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

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

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 o 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)

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 July 31, 2010: 16,991,845

 

 

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, 2010, December 31, 2009 and June 30, 2009			3
				Condensed Consolidated Statements of Income Three and Six Months Ended June 30, 2010 and June 30, 2009			4
				Condensed Consolidated Statement of Stockholders’ Equity Three and Six Months Ended June 30, 2010			5
				Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2010 and 2009			6
				Notes to unaudited Condensed Consolidated Financial Statements			7
Item 2				Management’s Discussion and Analysis Of Financial Condition and Results of Operations			26
Item 3				Quantitative and Qualitative Disclosure about Market Risk			59
Item 4T				Controls and Procedures			61
PART II.				OTHER INFORMATION
Item 1				Legal Proceedings			61
Item 1a				Risk Factors			62
Item 2				Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 3				Defaults Upon Senior Securities			63
Item 4				(Removed and Reserved)			63
Item 5				Other Information			63
Item 6				Exhibits			63
				SIGNATURE PAGE			64
EX-31.1
EX-31.2
EX-32.0

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2010 (unaudited), December 31, 2009 and June 30, 2009 (unaudited)

		June 30,				December 31,				June 30,
(Dollars in thousands)		2010				2009				2009
ASSETS
Cash and due from banks, noninterest bearing		$	36,815			$	36,902			$	36,352
Interest bearing due from banks			39,492				31,338				27,512
Federal funds sold and securities purchased under agreements to resell			—				—				15,140
Cash and cash equivalents			76,307				68,240				79,004
Securities available-for-sale, at fair value (including pledged collateral of $42,079 at June 30, 2010, $55,672 at December 31, 2009 and $60,678 at June 30, 2009)			176,001				80,062				75,480
Portfolio Loans, net of the allowance for loan losses of $12,767 at June 30, 2010, $11,207 at December 31, 2009 and $8,496 at June 30, 2009			600,832				590,023				587,637
Mortgage loans held for sale			26,875				27,288				20,225
Bank premises and equipment, net			9,988				9,980				10,586
Goodwill			3,695				3,727				3,727
Other real estate owned			2,039				2,880				3,229
Other assets			34,008				31,206				27,231
TOTAL ASSETS		$	929,745			$	813,406			$	807,119
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand — noninterest bearing		$	66,040			$	69,448			$	69,957
Demand — interest bearing			165,871				163,814				142,210
Savings accounts			76,438				65,414				59,432
Certificates of deposit			334,676				341,788				295,508
Total deposits			643,025				640,464				567,107
Securities sold under agreements to repurchase			13,444				9,621				10,843
Federal Home Loan Bank and Federal Reserve Bank borrowings			145,000				70,000				120,000
Mortgage warehouse lines of credit			—				—				17,512
Other liabilities			10,118				9,050				9,344
Junior subordinated debt payable to unconsolidated subsidiary grantor trust			15,465				15,465				15,465
Total Liabilities			827,052				744,600				740,271
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, 2010, December 31, 2009, and June 30, 2009			16,686				16,641				16,596
Common stock , no par value, 50,000,000 shares authorized; 16,991,495 shares issued and outstanding at June 30, 2010, 8,711,495 issued and outstanding on December 31, 2009 and at June 30, 2009			42,870				9,730				9,688
Common stock warrant			449				449				449
Retained earnings			40,031				39,004				37,922
Accumulated other comprehensive income, net of tax			443				657				30
Total Equity — Bank of Commerce Holdings			100,479				66,481				64,685
Non controlling interest in subsidiary			2,214				2,325				2,163
Total stockholders’ equity			102,693				68,806				66,848
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	929,745			$	813,406			$	807,119

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, 2010 and June 30, 2009 (Unaudited)

