and asset backed securities, we estimate loss projections for each security by assessing loans collateralizing the security and determining expected default rates and loss severities. Based upon our assessment of expected credit losses of each security given the performance of the underlying collateral and credit enhancements where applicable, we concluded that these securities were not other-than-temporarily impaired as of June 30, 2011.

NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Outstanding loan balances consist of the following at June 30, 2011 and December 31, 2010:


(Dollars in thousands)	June 30, 2011		December 31, 2010

Commercial	$	140,610	$	130,579
Real estate — construction loans		26,357		41,327
Real estate — commercial (investor)		218,535		215,697
Real estate — commercial (owner occupied)		68,327		68,055
Real estate — 1-4 family ITIN loans		67,675		70,585
Real estate — 1-4 family mortgage		22,116		19,299
Real estate — equity lines		46,850		48,178
Consumer		5,271		6,775
Other		91		301

Total gross loans	$	595,832	$	600,796
Less:
Deferred loan fees, net		51		90
Allowance for loan losses		13,363		12,841

Total net loans	$	582,418	$	587,865

Gross loan balances in the table above include net premiums of $199 thousand and $168 thousand for the periods ending June 30, 2011 and December 31, 2010, respectively.

Age analysis of past due loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 were as follows:


													Recorded
	30-59		60-89		Greater								Investment >
	Days Past		Days Past		Than 90		Total Past						90 Days and
(Dollars in thousands)	Due		Due		Days		Due		Current		Total		Accruing

June 30, 2011
Commercial	$	163	$	—	$	414	$	577	$	140,033	$	140,610	$	—
Commercial real estate:
Construction		1,874		—		26		1,900		24,457		26,357		—
Other		13,839		377		—		14,216		272,646		286,862		—
Residential:
1-4 family		5,646		1,004		7,486		14,136		75,655		89,791		953
Home equities		755		744		—		1,499		45,351		46,850		—
Consumer		—		—		—		—		5,362		5,362		—

Total	$	22,277	$	2,125	$	7,926	$	32,328	$	563,504	$	595,832	$	953


December 31, 2010
Commercial	$	1,625	$	—	$	677	$	2,302	$	128,277	$	130,579	$	—
Commercial real estate:
Construction		342		—		—		342		40,985		41,327		—
Other		5,168		—		2,520		7,688		276,064		283,752		—
Residential:
1-4 family		7,857		2,404		6,720		16,981		53,604		70,585		—
Home equities		450		—		—		450		67,027		67,477		—
Consumer		19		—		—		19		7,057		7,076		—

Total	$	15,461	$	2,404	$	9,917	$	27,782	$	573,014	$	600,796	$	—

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

The Company’s practice is to place an asset on nonaccrual status when one of the following events occur: (1) any installment of principal or interest is 90 days or more past due (unless in management’s opinion the loan is well-secured and in the process of collection), (2) management determines the ultimate collection of principal or interest to be unlikely or, (3) the terms of the loan have been renegotiated due to a serious weakening of the borrower’s financial condition. Nonperforming loans may be on nonaccrual, 90 days past due and still accruing, or have been restructured. Accruals are resumed on loans only when they are brought fully current with respect to interest and principal and when the loan is estimated to be fully collectible. Restructured loans are those loans on which concessions in terms have been granted because of the borrower’s financial or legal difficulties. Interest is generally accrued on such loans in accordance with the new terms, after a period of sustained performance by the borrower.

One exception to the 90 days past due policy for nonaccruals is the Company’s pool of home equity loans and lines purchased from a private equity firm. The purchase of this pool of loans included a put option allowing the bank to sell a portion of the loan pool back to the private equity firm in the event of default by the borrower. At 90 days past due a loan in this pool will be sold back to the private equity firm for the outstanding principal balance, unless a workout plan has been put in place with the borrower. Once this put reserve is exhausted, the bank will charge off any loans that become 90 days past due. Management believes that charging the loan off at the time it becomes impaired is more conservative than placing it on nonaccrual status.

Pursuant to Company policy, payments received on loans that are on nonaccrual status are applied to principal until such time the loan is reclassified to accrual status. It is the Company’s policy to resume the accrual of interest on any loan on nonaccrual status when, at a minimum, six consecutive payments of the original or modified contractual terms has occurred, and it is more likely than not that contractual or modified payment amounts will continue into the foreseeable future. Had nonaccrual loans performed in accordance with their contractual terms, the Company would have recognized additional interest income, net of tax, of approximately $120 thousand and $108 thousand for the three months ended June 30, 2011 and 2010, respectively. The Company would have recognized additional interest income, net of tax, of approximately $218 thousand and $154 thousand during the six months ended June 30, 2011 and 2010, respectively.

Nonaccrual loans, segregated by loan class, were as follows:


(Dollars in thousands)	June 30, 2011		December 31, 2010

Commercial	$	901	$	2,302
Commercial real estate:
Construction		1,999		342
Other		3,282		7,066
Residential:
1-4 family		12,741		10,704
Home equities		—		97
Consumer		—		—

Total	$	18,923	$	20,511

The Company considers and defines a loan as impaired when, based on current information and events, it is probable that the Company will be unable to collect all interest and principal payments due according to the contractual terms of the loan agreement. Management assesses all loans, either individually or in aggregate (homogenous retail credits), that meet the Company’s definition of impairment. Management classifies all troubled debt restructures (TDRs) as impaired. The Company generally applies all cash payments received on impaired loans towards the reduction of outstanding principal.

Pursuant to Company policy, interest income is recognized on TDRs with certain terms. When determining whether to accrue interest on a TDR, the following criteria is applied on a loan-by-loan basis:

	•		An impairment assessment has been completed on the TDR loan, as prescribed by ASC 310, and no impairment has been identified,

	•		the borrower has not been delinquent 90 or more days prior to the loan modification date, and

	•		it is more likely than not that the modified payment amounts will continue into the foreseeable future.

Under the circumstances when a TDR is delinquent 90 or more days at the date of the modification, it is the Company’s policy to maintain the TDR on nonaccrual status. Pursuant to such status, all cash payments received are applied to principal until such time the TDR borrower has made a minimum of six consecutive payments in conformance with the modified contractual terms, and it is more likely than not that the borrower’s modified payment amounts will continue into the foreseeable future.

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

The following table summarizes our impaired loans by loan class as of June 30, 2011 and December 31, 2010:


(Dollars in thousands)	As of June 30, 2011
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance

With no related allowance recorded:
Commercial	$	414	$	1,153	$	—
Commercial real estate:
Construction		1,874		2,949		—
Other		3,083		4,808		—
Residential:
1-4 family		1,672		3,089		—
Home equities		—		—		—

Total with no related allowance recorded	$	7,043	$	11,999	$	—
With an allowance recorded:
Commercial	$	487	$	496	$	414
Commercial real estate:
Construction		233		395		75
Other		17,503		17,508		712
Residential:
1-4 family		17,638		18,944		2,235
Home equities		968		968		97

Total with an allowance recorded	$	36,829	$	38,311	$	3,533
Subtotal:
Commercial	$	901	$	1,649	$	414
Commercial real estate	$	22,693	$	25,660	$	787
Residential	$	20,278	$	23,001	$	2,332

Total	$	43,872	$	50,310	$	3,533


(Dollars in thousands)	As of December 31, 2010
	Recorded		Unpaid Principal		Related
	Investment		Balance		Allowance

With no related allowance recorded:
Commercial	$	120	$	120	$	—
Commercial real estate:
Construction		718		947		—
Other		9,527		12,421		—
Residential:
1-4 family		8,067		9,745		—
Home equities		97		105		—

Total with no related allowance recorded	$	18,529	$	23,338	$	—
With an allowance recorded:
Commercial	$	2,182	$	5,028	$	449
Commercial real estate:
Construction		2,428		3,347		139
Other		1,160		3,022		111
Residential:
1-4 family		8,716		9,298		599
Home equities		901		901		90

Total with an allowance recorded	$	15,387	$	21,596	$	1,388
Subtotal:
Commercial	$	2,302	$	5,148	$	449
Commercial real estate	$	13,833	$	19,737	$	250
Residential	$	17,781	$	20,049	$	689

Total	$	33,916	$	44,934	$	1,388

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

The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
(Dollars in thousands)	June 30, 2011				June 30, 2011				June 30, 2010				June 30, 2010

	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized

Commercial	$	1,554	$	—	$	2,066	$	1	$	1,808	$	5	$	1,185	$	8
Commercial real estate:
Construction		898		1		654		2		4,764		30		4,118		48
Other		16,907		107		13,868		164		11,130		25		10,309		60
Residential:
1-4 family		18,284		49		17,730		101		10,400		46		8,219		79
Home equities		1,151		18		1,297		43		295		—		247		—

Total	$	38,794	$	175	$	35,615	$	311	$	28,397	$	106	$	24,078	$	195

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. The Company defines 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 principal and interest is likely. The Company defines a nonperforming loan as an impaired loan which may be on nonaccrual, is 90 days past due and still accruing, or has been restructured and is not in compliance with its modified terms.

Performing and nonperforming loans, segregated by class of loans, are as:


(Dollars in thousands)	June 30, 2011
	Performing		Nonperforming		Total

Commercial	$	139,709	$	901	$	140,610
Commercial real estate:
Construction		24,358		1,999		26,357
Other		283,580		3,282		286,862
Residential:
1-4 family		76,097		13,694		89,791
Home equities		46,850		—		46,850
Consumer		5,362		—		5,362

Total	$	575,956	$	19,876	$	595,832


(Dollars in thousands)	December 31, 2010
	Performing		Nonperforming		Total

Commercial	$	128,277	$	2,302	$	130,579
Commercial real estate:
Construction		40,985		342		41,327
Other		276,686		7,066		283,752
Residential:
1-4 family		59,881		10,704		70,585
Home equities		67,380		97		67,477
Consumer		7,076		—		7,076

Total	$	580,285	$	20,511	$	600,796

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

Pass Grade — Borrowers classified as Pass Grades specifically demonstrate:

	•		Strong cashflows — borrower’s cashflows must meet or exceed the Company’s minimum Debt Service Coverage Ratio.

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

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

•

Qualitative Factors — in addition to meeting the Company’s minimum cashflow and collateral requirements, a number of other quantitative and 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.

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

Watch Grade — Generally, borrowers classified as Watch exhibit some level of deterioration in one or more of the following:

	•		Adequate Cashflows — borrowers in this category demonstrate adequate cashflows and Debt Service Coverage Ratios, but also exhibit one or more less than positive conditions such as declining trends in the level of cashflows, increasing or sole reliance on secondary sources of cashflows, and/or do not meet the Company’s minimum Debt Service Coverage Ratio. However, cashflow remains at acceptable levels to meet debt service requirements.

	•		Adequate Collateral Margin — the collateral securing the debt remains adequate but also exhibits a declining trend in value or expected volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate to cover the outstanding debt under a liquidation scenario.

	•		Qualitative Factors — while the borrower’s cashflow and collateral margin generally remain adequate, one or more quantitative and qualitative factors may also factor into assigning a Watch Grade including the borrower’s level of leverage (Debt to Equity), deterioration in prospects, limited experience in their industry, newly formed company, overall deterioration in the industry, negative trends or recent events in a borrower’s credit history, deviation from core business, and any other relevant factors.

Special Mention Grade — Generally, borrowers classified as Special Mention exhibit a greater level of deterioration than Watch graded loans and warrant management’s close attention. If left uncorrected, the potential weaknesses could threaten repayment prospects in the future. Special Mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse risk grade.

The following represents potential characteristics of a Special Mention Grade but do not necessarily generate automatic reclassification into this loan grade:

	•		Adequate Cashflows — borrowers in this category demonstrate adequate cashflows and Debt Service Coverage Ratios, but also reflect adverse trends in operations or continuing financial deterioration that, if it does not stabilize and reverse in a reasonable timeframe, retirement of the debt may be jeopardized.

	•		Adequate Collateral Margin — the collateral securing the debt remains adequate but also exhibits a continuing declining trend in value or volatility due to macro or industry specific conditions. The current collateral value, less selling costs, remains adequate, but should the negative collateral trend continue, the full recovery of the outstanding debt under a liquidation scenario could be jeopardized.

	•		Qualitative Factors — while the borrower’s cashflow and/or collateral margin continue to deteriorate but generally remain adequate, one or more quantitative and qualitative factors may also be factoring into assigning a Special Mention Grade including inadequate or incomplete loan documentation, perfection of collateral, inadequate credit structure, borrower unable or unwilling to produce current and adequate financial information, and any other relevant factors.

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 the Company 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 classified 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,

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

	•		Protracted repayment terms outside of policy that are for longer than the same type of credit in the Company 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 credit risk rated as Doubtful has all the weaknesses inherent in a credit 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. As such, all doubtful loans are considered impaired. 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 ALL.

Credit grade definitions, including qualitative factors, for all credit grades are reviewed and approved annually by the Company’s Loan Committee. The following table summarizes our internal risk rating by loan class as of June 30, 2011 and December 31, 2010:


(Dollars in thousands)	June 30, 2011
	Pass		Watch		Special Mention		Substandard		Doubtful		Total

Commercial	$	117,926	$	12,690	$	825	$	8,268	$	901	$	140,610
Commercial real estate:
Construction		13,679		7,546		3,025		2,008		99		26,357
Other		235,961		19,312		10,421		20,968		200		286,862
Residential:
1-4 family		66,956		636		1,023		21,176		—		89,791
Home equities		26,249		3,054		10,983		5,596		968		46,850
Consumer		5,134		94		53		81		—		5,362

Total	$	465,905	$	43,332	$	26,330	$	58,097	$	2,168	$	595,832


(Dollars in thousands)	December 31, 2010
	Pass		Watch		Special Mention		Substandard		Doubtful		Total

Commercial	$	96,691	$	17,100	$	2,454	$	12,153	$	2,181	$	130,579
Commercial real estate:
Construction		26,960		8,228		44		5,995		100		41,327
Other		237,086		34,420		1,125		8,401		2,720		283,752
Residential:
1-4 family		57,390		—		—		13,195		—		70,585
Home equities		39,085		4,428		12,765		10,298		901		67,477
Consumer		6,544		362		73		97		—		7,076

Total	$	463,756	$	64,538	$	16,461	$	50,139	$	5,902	$	600,796

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

Allowance for Credit Losses and Recorded Investment in Financing Receivables:


(Dollars in thousands)	As of June 30, 2011
				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated		Total

Allowance for credit losses:
Beginning balance	$	4,185		$	3,900		$	46		$	4,561		$	149	$	12,841
Charge offs		(2,081	)		(2,155	)		(25	)		(871	)		—		(5,132	)
Recoveries		46			22			3			603			—		674
Provision		1,402			1,661			7			1,602			308		4,980

Ending balance	$	3,552		$	3,428		$	31		$	5,895		$	457	$	13,363

Ending balance:
individually evaluated for impairment	$	414		$	787		$	—		$	2,332		$	—	$	3,533
Ending balance:
collectively evaluated for impairment	$	3,138		$	2,641		$	31		$	3,563		$	457	$	9,830
Financing receivables:
Ending balance	$	140,610		$	313,219		$	5,362		$	136,641		$	—	$	595,832
Ending balance individually evaluated for impairment	$	901		$	22,693		$	—		$	20,278		$	—	$	43,872
Ending balance collectively evaluated for impairment	$	139,709		$	290,526		$	5,362		$	116,363		$	—	$	551,960


(Dollars in thousands)	As of December 31, 2010
				Commercial
	Commercial			Real Estate			Consumer		Residential			Unallocated			Total

Allowance for credit losses:
Beginning balance	$	5,306		$	3,535		$	35	$	2,059		$	272		$	11,207
Charge offs		(4,192	)		(3,391	)		—		(4,506	)		—			(12,089	)
Recoveries		393			154			8		318			—			873
Provision		2,678			3,602			3		6,690			(123	)		12,850

Ending balance	$	4,185		$	3,900		$	46	$	4,561		$	149		$	12,841

Ending balance:
individually evaluated for impairment	$	449		$	250		$	—	$	689		$	—		$	1,388
Ending balance:
collectively evaluated for impairment	$	3,736		$	3,650		$	46	$	3,872		$	149		$	11,453
Financing receivables
Ending balance	$	130,579		$	325,079		$	7,076	$	138,062		$	—		$	600,796
Ending balance individually evaluated for impairment	$	2,302		$	13,833		$	—	$	17,781		$	—		$	33,916
Ending balance collectively evaluated for impairment	$	128,277		$	311,246		$	7,076	$	120,281		$	—		$	566,880

The ALL totaled $13.4 million or 2.24% of total loans at June 30, 2011 compared to $12.8 million or 2.14% at December 31, 2010. The related allowance allocation for the Individual Tax Identification Number (ITIN) portfolio was $3.0 million and $2.9 million at June 30, 2011 and December 31, 2010, respectively. In addition, as of June 30, 2011, the Company has $138.6 million in commitments to extend credit, and recorded a reserve for off balance sheet commitments of $422 thousand in other liabilities.

Management employs its best judgment given available and relevant information in determining the adequacy of the allowance; however, there are a number of factors beyond the Company’s control, including the performance of the loan portfolio, changes in interest rates, economic conditions, and regulatory views towards loan classifications. As such, the ultimate adequacy of the allowance may differ significantly from the Company’s estimation.

The Company has lending policies and procedures in place with the objective of optimizing loan income within an accepted risk tolerance level. Management reviews and approves 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.

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

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 Company’s CRE portfolio are diverse in terms of type and primary source of repayment. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single industry. Management monitors and evaluates CRE loans based on occupancy status (investor versus owner-occupied), collateral, geography, and risk grade criteria.

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 being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long term financing.

Consumer Loans — The Company’s consumer loan portfolio is generally limited to home equity loans with nominal originations in unsecured personal loans and credit cards. The Company is 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.

The Company maintains 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 Audit Committee. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

The Company’s ALL is a reserve established through a provision for probable loan losses charged to expense. The ALL represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans as of the financial statement date presented.

The Company’s ALL methodology significantly incorporates management’s current judgments, and reflects the reserve amount that is necessary for estimated loan losses and risks inherent in the loan portfolio in accordance with ASC Topic 450 (Contingencies) and ASC Topic 310 (Receivables).

Management’s continuing evaluation of all known relevant quantitative and qualitative internal and external risk factors provide the foundation for the three major components of the Company’s ALL: (1) historical valuation allowances established in accordance with 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 and based on estimated probable losses on specific impaired loans. All three components are aggregated and constitute the Company’s ALL; 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.”

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

It is the Company’s 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.

In accordance with ASC 450, historical valuation allowances are established for loan pools with similar risk characteristics common to each loan grouping. The Company’s 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.

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. Management periodically reviews and updates its historical loss ratios based on net charge off experience for each loan 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 the Company’s loan portfolio.

Valuation allowances specific to the ITIN and purchased Home Equity Portfolios

ITIN Portfolio — During fiscal year 2010, management increased the general valuation allowance for the portfolio to 4.05%, and currently as of June 30, 2011 had allocated 4.45% of the outstanding principal balance. The following factors were considered in determining the reserve increase during 2010:

	•		Increased delinquencies — 20% of the portfolio was delinquent 30 days or more as of December 31, 2010.

	•		Servicer modification efforts were generally extending beyond a typical timeframe.

	•		Mortgage insurance — A small number of mortgage insurance claims have been denied and management has not been able to identify a trend regarding any potential future denials.

	•		Sale of OREO — An emerging trend in the lengthening disposition of ITIN OREO had developed, including the potential for decreased recoveries and consequently increased net charge offs.

	•		Lack of loss guaranty due to settlement.

In August of 2010, the Company settled and terminated the put reserve provided on the ITIN loan pool purchase. Subsequent to the settlement of the put reserve, the ITIN portfolio experienced approximately $640 thousand and $316 thousand in charge offs during the remainder of 2010, and the six months ended June 30, 2011, respectively. Management has estimated that related recoveries will approximate 90% of amounts charged off. As of June 30, 2011, 19.06% of the ITIN loan portfolio was delinquent 30 days or more.

Home Equity Portfolio — On March 12, 2010, the Company completed a loan swap transaction which included the purchase of a pool of residential mortgage home equity loans with a par value of $22.0 million. As of December 31, 2010, the Company’s specific valuation allowance pertaining to this loan pool was $758 thousand or 4.25% of the outstanding principal balance. As of June 30, 2011 the Company’s specific valuation allowance pertaining to this pool was $1.5 million or 9.48% of the outstanding principal balance.

An accompanying $1.5 million put reserve was also part of the loan swap transaction and represents a credit enhancement. As such, management considers this put reserve in estimating potential losses in the home equity portfolio. The put reserve is an irrevocable first loss guarantee from the seller that provides us the right to put back delinquent home equity loans to the seller that become 90 days or more delinquent, up to an aggregate amount of $1.5 million. As of June 30, 2011 the Company had a put reserve balance of $221.9 thousand or 1.38% of the outstanding principal balance of $16.1 million. This guarantee is backed by a seller cash deposit with the Company that is restricted for this sole purpose. The seller’s cash deposit is classified as a deposit liability on the Company’s consolidated balance sheet. At the end of the three year term of this loss guarantee, on March 11, 2013, the Company will be required to return the unused portion of the put reserve in the form of a cash deposit to the seller.

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

NOTE 6. OTHER REAL ESTATE OWNED

OREO represents real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, OREO is recorded at the fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses.

Subsequent to foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Subsequent valuation adjustments are recognized within net loss on OREO. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in noninterest expense in the Consolidated Statements of Income.

At June 30, 2011 and December 31, 2010, the recorded investment in OREO was $1.8 million and $2.3 million, respectively. For the six months ended June 30, 2011 the Company transferred foreclosed property from eleven loans in the amount of $2.5 million to OREO and adjusted the balances through charges to the allowance for loan losses in the amount of $803 thousand relating to the transferred foreclosed property. During the six months ended June 30, 2011, the Company sold seventeen properties with balances of $2.5 million for a net loss of $365 thousand, and recorded $557 thousand in write downs of existing OREO in other noninterest expense. The June 30, 2011 OREO balance consists of nine properties, of which eight are secured with 1-4 family residential real estate in the amount of $618.4 thousand. The remaining property consists of improved commercial land in the amount of $1.2 million.

NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES

Lease Commitments — The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all non-cancelable operating leases as of June 30, 2011 are below:


(Dollars in thousands)

Amounts due in:

2011	$	408
2012		623
2013		488
2014		499
2015		164
Thereafter		270

Total	$	2,452

Legal Proceedings - The Company is involved in various pending and threatened legal actions arising in the ordinary course of business. The Company maintains reserves for losses from legal actions, which are both probable and estimable. In the opinion of management, the disposition of claims, currently pending will not have a material adverse affect on the Company’s financial position or results of operations.

FHLB Advances — The Company has advances from the FHLB totaling $91.0 million as of June 30, 2011 and $145.0 million as of June 30, 2010. The Company has a total of four fixed rate advances: one for $50.0 million with interest payable monthly, two for $10.0 million each with interest payable monthly, and one for $6.0 million with interest payable semiannually. In addition, the Company has one floating rate advance for $15.0 million. The floating rate adjusts quarterly to 3 month LIBOR plus 1 basis point, with interest payable quarterly.

The following table illustrates borrowings outstanding at the end of the period:


(Dollars in thousands)
Advance Amount		Interest Rate			Maturity

$	50,000		0.22	%	August 17, 2011
	6,000		0.33	%	February 28, 2012
	10,000		0.33	%	June 18, 2012
	15,000		0.26	%	March 5, 2013
	10,000		1.46	%	June 16, 2015

The borrowings are secured by an investment in FHLB stock, certain real estate mortgage loans which have been specifically pledged to the FHLB pursuant to their collateral requirements, and securities held in the Bank’s available-for-sale securities portfolio.

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

Based upon the level of FHLB advances, the Company was required to hold an investment in FHLB stock of $7.3 million. Furthermore, the Company has pledged $348.9 million of its commercial and real estate mortgage loans, and has borrowed $85.0 million against the pledged loans.

As of June 30, 2011, the Company held $34.2 million in securities with the FHLB for pledging purposes. Of this amount $6.0 million are pledged as collateral against borrowings, and the remaining securities are considered unpledged. At June 30, 2011, the Company had an available borrowing line at the FHLB of $119.8 million.

Other Available Borrowing Lines — The Company may periodically obtain secured borrowings from the Federal Reserve Bank (FRB). FRB borrowings outstanding were $0 as of June 30, 2011 and $0 as of June 30, 2010. The FRB’s discount window credit facility is limited to overnight borrowings. The Company has pledged $64.9 million in commercial loans as collateral as of June 30, 2011, and had available borrowing lines at the FRB of $53.7 million. In additions, at June 30, 2011, the Company had a federal funds borrowing line at two correspondent banks totaling $15.0 million.

Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters into various types of transactions, which involve financial instruments with off-balance sheet risk.

These instruments include commitments to extend credit and standby letters of credit, which are not reflected in the accompanying consolidated balance sheets. These transactions may involve, to varying degrees, credit and interest rate risk more than the amount, if any recognized, in the consolidated balance sheets.

Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements.

Collateral held relating to these commitments varies, but includes real estate, securities, and cash. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Bank upon default of performance.

Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness, but may include cash and securities. Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans.

The Company’s commitments to extend credit are illustrated below:


(Dollars in thousands)
	June 30, 2011		December 31, 2010

Off-balance sheet commitments:
Commitments to extend credit	$	138,551	$	146,915
Standby letters of credit		3,067		3,509
Guaranteed commitments outstanding		1,274		1,299

Total commitments	$	142,892	$	151,723

The Company has mortgage loan purchase agreements with various mortgage bankers. The Company is obligated to perform certain procedures in accordance with these agreements. The agreements provide for conditions whereby the Company may be required to repurchase mortgage loans for various reasons, among which are (1) a mortgage loan is originated in violation of the mortgage banker’s requirement, (2) the Company breaches any term of the agreement, and (3) an early payment default occurs from a mortgage originated by the Company. As of June 30, 2011, the Company has recorded $357 thousand in other liabilities for estimated buy backs for early payment defaults, representations and warranties. The mortgage loan repurchase agreements are consistent with the standard representations and warranties of the loan sales agreements, and the Company considers the impact to the consolidated financial statements to be immaterial.

The Company entered into a mandatory forward loan volume commitment agreement with a purchaser of mortgage loans. Under the agreement, the Company was committed to deliver $264 million in loan volume over the period from March 1, 2010 through February 28, 2011. Upon failure to deliver minimum loan volume quarterly, the Company was responsible to pay a non-delivery fee to the purchaser. As of February 28, 2011, the Company met the volume commitments. As of June 30, 2011 there are no mandatory forward loan volume commitment agreements.

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

NOTE 8. ACCOUNTING FOR INCOME TAX AND UNCERTAINTIES

The Company’s effective income tax rate was 17.12% for the six months ended June 30, 2011, compared with 33.78% for the six months ended June 30, 2010. The decrease in the effective tax rate was primarily driven by reductions of accrued provision for income tax of approximately $393,000, recognized by our mortgage subsidiary and immaterial true-up adjustments.

The Company’s provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Company’s income before taxes. The principal difference between statutory tax rates and the Company’s effective tax rate is the benefit derived from investing in tax-exempt securities and preferential state tax treatment for qualified enterprise zone loans.

The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Noncontrolling interests are presented in the income statement such that the consolidated income statement includes income and income tax expense from both the Company and noncontrolling interests. The effective tax rate is calculated by dividing income tax expense by income before tax expense for the consolidated entity.

NOTE 9. FAIR VALUE MEASUREMENT

The following table presents estimated fair values of the Company’s financial instruments as of June 30, 2011 and December 31, 2010, excluding financial instruments recorded at fair value on a recurring basis (summarized in a separate table), whether or not recognized or recorded at fair value in the consolidated balance sheets.

Non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-1A), 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 the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.


	June 30, 2011				December 31, 2010
	Carrying				Carrying
(Dollars in thousands)	Amounts		Fair Value		Amounts		Fair Value

Financial assets
Cash and cash equivalents	$	48,316	$	48,316	$	63,256	$	63,256
Portfolio loans, net		582,418		589,960		587,865		595,442
Mortgages loans held for sale		26,067		26,067		42,995		42,995
Interest receivable		3,555		3,555		3,845		3,845
Financial liabilities
Deposits		625,431		623,131		648,702		650,200
Securities sold under agreements to repurchase		15,353		14,233		13,548		12,425
Federal Home Loan Bank advances		91,000		90,951		141,000		140,963
Subordinated debenture		15,465		6,762		15,465		6,633
Interest payable		451		451		458		458

	Contract				Contract
Off balance sheet financial instruments:	Amount				Amount
Commitments to extend credit	$	138,551			$	146,915
Standby letters of credit	$	3,067			$	3,509
Guaranteed commitments outstanding	$	1,274			$	1,299

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

Cash and cash equivalents — The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents are a reasonable estimate of fair value. The carrying amount is a reasonable estimate of fair value because of the relatively short term between the origination of the instrument and its expected realization.

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

Portfolio loans, net — For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. For fixed rate loans projected cash flows are discounted back to their present value based on specific risk adjusted spreads to the U.S. Treasury Yield Curve, with the rate determined based on the timing of the cash flows. The ALL is considered to be a reasonable estimate of loan discount for credit quality concerns.

Mortgage loans held for sale — Mortgage loans held for sale are carried at the lower of cost or fair value. Cost generally approximates fair value, given the short duration of these assets.

Interest receivable and payable — The carrying amount of interest receivable and payable approximates its fair value.

Deposits — The fair value of deposits was derived by discounting the expected cash flows back to their present values based on the FHLB yield curve. The OTS decay rate assumptions for the timing of cash flows were used as a conservative proxy for non-maturity deposits.

Securities sold under agreements to repurchase — The fair value of securities sold under agreements to repurchase is estimated by discounting the contractual cash flows under outstanding borrowings at rates equal to the Company’s current offering rate, which approximate general market rates.

FHLB advances — The fair value of the FHLB advances is derived by discounting the cash flows of the fixed rate borrowings by the current FHLB offering rates of borrowings of similar terms, as of June 30, 2011. For variable rate FHLB borrowings, the carrying value approximates fair value.

Subordinated debentures — The fair value of the subordinated debenture is estimated by discounting the future cash flows using market rates at June 30, 2011, of which similar debentures would be issued with similar credit ratings as ours and similar remaining maturities. Future cash flows were discounted at 6.71%.

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

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

Fair Value Hierarchy

Level 1 valuations utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has 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.

The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. The Company’s 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.

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

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, respectively, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.


(Dollars in thousands)	Fair Value at June 30, 2011
Recurring basis	Total		Level 1		Level 2		Level 3

Available-for-sale securities
Obligations of states and political subdivisions	$	57,881	$	—	$	57,881	$	—
Corporate securities	$	23,432		—	$	23,432		—
Other investment securities (1)	$	80,871		—	$	80,871		—

Total assets measured at fair value	$	162,184	$	—	$	162,184	$	—

Earn out payable		596						596

Total liabilities measured at fair value	$	596	$	—	$	—	$	596


(1)		Principally represents U.S. Treasury and agencies or residential mortgage backed securities issued or guaranteed by governmental agencies.


(Dollars in thousands)	Fair Value at December 31, 2010
Recurring basis	Total		Level 1		Level 2		Level 3

Available-for-sale securities
Obligations of states and political subdivisions	$	64,151	$	—	$	64,151	$	—
Corporate securities		28,957		—		28,957		—
Other investment securities (1)		96,127		—		96,127		—
Derivatives		2,341		—		2,341		—

Total assets measured at fair value	$	191,576	$	—	$	191,576	$	—

Earn out payable		986		—		—		986

Total liabilities measured at fair value	$	986	$	—	$	—	$	986


(1)		Principally represents U.S. Treasury and agencies or residential mortgage backed securities issued or guaranteed by governmental agencies.

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis for the three months and six months ended June 30, 2011, and 2010. The amount included in the “Transfer into Level 3” column represents the beginning balance of an item in the period (interim quarter) for which it was designated as a Level 3 fair value measure.


	Three months				Six months
	ended June 30,				ended June 30,
(Dollars in thousands)	2011		2010		2011			2010

Beginning balance — Earn out payable	$	596	$	965	$	986		$	965
Transfers into Level 3		—		—		—			—
Transfers out of Level 3		—		—		—			—
Total losses
Included in earnings (or changes in net liabilities)		—		11		(390	)		11
Included in other comprehensive income		—		—		—			—
Purchases, issuances, sales, and settlements
Purchases		—		—		—			—
Issuances		—		—		—			—
Sales		—		—		—			—
Settlements		—		—		—			—

Ending balance — Earn out payable	$	596	$	976	$	596		$	976

The available-for-sale securities amount above represents securities that have been adjusted to their fair value. For these securities, the Company obtains 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.

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

The derivative amount disclosed in the December 31, 2010 recurring fair value table above represent the fair value of the Company’s interest rate swaps, prior to termination. The valuation of the Company’s interest rate swaps was obtained from a third party pricing service. The fair values were determined by using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis was based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the source of the derivative fair values fall with Level 2 of the fair value hierarchy.

The earn out payable amount above represents the fair value of the Company’s earn out incentive agreement with the non controlling interest of the Bank of Commerce Mortgage subsidiary. The non controlling interest of the mortgage subsidiary will earn certain cash payments from the Company, based on targeted results. The fair value of the earn out payable is estimated by using a discounted cash flow model whereby discounting the contractual cash flows expected to be paid out, under the assumption the mortgage subsidiary meets the target results. The expected contractual cash flows are discounted using the six month and two year treasury rates coinciding with their expected payment dates. As such, the Company has determined that the fair values fall with Level 3 of the fair value hierarchy.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

Assets measured at fair value on a nonrecurring basis are included in the table below. No liabilities were measured at fair value on a nonrecurring basis at June 30, 2011 or December 31, 2010.


(Dollars in thousands)	Fair Value at June 30, 2011
Nonrecurring basis	Total		Level 1		Level 2		Level 3

Impaired loans	$	4,918	$	—	$	—	$	4,918
Other real estate owned		1,470		—		—		1,470

Total assets measured at fair value	$	6,388	$	—	$	—	$	6,388


(Dollars in thousands)	Fair Value at December 31, 2010
Nonrecurring basis	Total		Level 1		Level 2		Level 3

Impaired loans	$	12,982	$	—	$	—	$	12,982
Other real estate owned		1,994		—		—		1,994
Goodwill		3,695		—		—		3,695

Total assets measured at fair value	$	18,671	$	—	$	—	$	18,671

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2011 and 2010:


	Three months ended				Six months ended
	June 30,				June 30,
(Dollars in thousands)	2011		2010		2011		2010
Impaired loans	$	2,243	$	332	$	3,145	$	1,415
Other real estate owned		370		1,064		557		1,245
Goodwill		—		32		—		32

Total assets measured at fair value	$	2,613	$	1,428	$	3,702	$	2,692

For the six months ended June 30, 2011:

	•		Collateral dependent impaired loans with a carrying amount of $8.0 million were written down to their fair value of $4.9 million resulting in a $3.1 million adjustment to the ALL.

	•		OREO with a carrying amount of $2.0 million was written down to fair value of $1.5 million resulting in a loss of $557 thousand which was included in earnings for the period.

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

The loan amounts above represent impaired, collateral dependent loans that have been adjusted to fair value. 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 ALL.

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

The OREO amount above represents impaired real estate that has been adjusted to fair value. OREO represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, OREO is recorded at the fair value less costs to sell, which becomes the property’s new basis. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the ALL. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on OREO are recognized within net loss on real estate owned. The loss represents impairments on OREO for fair value adjustments based on the fair value of the real estate. The Company records OREO as a nonrecurring Level 3.

The fair value of goodwill in the December 31, 2010 nonrecurring fair value table above represents goodwill that has been adjusted to fair value. The fair value of the mortgage subsidiary is estimated using a market and income approach, and is provided to the Company by a third party independent valuation consultant. Based on the fair value of the mortgage subsidiary, the Company makes a determination of goodwill impairment. An impairment review was performed during the three months ended June 30, 2011, and no fair value adjustment was deemed necessary. See Note 8 in the Company’s December 31, 2010 financial statements, incorporated in the annual December 31, 2010 10-K filing for further disclosure pertaining to the goodwill impairment analysis. The Company records goodwill as a nonrecurring Level 3 when impairment is recorded.

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 the Company’s entire holdings of a particular financial instrument.

Because no market exists for a significant portion of the Company’s 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.

Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax assets and liabilities, and property, plant and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

NOTE 10. TRANSFER OF FINANCIAL ASSETS

On March 12, 2010, the Company transferred certain nonperforming loans, without recourse, and $14.8 million in exchange for the acquisition of a pool of performing residential mortgage home equity loans.

The acquired residential mortgage home equity loan portfolio was initially recorded at an estimated fair value of $21.8 million. The initial fair value of the residential home equity loan portfolio was measured based on the fair value of the assets transferred and derecognized. No gain on loss was recorded resulting from this transaction.

At the settlement date the mortgage home equity loan pool consisted of 562 loans with an average principal balance of approximately $39 thousand, a weighted average credit score of 744, a weighted average loan to value of 86%, and a weighted average yield of 7.76%. Fifty-one percent of the mortgage home equity loan pool is located in the state of Michigan; the remaining balance is geographically disbursed throughout the United States.

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

NOTE 11. SEGMENT REPORTING

The Company has two reportable segments: Commercial Banking and Mortgage Brokerage Services. The Company conducts general commercial banking business in the counties of El Dorado, Placer, Shasta, Tehama and Sacramento, California. The principal commercial banking activities include a full array of deposit accounts and related services and commercial lending for businesses, professionals and their interests.

Mortgage brokerage services are performed by Bank of Commerce Mortgage™ subsidiary. Mortgage brokerage services offers residential real estate loans with fifteen offices in two different states. Furthermore, the subsidiary is licensed in California, Oregon, Washington, and Colorado. Mortgages that are originated are sold, servicing included, in the secondary market or directly to correspondent financial institutions.

The following tables represent a reconciliation of the Company’s reportable segments income and expenses to the Company’s consolidated net income for the three and six months ended June 30, 2011, and 2010.


	Three months ended June 30, 2011
(Dollars in thousands)	Bank		Mortgage			Parent			Elimination			Consolidated

Net interest income (expense)	$	8,566	$	(3	)	$	(46	)	$	—		$	8,517
Provision for loan losses		2,580		—			—			—			2,580
Total noninterest income		1,128		2,550			5			(58	)		3,625
Total noninterest expense		5,056		2,665			191			(58	)		7,854

Income before provision for income taxes		2,058		(118	)		(232	)		—			1,708
Provision for income taxes		346		(130	)		—			—			216

Net income		1,712		12			(232	)		—			1,492
Less: net income attributable to noncontrolling interest		—		6			—			—			6

Net income attributable to Bank of Commerce Holdings	$	1,712	$	6		$	(232	)	$	—		$	1,486


	Three months ended June 30, 2010
(Dollars in thousands)	Bank		Mortgage			Parent			Elimination			Consolidated

Net interest income (expense)	$	8,329	$	(7	)	$	(141	)	$	—		$	8,181
Provision for loan losses		1,600		—			—			—			1,600
Total noninterest income		654		2,777			—			(104	)		3,327
Total noninterest expense		4,894		2,369			350			(104	)		7,509

Income before provision for income taxes		2,489		401			(491	)		—			2,399
Provision for income taxes		626		124			—			—			750

Net income		1,863		277			(491	)		—			1,649
Less: net income attributable to noncontrolling interest		—		144			—			—			144

Net income attributable to Bank of Commerce Holdings	$	1,863	$	133		$	(491	)	$	—		$	1,505


	Six months ended June 30, 2011
(Dollars in thousands)	Bank		Mortgage			Parent			Elimination			Consolidated

Net interest income (expense)	$	17,324	$	(42	)	$	(100	)	$	—		$	17,182
Provision for loan losses		4,980		—			—			—			4,980
Total noninterest income		2,135		5,083			5			(146	)		7,077
Total noninterest expense		9,832		5,465			349			(146	)		15,500

Income before provision for income taxes		4,647		(424	)		(444	)		—			3,779
Provision for income taxes		1,034		(387	)		—			—			647

Net income		3,613		(37	)		(444	)		—			3,132
Less: net income attributable to noncontrolling interest		—		(18	)		—			—			(18	)

Net income attributable to Bank of Commerce Holdings	$	3,613	$	(19	)	$	(444	)	$	—		$	3,150

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


	Six months ended June 30, 2010
(Dollars in thousands)	Bank		Mortgage			Parent			Elimination			Consolidated

Net interest income (expense)	$	16,066	$	(42	)	$	(296	)	$	—		$	15,728
Provision for loan losses		3,850		—			—			—			3,850
Total noninterest income		2,139		5,317			—			(215	)		7,241
Total noninterest expense		9,303		5,119			489			(215	)		14,696

Income before provision for income taxes		5,052		156			(785	)		—			4,423
Provision for income taxes		1,370		124			—			—			1,494

Net income		3,682		32			(785	)		—			2,929
Less: net income attributable to noncontrolling interest		—		(111	)		—			—			(111	)

Net income attributable to Bank of Commerce Holdings	$	3,682	$	143		$	(785	)	$	—		$	3,040

The following table represents financial information about the Company’s reportable segments at June 30, 2011 and December 31, 2010:


	June 30, 2011
(Dollars in thousands)	Bank		Mortgage		Parent		Elimination			Consolidated

Total assets	$	855,235	$	14,528	$	122,276	$	(123,517	)	$	868,522
Total portfolio loans, gross	$	596,077	$	—	$	2,194	$	(2,439	)	$	595,832
Total deposits	$	629,396	$	—	$	—	$	(3,965	)	$	625,431


	December 31, 2010
(Dollars in thousands)	Bank		Mortgage		Parent		Elimination			Consolidated

Total assets	$	923,832	$	23,912	$	118,173	$	(126,784	)	$	939,133
Total portfolio loans, gross	$	606,646	$	—	$	2,289	$	(8,139	)	$	600,796
Total deposits	$	655,802	$	—	$	—	$	(7,100	)	$	648,702

NOTE 12. DERIVATIVES

As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements or other derivatives to mitigate the interest rate risk inherent in certain assets and liabilities. Presently, the Company does not use derivatives for trading or speculative purposes.

The primary underlying risk exposure of the derivative instruments is the timing and level of changes in interest rates counter to management’s expectations. Furthermore, interest rate swap agreements involve the risk of dealing with institutional counterparties and their ability to adhere to contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. Oversight of the Derivatives and Hedging Program is the responsibility of the Asset/Liability Management Committee (ALCO) of the Company’s Board of Directors.

The following table summarizes the notional amount, effective dates and maturity dates of the forward starting interest rate contracts the Company had outstanding with counterparties as of December 31, 2010. The Company did not carry any derivatives as of June 30, 2011. The total of $75.0 million represents interest rate swaps designated as cash flow hedges.

(Dollars in thousands)

Description

Notional Amount

Effective Date

Maturity

Forward starting interest rate swap

75,000

March 1, 2012

September 1, 2012

Forward starting interest rate swap

75,000

September 4, 2012

September 1, 2013

Forward starting interest rate swap

75,000

September 3, 2013

September 1, 2014

Forward starting interest rate swap

75,000

September 2, 2014

September 1, 2015

Forward starting interest rate swap

75,000

September 1, 2015

March 1, 2017

Pursuant to the interest rate swap agreements, the Company pledged collateral to counterparties in the form of securities totaling $4.0 million with an amortized cost of $4.0 million and a fair value of $3.9 million as of December 31, 2010. No collateral was posted from counterparties to the Company as of December 31, 2010.

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

The following table summarizes the type of derivative and their location on the consolidated balance sheet and the fair values of such derivatives as of December 31, 2010. See Note 9 in these consolidated financial statements for further detail on the valuation of the Company’s interest rate swaps.

(Dollars in thousands)

Underlying

Balance Sheet

Risk Exposure

Description

Location

Fair Value

Maturity

Asset Derivatives

Interest rate contract

Forward starting interest rate swaps

Other assets

(22

)

September 1, 2012

Interest rate contract

Forward starting interest rate swaps

Other assets

198

September 1, 2013

Interest rate contract

Forward starting interest rate swaps

Other assets

443

September 1, 2014

Interest rate contract

Forward starting interest rate swaps

Other assets

611

September 1, 2015

Interest rate contract

Forward starting interest rate swaps

Other assets

1,111

March 1, 2017

Total

2,341

On February 4, 2011, ALCO terminated the Company’s forward starting swap positions and realized $3.0 million in cash from the counterparty, equal to the carrying amount of the derivative at the date of termination. Concurrent with the termination of the hedge contract, management removed the cash flow hedge designation.

ALCO terminated the forward starting swaps due to continuing uncertainty regarding future economic conditions including the corresponding uncertainty on the timing and extent of future changes in the three month Libor rate index. The $3.0 million in cash received from the counterparty related to the cash flow hedge reflects gains to be reclassified into earnings. Although the hedge designation was removed, management believes the forecasted transaction to be probable. Accordingly, the net gains will be reclassified from other comprehensive income to earnings as a credit to interest expense in the same periods during which the hedged forecasted transaction will affect earnings.

As of June 30, 2011, the Company estimates that $118 thousand of existing net gains reported in accumulated other comprehensive income will be reclassified into earnings within the next twelve months.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements and Risk Factors

An investment in the Company has risk. The discussion below and elsewhere in this Report and in other documents the Company files with the SEC incorporates various risk factors that could cause the Company’s financial results and condition to vary significantly from period to period. Information in the accompanying financial statements contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution the investor that such statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated. These risks and uncertainties include the Company’s ability to maintain or expand its market share and net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company’s ability to compete on price and other factors with other financial institutions, customer acceptance of new products and services, and general trends in the banking and the regulatory environment, as they relate to the Company’s cost of funds and return on assets. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

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, 2010 under the heading “Risk factors that may affect results.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. 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, 2010 to June 30, 2011. Also discussed are significant trends and changes in the Company’s results of operations for the three and six months ended June 30, 2011, compared to the same period in 2010. The consolidated financial statements and related notes appearing elsewhere in this report are condensed and unaudited. The following discussion and analysis is intended to provide greater detail of the Company’s financial condition and results.

Company Overview

Bank of Commerce Holdings (“Company,”, “Holding Company,” “We,” or “Us”) is a corporation organized under the laws of California and a financial holding company (“FHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). Our principal business is to serve as a holding company for Redding Bank of Commerce^tm (“Bank”), which operates under two separate names (Redding Bank of Commerce^tm and Roseville Bank of Commerce^tm,a division of Redding Bank of Commerce) and for Bank of Commerce Mortgage^tm, our majority-owned mortgage brokerage subsidiary. We also have two unconsolidated subsidiaries, Bank of Commerce Holdings Trust and Bank of Commerce Holdings Trust II, which were organized in connection with our prior issuances of trust preferred securities. Our common stock is traded on the NASDAQ Global Market under the symbol “BOCH.”

The Company commenced banking operations in 1982 and currently operates four full service facilities in two diverse markets in Northern California. We are proud of the Bank’s reputation as one of Northern California’s premier banks for business. During 2007, we re-branded the Bank as “Bank of Commerce ï Bank of Choice^tm” reflecting a renewed commitment to making the Bank the choice for local businesses with a fresh focus on family and personal finances. We provide a wide range of financial services and products for business and consumer banking. The services offered by the Bank include those traditionally offered by banks of similar size in California, such as free checking, interest bearing checking and savings accounts, money market deposit accounts, sweep arrangements, commercial, construction and term loans, travelers checks, safe deposit boxes, collection services and electronic banking activities. The Bank offers wealth management services through a third party investment broker.

In order to enhance our noninterest income, in May 2009 we acquired 51.0% of the capital stock of Simonich Corporation, a successful state of the art mortgage broker of residential real estate loans headquartered in San Ramon, California, with fifteen offices in two different states and licenses in California, Oregon, Washington, and Colorado. The business was formed in 1993 and funds over $1.0 billion of first mortgages annually. The acquisition allows us to penetrate into the mortgage brokerage services market at our current bank locations and to share in the income on mortgage transactions nationwide. On July 1, 2009 we changed the mortgage company’s name to Bank of Commerce Mortgage^tm in order to enhance our name recognition throughout Northern California. The services offered by Bank of Commerce Mortgage^tm include brokerage mortgages for single and multi-family residential new financing, refinancing and equity lines of credit which are then sold, servicing included, on the secondary market or to correspondent relationships.

We continuously search for both organic and external expansion opportunities, through internal growth, strategic alliances, acquisitions, establishing a new office or the delivery of new products and services.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Systematically, we will reevaluate the short and long term profitability of all of our lines of business, and will not hesitate to reduce or eliminate unprofitable locations or lines of business. We remain a viable, independent bank committed to enhancing shareholder value. This commitment has been fostered by proactive management and dedication to our staff, customers, and the markets we serve.

Our vision is to embrace changes in the industry and develop profitable business strategies that allow us to maintain our customer relationships and build new ones. Our competitors are no longer just banks; we must compete with a myriad of other financial entities that compete for our core business. The flexibility provided by our status as a financial holding company has become increasingly important. We have developed strategic plans that evaluate additional financial services and products that can be delivered to our customers efficiently and profitably. Producing quality returns is, as always, a top priority.

Our governance structure enables us to manage all major aspects of our business effectively through an integrated process that includes financial, strategic, risk and leadership planning. Our management processes, structures and policies and procedures help to ensure compliance with laws and regulations and provide clear lines for decision-making and accountability. Results are important, but we are equally concerned with how we achieve those results. Our core values and commitment to high ethical standards is material to sustaining public trust and confidence in our Company.

Our primary business strategy is to provide comprehensive banking and related services to small and mid-sized businesses, not-for-profit organizations, and professional service providers as well as banking services for consumers, primarily business owners and their key employees. We emphasize the diversity of our product lines and high levels of personal service and, through our technology, offer convenient access typically associated with larger financial institutions, while maintaining the local decision-making authority and market knowledge, typical of a local community bank. Management intends to pursue our business strategy through the following initiatives:

Utilize the Strength of Our Management Team. The experience, depth and knowledge of our management team represent one of our greatest strengths and competitive advantages. Our Senior Leadership Committee establishes short and long term strategies, operating plans and performance measures and reviews our performance on a monthly basis. Our Credit Round Table Committee recommends corporate credit practices and limits, including industry concentration limits and approval requirements and exceptions. Our Information Technology Steering Committee establishes technological strategies, makes technology investment decisions, and manages the implementation process. ALCO establishes and monitors liquidity ranges, pricing, maturities, investment goals, and interest spread on balance sheet accounts. Our SOX 404 Compliance Team has established the master plan for full documentation of the Company’s internal controls and compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Leverage Our Existing Foundation for Additional Growth. Based on our management’s depth of experience and certain infrastructure investments, we believe that we will be able to take advantage of certain economies of scale typically enjoyed by larger organizations to expand our operations both organically and through strategic cost-effective avenues. We believe that there will be significant opportunities to acquire failing institutions or their assets through loss sharing agreements with the FDIC, buy branches from struggling banks in our market areas looking to raise capital, and acquire entire franchises for little to no premium. We also believe that the investments we have made in our data processing, staff and branch network will be able to support a much larger asset base. We are committed, however, to control any additional growth in a manner designed to minimize risk and to maintain strong capital ratios. We believe that the net proceeds raised in our capital offering will assist us in implementing our growth strategies by providing the capital necessary to support future asset growth, both organically and through strategic acquisitions.

Maintain Local Decision-Making and Accountability. We believe we have a competitive advantage over larger national and regional financial institutions by providing superior customer service with experienced, knowledgeable management, localized decision-making capabilities and prompt credit decisions. We believe that our customers want to deal directly with the people who make the ultimate credit decisions and have provided our Bank managers and loan officers with the authority commensurate with their experience and history which we believe strikes the right balance between local decision-making and sound banking practice.

Focus on Asset Quality and Strong Underwriting. We consider asset quality to be of primary importance and have taken measures to ensure that, despite the turbulent economy and growth in our loan portfolio, we consistently maintain strong asset quality. As part of our efforts, we utilize a third party loan review service to evaluate our loan portfolio on a quarterly basis and recommend action on certain loans if deemed appropriate. As of June 30, 2011, we had $21.7 million in nonperforming assets, or 2.49% of total assets. We also seek to maintain a prudent ALL, which at June 30, 2011 was $13.4 million, representing 2.24% of our loan portfolio.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Build a Stable Core Deposit Base. We will continue to grow a stable core deposit base of business and retail customers. In the event that our asset growth outpaces these local core deposit funding sources, we will continue to utilize FHLB borrowings and raise deposits in the national market using deposit intermediaries. We intend to continue our practice of developing a full deposit relationship with each of our loan customers, their business partners, and key employees. We will continue to use “hot spot” consumer depositories with state of the art technologies in highly convenient locations to enhance our core deposit base.

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

Risk Factors

	•		Our business is subject to various economic risks that could adversely impact our results of operations and financial condition.

	•		Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.

	•		We have a concentration risk in real estate related loans.

	•		Monitoring and servicing our IITIN residential mortgage loans could prove more costly and time consuming than previously modeled.

	•		Future loan losses may exceed the allowance for loan losses.

	•		Defaults may negatively impact us.

	•		Interest rate fluctuations, which are out of our control, could harm profitability.

	•		Changes in the fair value of our securities may reduce our stockholders’ equity and net income.

	•		Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.

	•		The condition of other financial institutions could negatively affect us.

	•		Changes in laws, government regulation and monetary policy may have a material effect on our results of operations.

	•		Because of our participation in the Troubled Asset Relief Program we are subject to several restrictions including, without limitation, restrictions on our ability to declare or pay dividends and repurchase our shares as well as restrictions on compensation paid to our executives.

	•		Our Series A Preferred Stock diminishes the net income available to our common shareholders and earnings per common share.

	•		Our holders of the Series A Preferred Stock have certain voting rights that may adversely affect our common shareholders, and the holders of the Series A Preferred Stock may have interests different from our common shareholders.

	•		We rely heavily on our management team and the loss of key officers may adversely affect operations.

	•		Internal control systems could fail to detect certain events.

	•		Our operations could be interrupted if third party service providers experience difficulty, terminate their services or fail to comply with banking regulations.

	•		Confidential customer information transmitted through the Bank’s online banking service is vulnerable to security breaches and computer viruses, which could expose the Bank to litigation and adversely affect its reputation and ability to generate deposits.

	•		Potential acquisitions may disrupt our business and dilute shareholder value.

	•		We are subject to extensive regulation which could adversely affect our business.

	•		Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

	•		Shares eligible for future sale could have a dilutive effect.

	•		Changes in accounting standards may impact how we report our financial condition and results of operations.

	•		A natural disaster or recurring energy shortage, especially in California, could harm our business.

	•		The price of our common stock may fluctuate significantly, and this may make it difficult to resell shares of common stock at desirable prices.

	•		Our profitability measures could be adversely affected if we are unable to effectively deploy the capital raised in our latest offering.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

	•		Only a limited trading market exists for our common stock, which could lead to significant price volatility

	•		Anti-takeover provisions in our articles of incorporation could make a third party acquisition of us difficult

	•		There may be future sales or other dilutions of our equity which may adversely affect the market price of our common stock.

	•		The holders of our preferred stock and trust preferred securities have rights that are senior to those of our holders of common stock and that may impact our ability to pay dividends on our common stock to our common shareholders and reduce net income available to our common shareholders.

	•		Our future ability to pay dividends and repurchase stock is subject to restrictions.

	•		Potential volatility of deposits.

	•		Negative publicity could damage our reputation.

	•		Mortgage banking interest rate and market risk.

	•		Mortgage banking revenue can be volatile quarter to quarter.

	•		The impact of financial reform legislation is yet to be determined.

Executive Overview

Our Company was established to make a profitable return while serving the financial needs of the business and professional communities which make up our markets. We are in the financial services business, and no line of financial services is beyond our charter so long as it serves the needs of our customers. Our mission is to provide our shareholders with a safe and profitable return on investment over the long term. Management will attempt to minimize risk to our shareholders by making prudent business decisions, maintaining adequate levels of capital and reserves, and communicating effectively with stockholders.

Our vision is to embrace changes in the industry and develop profitable business strategies that allow us to both maintain customer relationships and build new ones. Our competitors are no longer just banks. We must compete with financial powerhouses that want our core business. The flexibility provided by our status as a Financial Holding Company will become increasingly important. We have developed strategic plans that evaluate additional financial services and products that can be delivered to our customers efficiently and profitably. Producing quality returns is, as always, a top priority.

It is also our vision of the Company to remain independent, expanding our presence through internal growth and the addition of strategically important full service and focused service locations. We will pursue attractive opportunities to enter related lines of business and to acquire financial institutions with complementary lines of business. We will strive to continue our expansion into profitable markets in order to build franchise value. We will distinguish ourselves from the competition by a commitment to efficient delivery of products and services in our target markets — to businesses and professionals, while maintaining personal relationships with mutual loyalty.

Our long term success rests on the shoulders of the leadership team and its ability to effectively enhance the performance of the Company. As a financial services company, we are in the business of taking and managing risks. Whether we are successful depends largely upon whether we take the right risks and get paid appropriately for those risks. Our governance structure enables us to manage all major aspects of the Company’s business effectively through an integrated process that includes financial, strategic, risk and leadership planning.

We define risks to include not only credit, market and liquidity risk, the traditional concerns for financial institutions, but also operational risks, including risks related to systems, processes or external events, as well as legal, regulatory and reputation risks. Our management processes, structures, and policies help to ensure compliance with laws and regulations and provide clear lines for decision-making and accountability. Results are important, but equally important is how we achieve those results. Our core values and commitment to high ethical standards is material to sustaining public trust and confidence in our Company.

Sources of Income

We derive our income from two principal sources: (1) 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, and (2) fee income, which includes fees earned on deposit services, income from payroll processing, electronic-based cash management services, mortgage brokerage fee income and merchant credit card processing services.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Our income depends to a great extent on net interest income. These interest rate characteristics are highly sensitive to many factors, which are beyond our control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, and the Federal Reserve Board in particular. Because of our predisposition to variable rate pricing on our assets and level of time deposits, we are frequently considered asset sensitive, and generally we are affected adversely by declining interest rates. However, in the present interest rate environment, many of our variable rate loans are priced at their floors. As a result, we would not experience an immediate benefit in a rising rate environment.

Net interest income reflects both our net interest margin, which is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding, and the amount of earning assets we hold. As a result, changes in either our net interest margin or the amount of earning assets we hold could affect our net interest income and our earnings.

Increase or decreases in interest rates could adversely affect our net interest margin. Although the yield we earn on our assets and our 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 the repricing opportunities of our liabilities, causing our net interest margin to contract until the repricing of liabilities catches up.

Changes in the slope of the “yield curve” — or 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 scenarios that differ based on assumptions about 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 our earnings in material amounts, especially if actual conditions turn out to be materially different than what we assumed. 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)


(Unaudited)	June 30, 2011			June 30, 2010

Profitability
Return on average assets		0.68	%		0.73	%
Return on average equity		5.93	%		7.14	%
Average earning assets to total average assets		96.47	%		94.69	%
Interest Margin
Net interest margin		3.96	%		4.06	%
Asset Quality
Allowance for loan losses to total loans		2.24	%		2.08	%
Nonperforming assets to total assets		2.49	%		2.74	%
Net charge offs to average loans		0.73	%		0.38	%
Liquidity
Loans to deposits		93.12	%		93.44	%
Liquidity ratio		45.98	%		32.84	%
Capital
Tier 1 Risk-Based Capital — Bank		15.76	%		14.21	%
Total Risk-Based Capital — Bank		17.02	%		15.47	%
Tier 1 Risk-Based Capital — Company		15.75	%		15.03	%
Total Risk-Based Capital — Company		17.00	%		16.29	%
Efficiency
Efficiency ratio		62.30	%		63.98	%

Financial Highlights — Results of Operations

Balance Sheet

As of June 30, 2011, the Company had total consolidated assets of $868.5 million, total net portfolio loans of $582.4 million, an ALL of $13.4 million, deposits outstanding of $625.4 million, and stockholders’ equity of $108.2 million.

The Company continued to maintain a strong liquidity position during the reporting period. As of June 30, 2011, the Company maintained cash positions at the Federal Reserve Bank (FRB) and correspondent banks in the amount of $19.1 million. The Company also held certificates of deposits with other financial institutions in the amount of $29.2 million, which the Company considers highly liquid.

The Company continues to maintain a relatively low-risk, liquid available-for-sale investment portfolio. This resource is utilized as a source of liquidity as opportunities to reposition the balance sheet present themselves. Investment securities totaled $162.2 million at June 30, 2011, compared with $189.2 million at December 31, 2010. The $27.1 million, or 14.3% decrease primarily reflected net sales activity relating to municipal bonds, residential mortgage backed securities, and corporate securities. During the period the Company sold securities to generate liquidity to payoff maturing FHLB borrowings, and to a lesser extent, reposition the portfolio to shorten duration. As a direct result of the investment portfolio liquidation, for the six months ended June 30, 2011, the Company recorded approximately $913 thousand in realized gains on sales of securities.

At June 30, 2011, the Company’s net unrealized gain on available-for-sale securities was $809 thousand, compared with $3.2 million net unrealized loss at December 31, 2010. The favorable change in net unrealized losses was primarily due to increases in the fair values of the Company’s municipal bond portfolio.

Overall, the net portfolio loan balance did not change significantly for the period ended June 30, 2011. The Company’s net loan portfolio was $582.4 million at June 30, 2011, compared with $587.9 million at December 31, 2010, a decrease of $5.4 million, or 0.92%. The Company continued to conservatively monitor credit quality during the period, and adjust the ALL accordingly. As such, the Company provided $5.0 million in provisions for loan losses for the six months ended June 30, 2011 compared with $3.9 million for the same period a year ago. The Company’s ALL as a percentage of total portfolio loans were 2.24% and 2.08% for the six months ended June 30, 2011, and June 30, 2010, respectively.

Net charge offs were $4.5 million for the six months ended June 30, 2011 compared with net charge offs of $2.3 million for the same period a year ago. The charge offs were centered in commercial loans and construction loans, where ongoing credit quality issues continue to surface. The weaknesses in the commercial loan portfolio are specifically centered on loans where the borrowers business is tied to real estate. For the foreseeable future, the commercial loan portfolio, as well as the commercial real estate loan portfolio will continue to be influenced by weakness in real estate values, the effects of high unemployment levels, and general overall weakness in economic conditions.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Loans held for sale, consisting of residential mortgages to be sold in the secondary market, were $26.1 million at June 30, 2011, compared with $43.0 million at December 31, 2010. The decrease in loans held for sale was principally due to a decrease in mortgage loan origination and refinancing activity, primarily driven by an increase in interest rates during the during the first six months of 2011.

The Company’s OREO decreased from $2.3 million to $1.8 million for the six months ended June 30, 2011. The net decrease was driven primarily by the sale of a $1.6 million commercial building and the associated property. See Note 7 in the Condensed Consolidated Financial Statements incorporated in this report, for further details relating to the Company’s OREO portfolio. The Company remains committed to working with customers who are experiencing financial difficulties to find potential solutions. However, the Company expects to realize further transfer and sale activity in the OREO portfolio for the foreseeable future.

Income Statement

Due to conservative loan underwriting, active servicing of problem credits, and maintenance of a healthy net interest margin, the Company has remained profitable during the economic downturn. Accordingly, the Company continues to be well positioned to take advantage of growth opportunities in the coming years. Net income attributable to Bank of Commerce Holdings was $1.5 million and $3.2 million for the three months and six months ended June 30, 2011, compared with $1.5 million and $3.0 million for the same periods in 2010, respectively. Net income available to common stockholders was $1.3 million and $2.7 million for the three and six months ended June 30, 2011, compared with $1.3 million and $2.6 million for the same periods in 2010, respectively. Diluted earnings per share was $0.07 and $0.16 for the three months and six months ended June 30, 2011, compared with $0.08 and $0.20 for the same periods in 2010, respectively.

The decrease in the six months ended diluted earnings per share was primarily driven by the disproportional increase in common shares outstanding for the six months ended June 30, 2011. The increase in common shares outstanding is directly related to the Company’s successful Offering in March 2010. See the subsequent discussion on Capital Management and Adequacy in this document for further information pertaining to the Offering.

The Company continued to pay dividends on common stock during the three months ended June 30, 2011. The dollar amount per share decreased from $0.06 per quarter during 2010 to $0.03 per quarter in 2011. The decrease in the dividend rate was executed to preserve capital, while ensuring that dividend payout ratios remain consistent to periods prior to the Offering.

Return on average assets (ROA) and return on average equity (ROE) for the three months ended June 30, 2011 was 0.65% and 5.53% respectively, compared with 0.70% and 6.02% respectively, for the three months ended June 30, 2010. ROA and ROE for the six months ended June 30, 2011 was 0.68% and 5.93% respectively, compared with 0.73% and 7.14% respectively, for the six months ended June 30, 2010. The modest decrease in return on assets was driven by lower yields in the loan portfolio associated with the pay off of higher yielding loans, downward rate adjustments of variable rate loans, and the transfer of existing loans to nonaccrual status. Decreased yield in the available-for-sale investment portfolio had a negative impact on ROA as well. The decline in the investment portfolio yields was primarily driven by sales of securities with relatively higher yields. The transaction activity pertaining to the investment portfolio was in accordance to the Company’s objective of liquidating the portfolio to pay down FHLB borrowings, while also shortening duration.

The decrease in ROE for the three and six months ended June 30, 2011, compared with the same period a year ago, was primarily driven by the lower ROA and the deleveraging of the balance sheet. In addition, the disproportional increase in average common equity relative to changes in earning assets and interest bearing liabilities combined as well to decrease ROE.

Liquidity

The objective of liquidity management is to ensure that the Company can efficiently meet the borrowing needs of our customers, withdrawals of our depositors and other cash commitments under both normal operating conditions and under unforeseen and unpredictable circumstances of industry or market stress.

ALCO establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid resources of cash and due from banks, asset liquidity is supported by debt securities in the available-for-sale portfolio and the ability to sell loans in the secondary market. Furthermore, the Company pledges various loans as collateral, enabling access to secured borrowing lines of credit with the FHLB, FRB, and borrowing lines with other financial institutions.

Customer core deposits have historically provided the Company with a source of relatively stable and low-cost funds. Additional funding is provided by long term debt, including FHLB borrowings and the Company’s junior subordinated debentures.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company’s consolidated liquidity position remains adequate to meet short term and long term future contingencies. At June 30, 2011, the Company had available lines of credit at the FHLB and FRB of approximately $119.8 million and $53.7 million, respectively. The Company also has fed funds borrowing lines with two correspondent banks totaling $15.0 million.

Capital Management and Adequacy

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

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

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject to, as of June 30, 2011.

As of June 30, 2011, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum Total Risk-Based, Tier 1 Risk-Based and Tier 1 Leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Company and the Bank’s capital amounts and ratios as of June 30, 2011 are presented in the table.



						Well
			Actual			Capitalized			Minimum Capital
(Dollars in thousands)	Capital		Ratio			Requirement			Requirement

The Holding Company
Leverage	$	117,246		12.87	%		n/a			4.00	%
Tier 1 Risk-Based		117,246		15.75	%		n/a			4.00	%
Total Risk-Based		126,608		17.00	%		n/a			8.00	%

The Bank
Leverage	$	110,365		12.16	%		5.00	%		4.00	%
Tier 1 Risk-Based		110,365		15.76	%		6.00	%		4.00	%
Total Risk-Based		119,181		17.02	%		10.00	%		8.00	%

The United States Department of Treasury (“Treasury”) introduced the Capital Purchase Program on October 14, 2008, under which the Treasury was authorized to make up to $250 billion in equity capital available to qualifying healthy financial institutions. Bank of Commerce Holdings qualified for this highly selective program and received capital investment in November of 2008.

On March 23, 2010, the Company filed a Form S-1/A Registration Statement (the “Registration Statement”) with the SEC to offer 7,200,000 shares of our common stock in an underwritten public offering (“Offering”). In the Registration Statement, we set out our intent to use the net proceeds of the Offering for general corporate purposes, including contributing additional capital to the Bank, supporting our ongoing and future anticipated growth, which may include opportunistic acquisitions of all or parts of other financial institutions, including FDIC-assisted transactions, and positioning us for eventual redemption of our Series A Preferred Stock issued to the Treasury.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

On March 29, 2010 the Company announced the successful closing of the Offering. The Company received net proceeds from the Offering of approximately $28.8 million, after underwriting discounts and commissions and estimated expenses. On April 14, 2010 the underwriters exercised their overallotment option adding additional net proceeds of approximately $4.2 million to the Company’s equity, for a total of $33.0 million in net proceeds received through the Offering.

Although we are periodically engaged in discussions with potential acquisition candidates, we are not currently party to any purchase or merger agreement. With our strong capital position, we are constantly seeking new opportunities to increase franchise value through loan growth, investment portfolio purchases, and core deposits.

Periodically, the Board of Directors authorizes the Company to repurchase shares. Share repurchase announcements are published in press releases and SEC 8-K filings. Typically we do not give any public notice before repurchasing shares.

Various factors determine the amount and timing of our share repurchases, including our capital requirements, market conditions and legal considerations. These factors can change at any time and there can be no assurance as to the number of shares repurchased or the timing of the repurchases.

Our policy has been to repurchase shares under the safe harbor conditions of Rule 10b-18 of the Exchange Act including a limitation on the daily volume of repurchases. The Company’s potential sources of capital include retained earnings, common and preferred stock issuance and issuance of subordinated debt and trust notes.

Short and Long Term Borrowings

The Company actively uses FHLB advances as a source of wholesale funding to support growth strategies as well as to provide liquidity. At June 30, 2011, the Company’s FHLB advances were of fixed term and variable term borrowings without call or put option features. At June 30, 2011, the Company had $91.0 million in FHLB advances outstanding at an average rate of 0.38% compared to $145.0 million at an average rate of 0.13% at June 30, 2010.

Allowance for Loan Losses

The ALL, which consists of the allowance for loan losses, is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. The Company has established a process using several analytical tools and benchmarks, to calculate a range of probable outcomes and determine the adequacy of the allowance. No single statistic or measurement determines the adequacy of the allowance. Loan recoveries and the provision for credit losses increase the allowance, while loan charge offs decrease the allowance.

Although the Company has a diversified loan portfolio, a significant portion of its customers’ ability to repay the loans is dependent upon the professional services and investor commercial real estate sectors. Loans within the Company’s loan portfolio are generally secured by real estate or other assets, and are expected to be repaid from cash flows of the borrower’s business or cash flows from real estate investments. The Company’s exposure to credit loss, if any, is the difference between the fair value of the collateral, and the outstanding balance of the loan.

Provisions for loan losses for the three months ended June 30, 2011, and 2010 were $2.6 million and $1.6 million, respectively. Provisions for loan losses for the six months ended June 30, 2011, and 2010 were $5.0 million and $3.9 million, respectively. The Company’s ALL was 2.24% of total loans at June 30, 2011, compared with 2.08% at June 30, 2010.

The increased level of the Company’s ALL relative to the gross loan portfolio is primarily driven by the declining credit quality, as well as management’s conservative approach to managing through the credit quality issues. This approach has inherently resulted in an increasing number of impairment reviews, and consequently identified impairment. Refer to the nonperforming assets caption in this document for further detail on impaired loans and nonperforming assets.

Factors that may affect future results

As a financial services company, our earnings are significantly affected by general business and economic conditions. These conditions include short term and long term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economies in which we operate.

For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts including the aftermath of the war with Iraq, could impact business conditions in the United States.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can materially affect the value of financial instruments we hold. Its policies can also affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in Federal Reserve Board policies are beyond our control and hard to predict or anticipate.

We operate in a highly competitive industry that could become even more competitive because of legislative, regulatory and technological changes and continued consolidation.

Banks, securities firms and insurance companies can now merge creating a Financial Holding Company that can offer virtually any type of financial service, including banking, securities underwriting, insurance (agency and underwriting), and merchant banking.

Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

The holding company, subsidiary bank and non-bank subsidiary are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not investors. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies including changes in interpretation and implementation could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer. Our failure to comply with the laws, regulations or policies could result in sanctions by regulatory agencies and damage our reputation. For more information, refer to the “Supervision and Regulation” section in the Company’s 2010 Annual Report on Form 10-K.

There is increasing pressure on financial services companies to provide products and services at lower prices. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. This can reduce our net interest margin and revenues from fee-based products and services. In addition, the widespread adoption of new technologies, including internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services. Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense.

The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that our bank may pay to the holding company. For more information, refer to “Dividends and Other Distributions” in the Company’s 2010 Annual Report on Form 10-K.

Critical Accounting Policies

Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Management has determined the following five accounting policies to be critical: Valuation of Investments and Impairment of Securities, Allowance for loan losses, Accounting for Income Taxes, Accounting for Derivative Financial Instruments and Hedging Activities, and Accounting for Fair Value Measurements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Valuation of Investments and Impairment of Securities

At the time of purchase, the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs and intent to hold. The Company does not engage in trading activity. Securities designated as held-to-maturity are carried at cost adjusted for the accretion of discounts and amortization of premiums. The Company has the ability and intent to hold these securities to maturity. Securities designated as available-for-sale may be sold to implement the Company’s asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities designated as available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as part of accumulated other comprehensive income (loss), a separate component of shareholders’ equity. Gains or losses on sale of securities are based on the specific identification method. The market value and underlying rating of the security is monitored for quality. Securities may be adjusted to reflect changes in valuation as a result of other-than-temporary declines in value. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed rate investments, from changes in interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends.

When an investment is other-than-temporarily impaired, the Company assesses whether it intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. If the Company intends to sell the security or if it more likely than not that the Company 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. The Company follows a consistent and systematic process for determining and recording other-than-temporary impairment loss. The Company has designated the ALCO Committee responsible for the other-than-temporary evaluation process.

The ALCO Committee’s assessment of whether other-than-temporary impairment loss should be recognized incorporates both quantitative and qualitative information including, but not limited to: (1) the length of time and the extent of which the fair value has been less than amortized cost, (2) the financial condition and near term prospects of the issuer, (3) the intent and ability of the Company to retain its 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.

Allowance for Loan Losses

ALL is based upon estimates of loan 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 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. We formally assess the adequacy of the ALL 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 graded when originated. They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement is performed at least quarterly on a loan-by-loan basis.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Income Taxes

Income taxes reported in the 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 financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that they will be realized. In evaluating our ability to recover the deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, management develops assumptions including the amount of future state and federal pretax 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. The Company files consolidated federal and combined state income tax returns.

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. For tax positions that meet the more likely than not threshold, we may recognize only the largest amount of tax benefit that is greater than fifty percent likely to be realized upon ultimate settlement with the taxing authority. Management believes that all of our tax positions taken meet the more likely than not recognition threshold. To the extent tax authorities disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement with the taxing authorities.

Derivative Financial Instruments and Hedging Activities

	•		Derivative Loan Commitments — The Company, through its majority owned subsidiary, Bank of Commerce Mortgage, enters into forward delivery contracts to sell residential mortgage loans at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Generally, the Company enters into a best efforts interest rate lock commitment (IRLC) with borrowers and forward delivery contracts with investors associated with mortgage loans receivable held for sale.

			These derivative instruments consist primarily of IRLC’s executed with borrowers and mandatory forward purchase commitments with investor lenders. These derivative instruments are accounted for as fair value hedges, with the changes in fair value reflected in earnings as a component of mortgage brokerage fee income. At June 30, 2011 the Company did not maintain any open positions or any other outstanding derivative loan commitments.

	•		Interest Rate Swap Agreements — As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements or other derivatives to mitigate the interest rate risk inherent in certain assets and liabilities. These derivative instruments are accounted for as cash flow hedges, with the changes in fair value reflected in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized on the hedged item. At June 30, 2011, the Company did not maintain any interest rate swap agreements.

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, derivatives, and loans held for sale, if any, 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, securities held-to-maturity that are other-than-temporarily impaired, 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, management uses its 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 financial statements. For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 9 to the Condensed Consolidated Financial Statements in this document.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Net Interest Income and Net Interest Margin

Net interest income is the largest source of our operating income. Net interest income for the three months ended June 30, 2011 was $8.5 million, an increase of $336 thousand or 4.1% compared to the same period in 2010. Net interest income for the three months ended June 30, 2011 was positively impacted by a lower volume of FHLB borrowings, lower funding costs relating to the Company’s certificate of deposits, and floating rate junior subordinated debentures. Net interest income for the six months ended June 30, 2011 was $17.2 million, an increase of $1.5 million or 9.24% compared to the same period in 2010. The results for the three and six months ended June 30, 2011, as compared to the same period in 2010 are attributable to growth in outstanding average interest earning assets, primarily investment securities, partially offset by growth in interest bearing liabilities, primarily FHLB borrowings.

The net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 3.97% for the three months ended June 30, 2011, a decrease of 15 basis points as compared to the same period in 2010. The net interest margin on a fully taxable basis was 3.96% for the six months ended June 30, 2011, a decrease of 10 basis points as compared to the same period in 2010. The decrease in net interest margin primarily resulted from decreased yield on the loan portfolio as a result of payoffs, downward rate adjustments on variable rate loans, and transfers to nonaccrual status, partially offset by a decrease in interest expense to earning assets of 34 basis points due to declining costs of interest bearing deposits, and junior subordinated debentures.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Our net interest income is affected by changes in the amount and mix of interest earning assets and interest bearing liabilities, as well as changes in the yields earned on interest earning assets and rates paid on deposits and borrowed funds. The following tables present condensed average balance sheet information, together with interest income and yields on average interest earning assets, and interest expense and rates paid on average interest bearing liabilities for the six months ended June 30, 2011 and 2010:

Average Balances, Interest Income/Expense and Yields/Rates Paid
(unaudited)


	Six months ended							Six months ended
	June 30, 2011							June 30, 2010
	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate

Interest Earning Assets
Portfolio loans¹	$	626,685	$	17,991		5.74	%	$	622,525	$	18,689		6.00	%
Tax-exempt securities		50,899		1,485		5.84	%		34,288		1,034		6.03	%
US government securities		29,480		316		2.14	%		21,329		292		2.74	%
Mortgage backed securities		73,500		995		2.71	%		32,076		653		4.07	%
Other securities		42,256		802		3.80	%		9,043		193		4.27	%
Interest bearing due from banks		69,205		426		1.23	%		71,793		422		1.18	%
Federal funds sold		—		—		0.00	%		990		1		0.20	%

Total average interest earning assets		892,025		22,015		4.94	%		792,044		21,284		5.37	%
Cash & due from banks		1,985							1,829
Bank premises		9,576							9,911
Other assets		21,114							32,681

Total average assets	$	924,700						$	836,465

Interest Bearing Liabilities
Interest bearing demand	$	148,473	$	430		0.58	%	$	143,813	$	456		0.63	%
Savings deposits		90,714		475		1.05	%		71,789		440		1.23	%
Certificates of deposit		307,094		2,585		1.68	%		333,239		3,315		1.99	%
Repurchase agreements		14,224		27		0.38	%		11,215		27		0.48	%
Other borrowings		156,756		840		1.07	%		89,692		986		2.20	%

Total average interest liabilities		717,261		4,357		1.21	%		649,748		5,224		1.61	%
Noninterest bearing demand		95,641							74,713
Other liabilities		5,617							26,893
Shareholders’ equity		106,181							85,111

Total average liabilities and shareholders’ equity	$	924,700						$	836,465

Net Interest Income and Net Interest Margin²			$	17,658		3.96	%			$	16,060		4.06	%

Interest income on loans includes fee (expense) income of approximately $(95) thousand and $85 thousand for the period ended June 30, 2011, and 2010, respectively.


¹		Average nonaccrual loans and average loans held for sale of $18.8 and $19.5 million are included, respectively

²		Tax-exempt income has been adjusted to a tax equivalent basis at a 32% tax rate. The amount of such adjustments was an addition to recorded income of approximately $476 thousand and $332 thousand for the six months ended June 30, 2011 and 2010, respectively.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table sets forth changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the six months ended June 30, 2011 as compared to the same period in 2010. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionally between both variances.

Table 2 Analysis of Changes in Net Interest Income and Interest Expense (Unaudited)


(Dollars in thousands)	June 30, 2011 over June 30, 2010
	Variance Due to			Variance Due to
	Average Volume			Average Rate			Total

Increase (decrease)
Interest income:
Portfolio loans	$	119		$	(817	)	$	(698	)
Tax-exempt securities		485			(35	)		450
US government securities		87			(63	)		24
Mortgage backed securities		561			(219	)		342
Federal funds sold		—			(1	)		(1	)
Other securities		630			(21	)		609
Interest bearing due from banks		(16	)		20			4

Total increase (decrease)		1,866			(1,136	)		730


(Decrease) increase
Interest expense:
Interest bearing demand		13			(39	)		(26	)
Savings deposits		99			(64	)		35
Certificates of deposit		(220	)		(510	)		(730	)
Repurchase agreements		6			(6	)		—
Other borrowings		359			(506	)		(147	)

Total increase (decrease)		257			(1,125	)		(868	)


Net increase (decrease)	$	1,609		$	(11	)	$	1,598

Noninterest Income

Noninterest income includes service charges on deposit accounts, payroll processing fees, earnings on key life investments, gains on the sale of securities investments, and mortgage brokerage fee income.

Noninterest income for the three months ended June 30, 2011 was $3.6 million or 25.4% of total gross revenues compared to $3.3 million or 23.65% of total gross revenues during the same period in 2010. Noninterest income for the six months ended June 30, 2011 was $7.1 million or 24.73% of total gross revenues compared to $7.2 million or 25.68% of total gross revenues during the same period a year ago. The following table presents the key components of noninterest income for the three and six months ended June 30, 2011 and 2010:


(Dollars in thousands)	Three months ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010

Noninterest income:
Service charges on deposit accounts	$	52	$	62	$	102	$	144
Payroll and benefit processing fees		102		100		230		228
Earnings on cash surrender value — Bank owned life insurance		119		107		230		215
Net gain on sale of securities available-for-sale		655		133		913		1,064
Merchant credit card service income, net		33		64		303		117
Mortgage banking revenue, net		2,550		2,776		5,083		5,336
Other income		114		85		216		137

Total noninterest income	$	3,625	$	3,327	$	7,077	$	7,241

For the three and six months ended June 30, 2011, we recorded service charges on deposit accounts of $52 thousand and $102 thousand, respectively, as compared to $62 thousand and $144 thousand, respectively, for the same periods a year ago. The decrease in service charges was primarily attributable to the discontinuance of the Overdraft Privilege product, and decreased analysis fees charged to our customers.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

For the three and six months ended June 30, 2011, we recorded earnings on cash surrender value Bank owned life insurance of $119 thousand and $107 thousand, respectively, as compared to $107 thousand and $215 thousand, respectively, for the same periods a year ago. The increased income was primarily attributable to one time accrual adjustments, and the purchase of an additional policy.

For the three and six months ended June 30, 2011, we recorded securities gains of $655 thousand and $913 thousand, respectively, as compared to securities gains of $133 thousand and $1.1 million, respectively, for the three and six months ended June 30, 2010. The increased gains during the three months ended June 30, 2011 compared to the same period a year ago, resulted from increased sales activity pursuant to the liquidation and repositioning of the available-for-sale investment portfolio.

For the three and six months ended June 30, 2011, we recorded merchant credit card income of $33 thousand and $303 thousand, respectively, as compared to merchant credit card income of $64 thousand and $117 thousand, respectively for the same periods a year ago. During the first quarter of 2011, approximately 50% of the merchant credit card portfolio was sold to an independent third party, resulting in additional revenues of $225 thousand. Accordingly, merchant credit card income for the three months ended June 30, 2011 is down 48% compared to the same period a year ago.

Mortgage banking revenue for the three and six months ended June 30, 2011 decreased by 8.14% and 4.98% respectively, as compared to the same period a year ago, primarily driven by decreased origination and financing activity due to higher market interest rates. Closed mortgage volume for the six months ended June 30, 2011 was $355.9 million, representing an 18.43% decrease compared to the same period a year ago.

Noninterest Expense

Noninterest expense includes salaries and benefits, occupancy, write down of OREO, FDIC insurance assessments, director fees, and other expenses. Other expenses include overhead items such as utilities, telephone, insurance and licensing fees, and business travel.

Noninterest expense for the three months ended June 30, 2011 was $7.9 million compared to $7.5 million during the same period in 2010. Noninterest expense for the six months ended June 30, 2011 was $15.5 million compared to $14.7 million during the same period a year ago. The following table presents the key components of noninterest expense for the three and six months ended June 30, 2011 and 2010:


(Dollars in thousands)	Three months ended				Six months ended
	June 30,		June 30,		June 30,		June 30,
	2011		2010		2011		2010

Noninterest expense:
Salaries & related benefits	$	4,068	$	3,365	$	8,321	$	7,076
Occupancy & equipment expense		800		924		1,528		1,853
Write down of other real estate owned		370		1,064		557		1,245
FDIC insurance premium		363		254		735		505
Data processing fees		91		64		190		153
Professional service fees		595		543		1,169		943
Directors deferred fee compensation plan		131		122		258		240
Stationery & supplies		88		96		139		176
Postage		44		45		90		87
Directors’ expenses		67		68		141		152
Goodwill impairment		—		32		—		32
Other expenses		1,237		932		2,372		2,234

Total noninterest expense	$	7,854	$	7,509	$	15,500	$	14,696

Salaries and related benefits for the three months ended June 30, 2011 increased by $703 thousand or 20.89%, compared to the same period a year ago. Salaries and related benefits for the six months ended June 30, 2011 increased by $1.2 million or 17.59%, compared to the same period a year ago. During the last six months of fiscal year 2010, Mortgage Services transitioned existing independent contractors to full time equivalents, and increased staff due to growth in general operations, resulting in an increase in salaries and related benefits compared to the same periods a year ago.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Occupancy and equipment expense for the three months ended June 30, 2011 decreased by $124 thousand or 13.42%, compared to the same period a year ago. Occupancy and equipment expense for the six months ended June 30, 2011 decreased by $325 thousand, or 17.54%, compared to the same period a year ago. The decrease is primarily driven by decreased rent expense, and decreased equipment repairs, both pertaining to the mortgage subsidiary.

Write down of the Company’s other real estate owned decreased by $694 thousand and $688 thousand for the three and six months ended June 30, 2011, respectively, compared to the same period a year ago. During the three months ended June 30, 2010, management determined that further impairment on a specific commercial lot was necessary, resulting in a substantial write down of the property’s carrying value.

FDIC insurance premium expense for the three months ended June 30, 2011 increased by $109 thousand or 42.91%, compared to the same period a year ago. FDIC insurance premium expense for the six months ended June 30, 2011 increased by $230 thousand, or 45.54%, compared to the same period a year ago. The increase is primarily due to the FDIC’s revisions in deposit insurance assessments methodology for determining premiums, and prepayment true up adjustments.

Data processing expense for the three months ended June 30, 2011 increased by $27 thousand or 42.19%, compared to the same period a year ago. Data processing expense for the six months ended June 30, 2011 increased by $37 thousand, or 24.18%, compared to the same period a year ago. The increase is primarily attributable to new software additions and their associated licensing.

Professional service fees encompass audit, legal and consulting fees. The Company continues to experience increased expense in this area due to ongoing credit quality issues within the loan portfolio, and increased regulatory and financial reporting burdens.

Other expenses for the three months ended June 30, 2011 increased by $275 thousand or 28.59%, compared to the same period in the prior year, attributable primarily to increased losses on sale of other real estate owned, and increased regulatory compliance expense.

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 principal difference between statutory tax rates and our effective tax rate is the benefit derived investing in tax-exempt securities and preferential state tax treatment for qualified enterprise zone loans. We continue to participate in a California Affordable Housing project which affords federal and state tax credits. Increases and decreases in the provision for taxes reflect changes in our income before taxes.

The following table reflects the Company’s tax provision and the related effective tax rate for the periods indicated.


(Dollars in thousands)	Three months ended						Six months ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010

Income tax provision (benefit)	$	216		$	750		$	647		$	1,494
Effective tax rate		12.65	%		31.26	%		17.12	%		33.78	%

Income tax provisions (benefit) for the three months ended June 30, 2011 decreased by $534 thousand or 71.20%, compared to the same period a year ago. Income tax provisions (benefit) for the six months ended June 30, 2011 decreased by $847 thousand, or 56.69%, compared to the same period a year ago. The decrease is primarily driven by income tax benefits realized from the mortgage subsidiary. During the first six months of the year, the Mortgage Company subsidiary recognized a reduction in provision for income tax previously accrued of approximately $393 thousand. During 2010, the Company did not consider the benefit of the state tax deduction when deriving the federal tax provision. As such, this benefit was recognized during the first quarter of 2011.

The Company had a net deferred tax asset of $6.5 million at June 30, 2011. The Company does not reasonably estimate that the deferred tax asset will change significantly within the next twelve months. Deferred tax assets are recognized subject to management judgment that realization is more likely than not. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company files a consolidated federal and state income tax return. The Company determines deferred income tax assets and liabilities using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between book and tax basis of assets and liabilities, and recognizes enacted changes in tax rates and laws.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 2011 consist of the following:



	June 30,			June 30,
(Dollars in thousands)	2011			2010

Deferred tax assets:
State franchise taxes	$	101		$	162
Deferred compensation		2,658			2,446
Loan loss reserves		6,282			5,830
Unrealized gains on available-for-sale investment securities		(1,575	)		—
Other		823			271

Total deferred tax assets	$	8,289		$	8,709


Deferred tax liabilities:
State franchise taxes	$	(712	)	$	—
Unrealized gains on available-for-sale investment securities		—			(284	)
Depreciation		(78	)		(242	)
Deferred loan origination costs		(460	)		(412	)
Deferred state taxes		—			(644	)
Other		(495	)		(156	)

Total deferred tax liabilities	$	(1,745	)	$	(1,738	)


Net deferred tax asset	$	6,544		$	6,971

Asset Quality and Portfolio Concentration

We concentrate our portfolio lending activities primarily within El Dorado, Placer, Sacramento, Shasta, and Tehama counties in California, and the location of the Bank’s four full services branches, specifically identified as Northern California. We manage our credit risk through diversification of our loan portfolio and the application of underwriting policies and procedures and credit monitoring practices.

Generally, the loans are secured by real estate or other assets located in California and are expected to be repaid from cash flows of the borrower’s business or cash flows from real estate investments.

Although we have a diversified loan portfolio, a significant portion of its borrowers’ ability to repay the loans is dependent upon the professional services, commercial real estate market and the residential real estate development industry sectors. The loans are secured by real estate or other assets primarily located in California and are expected to be repaid from cash flows of the borrower or proceeds from the sale of collateral. As such, the Company’s dependence on real estate increases the risk of loss in the loan portfolio of the Company. Furthermore, declining real estate values negatively impact holdings of OREO as well.

The recent deterioration of the real estate market in California has had an adverse effect on the Company’s business, financial condition and results of operations. The slowdown in residential development and construction markets has led to an increase in nonperforming loans which has resulted in additional provisions to our ALL. Management has taken cautious yet decisive steps to ensure the proper funding of loan reserves. Given our current business environment, management’s top focus is on credit quality, expense control, and bottom line net income. All of these are affected either directly or indirectly by the Company’s management of its asset quality.

The Company’s practice is to place an asset on nonaccrual status when one of the following events occurs: (1) any installment of principal or interest is 90 days or more past due (unless in management’s opinion the loan is well-secured and in the process of collection), (2) management determines the ultimate collection of principal or interest to be unlikely, or (3) the terms of the loan have been renegotiated due to a serious weakening of the borrower’s financial condition. Nonperforming loans may be on nonaccrual, 90 days past due and still accruing, or have been restructured and are not performing to their modified terms. Accruals are resumed on loans only when they are brought fully current with respect to interest and principal and when the loan is estimated to be fully collectible.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continued)

One exception to the 90 days past due policy for nonaccruals is the Company’s pool of home equity loans and lines purchased from a private equity firm. The purchase of this pool of loans included a put option allowing the bank to sell a portion of the loan pool back to the private equity firm in the event of default by the borrower [each home equity loan that becomes ninety days past due will be sold back to the private equity firm for the outstanding principal balance, unless a workout plan has been put in place with the borrower]. Once this put reserve is exhausted, the bank will charge off any loans that go more than 90 days past due. As such, management does not expect to classify any of the loans from this pool as nonaccrual. Management believes that charging the entire loan balance off at the time it becomes impaired would be more conservative than placing it in nonaccrual status.

Total portfolio loans outstanding at June 30, 2011 were $582.4 million, a decrease of $5.4 million when compared to the same period a year ago. This decrease was primarily driven by $6.1 million in payoffs, and $1 million in charge offs relating to real estate construction loans. The following table presents the concentration distribution of the Company’s loan portfolio at June 30, 2011 and December 31, 2010.


(Dollars in thousands)	June 30, 2011		%			December 31, 2010		%

Commercial	$	140,610		23.60	%	$	130,579		21.73	%
Real estate — construction loans		26,357		4.42	%		41,327		6.88	%
Real estate — commercial (investor)		218,535		36.68	%		215,697		35.90	%
Real estate — commercial (owner occupied)		68,327		11.47	%		68,055		11.33	%
Real estate — ITIN loans		67,675		11.36	%		70,585		11.75	%
Real estate — mortgage		22,116		3.71	%		19,299		3.21	%
Real estate — equity lines		46,850		7.86	%		48,178		8.02	%
Consumer		5,271		0.88	%		6,775		1.13	%
Other		91		0.02	%		301		0.05	%

Gross portfolio loans	$	595,832		100.00	%	$	600,796		100.00	%
Less:
Deferred loan fees, net		51					90
Allowance for loan losses		13,363					12,841

Net portfolio loans	$	582,418				$	587,865

The following table provides a breakdown of the Company’s real estate construction portfolio as of June 30, 2011:

Dollars in thousands


			% of gross
Loan Type	Balance		portfolio loans

Commercial lots and entitled commercial land	$	8,363		1.40	%
Commercial real estate — construction		14,380		2.41	%
1-4 family subdivision loans		1,900		0.32	%
1-4 family individual residential lots		1,714		0.29	%

Total real estate — construction	$	26,357		4.42	%

Mortgages held for sale

Mortgages held for sale are not included in total net portfolio loans in the table above. Mortgages held for sale are generated through two pipelines: (1) Bank of Commerce Mortgage and (2) the Bank’s purchase program with Bank of Commerce Mortgage. In both cases our majority owned subsidiary Bank of Commerce Mortgage originates residential mortgage loans within Bank of Commerce’s geographic market, as well as on a nationwide basis. In scenario (1) above, the loans are funded through a warehouse line of credit with the Bank or other financial institutions, and are accounted for as loans held for sale at the Mortgage Subsidiary. Under scenario (2) above, the Bank purchases the mortgages at origination from the Mortgage Subsidiary, and are classified as held for sale at the Bank.

All mortgage loans originated through either pipeline represent loans collateralized by one to four family residential real estate and are made to borrowers in good credit standing. These loans are typically sold to primary mortgage market aggregators (Fannie Mae (FNMA), Freddie Mac (FHLMC), and Ginnie Mae (GNMA)) and to third party investors including the servicing rights. Mortgages held for sale are carried at the lower of cost or fair value. Cost generally approximates fair value, given the short duration of these assets. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of a loan. We generally sell all servicing rights associated with the mortgage loans. Accordingly, there are no separately recognized servicing assets or liabilities resulting from the sale of mortgage loans. As of June 30, 2011, the Company had $26.1 million in mortgages that were held for sale. These loans are not included in net portfolio loans listed in the table above.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Nonperforming Assets

The following table sets forth a summary of the Company’s nonperforming assets as of the dates indicated:

(Dollars in thousands)


	June 30,			December 31,
Nonperforming assets	2011			2010


Commercial	$	901		$	2,302
Real estate construction
Commercial real estate construction		1,973			100
Residential real estate construction		26			242

Total real estate construction		1,999			342
Real estate mortgage
1-4 family, closed end 1st lien		3,002			1,166
1-4 family revolving		—			97
ITIN 1-4 family loan pool		9,739			9,538
Home equity loan pool		—			—

Total real estate mortgage		12,741			10,801
Commercial real estate		3,282			7,066

Total nonaccrual loans		18,923			20,511
90 days past due and still accruing		953			—

Total nonperforming loans		19,876			20,511

Other real estate owned		1,793			2,288

Total nonperforming assets	$	21,669		$	22,799

Nonperforming loans to total loans		3.34	%		3.41	%
Nonperforming assets to total assets		2.49	%		2.43	%

Nonperforming assets adversely affect our net income in various ways. Until macroeconomic and local market conditions improve, we may expect to continue to incur losses relating to nonperforming assets. We generally do not record interest income on nonperforming loans or OREO, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we mark the respective assets to their fair market value which may result in the recognition of a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile.

While we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.

On March 12, 2010, the Company completed a loan swap transaction which included the purchase of a pool of residential mortgage home equity loans with a par value of $22.0 million. As of June 30, 2011, the Company had allocated $1.5 million towards this pool or 9.48% of the outstanding principal balance. An accompanying $1.5 million put reserve was also part of the loan swap transaction and represented a credit enhancement. As such, management considered the put reserve in estimating probable losses in the home equity portfolio.

At June 30, 2011, the remaining put reserve totaled $222 thousand or 1.38% of the outstanding principal balance. The put reserve is considered an irrevocable first loss guarantee from the seller that provides the Company the right to put back delinquent home equity loans to the seller that are 90 days or more delinquent up to an aggregate amount of $1.5 million. The guarantee is backed by a seller cash deposit with the Company that is restricted for this sole purpose. The seller’s cash deposit is classified as a deposit liability in the Company’s balance sheet. At the end of the term of the loss guarantee, on March 11, 2013, the Company is required to return the unused cash deposit to the seller.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The ITIN loan pool represents residential mortgage loans made to legal United States residents without a social security number and are geographically dispersed throughout the United States. The ITIN loan portfolio is serviced through a third party. Worsening economic conditions in the United States may cause us to suffer higher default rates on our ITIN loans and reduce the value of the assets that we hold as collateral. In addition, if we are forced to foreclose and service these ITIN properties ourselves, we may realize additional monitoring, servicing and appraisal costs due to the geographic disbursement of the portfolio which will adversely affect our noninterest expense.

As part of the original ITIN loan transaction, we obtained an irrevocable first loss guarantee from the seller that provided us the right to put back delinquent ITIN loans to the seller that were 90 days or more delinquent up to an aggregate amount of $3.5 million. This guarantee was backed by a seller cash deposit with the Company that was restricted for this sole purpose. The seller’s cash deposit was classified as a deposit liability in the Company’s balance sheet. At the end of the term of this loss guarantee, the Company was required to return the cash deposit to the seller to the extent not used to fund losses in the ITIN portfolio.

The Company accounted for the loans returned to the seller under the loss guarantee by derecognizing the loan, debiting cash and relieving the deposit liability. During the period from March 2010 to September 2010, thirteen ITIN loans with an aggregate principal amount of $1.4 million were returned to the seller under the loss guarantee, reducing the deposit liability to approximately $2.1 million prior to reaching a settlement with the seller to eliminate the loss guarantee arrangement. At the date of settlement, the Company received $1.8 million in cash and returned $300 thousand in cash to the seller from the deposit account. Accordingly, the Company recognized a gain upon settlement. As such, no portion of the remaining outstanding principal balance of the ITIN loan portfolio has an accompanying loss guarantee.

In conjunction with settlement of the loss guarantee, $1.8 million was expensed in provisions for loan losses, and specifically allocated in the ALL against the ITIN portfolio. The gain on settlement and the increase in loan loss provisions were two separate and distinct events. However, the two events are linked because upon eliminating the irrevocable loss guarantee from the seller, an increase in our ALL related to the ITIN loans was necessary; the following factors were considered in determining the specific ALL allocation to the ITIN Portfolio:

	•		Increasing delinquencies — 20% of the portfolio was delinquent 30 days or more as of December 31, 2010,

	•		Servicer modification efforts were generally extending beyond a typical timeframe,

	•		Mortgage insurance — A small number of mortgage insurance claims have been denied and management has not been able to identify a trend regarding any potential future denials,

	•		Sale of OREO — An emerging trend in the lengthening disposition of ITIN OREO had developed including the potential for decreased recoveries and consequently increased net charge offs,

	•		Lack of loss guaranty due to settlement.

As of March 31, 2011 and December 31, 2010, the specific ITIN ALL allocation represented approximately 4.45% and 4.05% of the total outstanding principal, respectively.

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

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 senior credit quality officers.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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 loan loss provisions or charge offs from the date they become known.

As of June 30, 2011, impaired loans totaled $43.9 million, of which $18.9 million were in nonaccrual status. Of the total impaired loans $13.3 million, or one hundred and forty-seven were ITIN loans with an average balance of approximately $90 thousand. The remaining nonaccrual loans consist of two commercial loans, three construction loans, four commercial real estate loans, and seven residential mortgages.

Loans are reported as TDRs when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it 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 the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. 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 allowance for loan losses.

TDRs are considered impaired loans, but are not necessarily placed on nonaccrual status. Rather, if the borrower is current at the time of the restructuring, and continues to pay as agreed, the loan is reported as current. As of June 30, 2011, there were $7.6 million of ITINs which were classified as TDRs, of which $4.1 million were on nonaccrual status.

As of June 30, 2011 the Company had $32.4 million in TDRs compared to $24.6 million as of December 31, 2010. As of June 30, 2011, the Company had one hundred and nine restructured loans that qualified as TDRs, of which fifty-eight were performing according to their restructured terms. TDRs represented 5.43% of gross portfolio loans as of June 30, 2011 compared with 4.10% at December 31, 2010.

The following table sets forth a summary of the Company’s restructured loans that qualify as TDRs:

(Dollars in thousands)


	June 30,		December 31,
Troubled debt restructurings	2011		2010

Nonaccrual	$	7,959	$	11,977
Accruing		24,410		12,668

Total troubled debt restructurings	$	32,369	$	24,645

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The following table summarizes the activity in the ALL reserves for the periods indicated.


	June 30,			December 31,			June 30,
(Dollars in thousands)	2011			2010			2010

Beginning balance	$	12,841		$	11,207		$	12,197
Provision for loan loss charged to expense		4,980			12,850			1,600
Loans charged off		(5,132	)		(12,089	)		(1,194	)
Loan loss recoveries		674			873			164

Ending balance	$	13,363		$	12,841		$	12,767

Gross portfolio loans outstanding at period end	$	595,832		$	600,796		$	613,792

Ratio of allowance for loan losses to total loans		2.24	%		2.14	%		2.08	%
Nonaccrual loans at period end:
Commercial	$	901		$	2,302		$	3,404
Construction		1,999			342			2,415
Commercial real estate		3,282			7,066			9,601
Residential real estate		12,741			10,704			6,910
Home equity		—			97			499

Total nonaccrual loans	$	18,923		$	20,511		$	22,829
Accruing troubled debt restructured loans
Commercial	$	—		$	—		$	484
Construction		108			2,804			2,320
Commercial real estate		17,304			3,621			1,164
Residential real estate		6,569			6,243			5,120
Home equity		429			—			—

Total accruing restructured loans	$	24,410		$	12,668		$	9,088

All other accruing impaired loans		539			737			—


Total impaired loans	$	43,872		$	33,916		$	31,917


Allowance for loan losses to nonaccrual loans at period end		70.62	%		62.61	%		55.92	%
Nonaccrual loans to total loans		3.18	%		3.41	%		3.72	%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
QUARTERLY INCOME STATEMENT


	June 30,		March 31,			December 31,		September 30,		June 30,
(Amounts in thousands)	2011		2011			2010		2010		2010

Interest income:
Interest and fees on loans	$	8,958	$	9,033		$	9,635	$	9,710	$	9,511
Interest on tax-exempt securities		478		532			524		465		381
Interest on U.S. government securities		633		678			505		633		507
Interest on federal funds sold and securities purchased under agreement to resell		—		—			—		1		—
Interest on other securities		577		651			529		471		342

Total interest income		10,646		10,894			11,193		11,280		10,741
Interest expense:
Interest on demand deposits		204		226			261		251		226
Interest on savings deposits		229		246			244		237		221
Interest on certificates of deposit		1,272		1,313			1,383		1,453		1,554
Securities sold under agreements to repurchase		13		14			12		13		15
Interest on FHLB borrowings		148		164			181		178		138
Interest on other borrowings		263		266			495		470		406

Total interest expense		2,129		2,229			2,576		2,602		2,560

Net interest income		8,517		8,665			8,617		8,678		8,181
Provision for loan and lease losses		2,580		2,400			4,550		4,450		1,600

Net interest income after provision for loan losses		5,937		6,265			4,067		4,228		6,581
Noninterest income:
Service charges on deposit accounts		52		50			53		63		62
Payroll and benefit processing fees		102		128			113		107		100
Earnings on cash surrender value — Bank owned life insurance		119		111			111		112		107
Net gain on sale of securities available-for-sale		655		258			738		179		133
Gain on settlement of put reserve		—		—			—		1,750		—
Merchant credit card service income, net		33		270			53		65		64
Mortgage brokerage fee income		2,550		2,533			5,711		3,281		2,776
Other income		114		102			123		91		85

Total noninterest income		3,625		3,452			6,902		5,648		3,327
Noninterest expense:
Salaries and related benefits		4,068		4,253			4,665		4,162		3,365
Occupancy and equipment expense		800		728			855		952		924
Write down of other real estate owned		370		187			196		129		1,064
FDIC insurance premium		363		372			261		250		254
Data processing fees		91		99			65		52		64
Professional service fees		595		574			567		216		543
Deferred compensation expense		131		127			127		126		122
Stationery and supplies		88		51			47		35		96
Postage		44		46			53		58		45
Directors’ expense		67		74			58		56		68
Other expenses		1,237		1,135			1,445		1,260		964

Total noninterest expense		7,854		7,646			8,339		7,296		7,509

Income before provision for income taxes		1,708		2,071			2,630		2,580		2,399
Provision for income taxes		216		431			749		916		750

Net Income		1,492		1,640			1,881		1,664		1,649
Less: Net income (loss) attributable to non- controlling interest		6		(24	)		260		105		144
Net income attributable to Bank of Commerce Holdings	$	1,486	$	1,664		$	1,621	$	1,559	$	1,505

Less: Preferred dividend and accretion on preferred stock	$	235	$	235		$	235	$	235	$	236
Income available to common stockholders	$	1,251	$	1,429		$	1,386	$	1,324	$	1,269

Basic earnings per share	$	0.07	$	0.08		$	0.08	$	0.08	$	0.08
Weighted average shares — basic		16,991		16,991			16,991		16,991		16,837
Diluted earnings per share	$	0.07	$	0.08		$	0.08	$	0.08	$	0.08
Weighted average shares — diluted		16,991		16,991			16,991		16,991		16,837
Cash dividends declared	$	0.03	$	0.03		$	0.03	$	0.03	$	0.06

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as interest rates. The risk is inherent in the financial instruments associated with our operations and activities including loans, deposits, securities, short term borrowings, long term debt and derivatives. Market-sensitive assets and liabilities are generated through loans and deposits associated with our banking business, our Asset/Liability Management (“ALM”) process, and credit risk mitigation activities. Traditional loan and deposit products are reported at amortized cost for assets or the amount owed for liabilities. These positions are subject to changes in economic value based on varying market conditions. Interest rate risk is the effect of changes in economic value of our loans and deposits, as well as our other interest rate sensitive instruments, and is reflected in the levels of future income and expense produced by these positions versus levels that would be generated by current levels of interest rates. We seek to mitigate interest rate risk as part of the ALM process.

Interest rate risk represents the most significant market risk exposure to our financial instruments. Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not adversely affect net interest income. Interest rates risk is measured as the potential volatility in our net interest income caused by changes in market interest rates. Lending and deposit gathering creates interest rate sensitive positions on our balance sheet. Interest rate risk from these activities as well as the impact of ever changing market conditions is mitigated using the ALM process. We do not operate a trading account and do not hold a position with exposure to foreign currency exchange or commodities. We face market risk through interest rate volatility.

The Board of Directors has overall responsibility for our interest rate risk management policies. ALCO establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. The internal ALCO Roundtable group maintains a net interest income forecast using different rate scenarios via a simulation model. This group updates the net interest income forecast for changing assumptions and differing outlooks based on economic and market conditions.

The simulation model used includes measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative sensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experience, recognizing the timing differences of rate changes. In the simulation of net interest margin and net income the forecast balance sheet is processed against five rate scenarios. These five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in the future and four additional rate ramp scenarios ranging for + 400 to — 400 basis points in 100 basis point increments, unless the rate environment cannot move in these basis point increments before reaching zero.

The formal policies and practices we adopted to monitor and manage interest rate risk exposure measure risk in two ways: (1) repricing opportunities for earning assets and interest bearing liabilities, and (2) changes in net interest income for declining interest rate shocks of 100 to 400 basis points.

Because of our predisposition to variable rate pricing and noninterest bearing demand deposit accounts, we are normally considered asset sensitive. However, with the current historically low interest rate environment, the market rates on many of our variable-rate loans are below their respective floors. Consequently, we would not immediately benefit in a rising rate environment. Based on the most recent model run, we are considered liability sensitive in the 100 basis point to 400 basis point upward rate shock. As a result, management anticipates that, in a rising interest rate environment, our net interest income and margin would generally be expected to decline, as well as in a declining interest rate environment. However, given that the model assumes a static balance sheet, no assurance can be given that under such circumstances we would experience the described relationships to declining or increasing interest rates.

To estimate the effect of interest rate shocks on our net interest income, management uses a model to prepare an analysis of interest rate risk exposure. Such analysis calculates the change in net interest income given a change in the federal funds rate of 100, 200, 300 or 400 basis points up or down. All changes are measured in dollars and are compared to projected net interest income. Given the historically low interest rates we are currently experiencing, we are currently only running the model for 100 and 200 basis points in a down rate scenario. The most recent model results indicate the estimated annualized reduction in net interest income attributable to 100 and 200 basis point declines in the federal funds rate was $784,030 and $1,744,069, respectively.

The Federal Reserve currently has the federal funds rate targeted between zero to twenty five basis points. Accordingly, the Company is focused on the affects of interest rate shocks on our net interest income during a rising rate environment. The most recent model results indicate the estimated annualized decrease in net interest income attributable to 100, 200, and 300 basis point increases in the federal funds rate was $355,478, $401,310, and $162,047, respectively. When shocked 400 basis points, the model shows a net interest income increase of $163,469.

ALCO has established a policy limitation to interest rate risk of -28% of the net interest margin and -40% of the present value of equity. The securities portfolio is integral to our asset/liability management process. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity, regulatory requirements and the relative mix of our cash positions.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

Management believes that the short duration of its rate-sensitive assets and liabilities contributes to its ability to re-price a significant amount of its rate-sensitive assets and liabilities and mitigate the impact of rate changes in excess of 100, 200, 300, or 400 basis points. The model’s primary benefit to management is its assistance in evaluating the impact that future strategies, with respect to our mix and level of rate-sensitive assets and liabilities, will have on our net interest income.

Our approach to managing interest rate risk may include the use of derivatives, including interest rate swaps, caps and floors. This helps to minimize significant, unplanned fluctuations in earnings, fair values of assets and liabilities and cash flows caused by interest rate volatility. This approach involves an off-balance sheet instrument with the same characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect of this unrealized gain or loss will generally be offset by income or loss on the derivatives linked to the hedged assets and liabilities. For a cash flow hedge, the change in the fair value of the derivative to the extent that it is effective is recorded through other comprehensive income.

At inception, the relationship between hedging instruments and hedged items is formally documented with our risk management objective, strategy and our evaluation of effectiveness of the hedge transactions. This includes linking all derivatives designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific transactions. Periodically, as required, we formally assess whether the derivative we designated in the hedging relationship is expected to be and has been highly effective in offsetting changes in fair values or cash flows of the hedged item.

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 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 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 financial statements.

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

On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer (whom is also our Principal Accounting Officer) of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. As of June 30, 2011, 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 second quarter of 2011 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various pending and threatened legal actions arising in the ordinary course of business. The Company maintains reserves for losses from legal actions, which are both probable and estimable. In the opinion of management, the disposition of claims currently pending will not have a material adverse affect on the Company’s 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, 2010, filed with the SEC on March 4, 2011.

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

We did not have any unregistered sales of our equity securities within the past three years ended June 30, 2011.

Item 3. Defaults Upon Senior Securities

N/A.

Item 4. (Removed and Reserved)

N/A

Item 5. Other Information

N/A

Item 6. Exhibits

(31.1)		Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002

(31.2)		Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002

(32.0)		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002

SIGNATURES

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


	BANK OF COMMERCE HOLDINGS (Registrant)
Date: August 5, 2011	/s/ Samuel D. Jimenez
	Samuel D. Jimenez
	Executive Vice President and Chief Financial Officer

Bank of Commerce Holdings - FORM 10-Q - August 5, 2011

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