		For Three Months Ended:								For Six Months Ended:
		June 30,				June 30,				June 30,				June 30,
(Amounts in thousands, except for per share data)		2010				2009				2010				2009
Interest income:
Interest and fees on loans		$	9,302			$	9,272			$	18,353			$	17,321
Interest on tax-exempt securities			381				279				703				575
Interest on U.S. government securities			507				954				945				2,146
Interest on federal funds sold and securities purchased under agreements to resell			—				5				1				30
Interest on other securities			343				131				614				248
Total interest income			10,533				10,641				20,616				20,320
Interest expense:
Interest on demand deposits			226				239				456				546
Interest on savings deposits			221				238				440				519
Interest on certificates of deposit			1,554				1,900				3,315				3,781
Securities sold under agreements to repurchase			15				11				27				25
Interest on FHLB and other borrowings			138				539				274				1,120
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trust			207				216				415				431
Total interest expense			2,361				3,143				4,927				6,422
Net interest income			8,172				7,498				15,689				13,898
Provision for loan and lease losses			1,600				3,056				3,850				4,481
Net interest income after provision for loan losses			6,572				4,442				11,839				9,417
Noninterest income:
Service charges on deposit accounts			62				96				144				188
Payroll and benefit processing fees			100				104				228				238
Earnings on cash surrender value - Bank owned life insurance			107				117				215				203
Net gain on sale of securities available-for-sale			133				1,074				1,064				1,478
Net gain on transfer of financial assets			—				340				—				340
Merchant credit card service income, net			64				75				117				149
Mortgage brokerage fee income			2,753				1,302				5,292				1,302
Other income			118				87				219				162
Total noninterest income			3,337				3,195				7,279				4,060
Noninterest expense:
Salaries and related benefits			3,365				2,644				7,076				4,771
Occupancy and equipment expense			924				730				1,853				1,302
Write down of other real estate owned			1,064				—				1,245				—
FDIC insurance premium			254				301				505				574
Data processing fees			64				68				153				179
Professional service fees			543				295				943				454
Deferred compensation expense			122				123				240				242
Stationery and supplies			96				26				176				79
Postage			45				76				87				157
Directors’ expense			68				120				152				157
Goodwill impairment			32				—				32				—
Other expenses			929				510				2,229				938
Total noninterest expense			7,510				4,893				14,695				8,853
Income before provision for income taxes			2,399				2,744				4,423				4,624
Provision for income taxes			750				1,027				1,494				1,637
Net Income			1,649				1,717				2,929				2,987
Less: Net income (loss) attributable to non-controlling interest			144				101				(111	)			101
Net Income attributable to Bank of Commerce Holdings		$	1,505			$	1,616			$	3,040			$	2,886
Less: preferred dividend and accretion on preferred stock			236				235				471				472
Income available to common shareholders		$	1,269			$	1,381			$	2,569			$	2,414
Basic earnings per share		$	0.08			$	0.16			$	0.20			$	0.28
Weighted average shares — basic			16,837				8,711				12,877				8,711
Diluted earnings per share		$	0.08			$	0.16			$	0.20			$	0.28
Weighted average shares — diluted			16,837				8,712				12,877				8,712
Cash Dividends declared		$	0.06			$	0.00			$	0.12			$	0.06

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
Three and Six Months Ended June 30, 2010 (Unaudited)

																										Accumulated Other
																										Comp - Income				Subtotal				Non Controlling
		Comprehensive				Preferred								Common				Stock								(Loss),				Bank of Commerce				Interest in
(Dollars in Thousands)		Income				Amount				Warrant				Shares				Amount				Retained Earnings				net of tax				Holdings				Subsidiary				Total
Balance at December 31, 2009						$	16,641			$	449				8,711,495			$	9,730			$	39,004			$	657			$	66,481			$	2,325			$	68,806
Comprehensive Income:
Net Income (loss)		$	1,280																				1,535								1,535				(255	)			1,280
Other Comprehensive Income:
Unrealized gains on securities, net of tax			244
Less: reclassification adjustment for gains included in net income, net of tax			(549	)
Total Other Comprehensive Income			975
Less: Other Comprehensive loss non-controlling interest			(255	)
Total Comprehensive Income - BOCH		$	1,230																								(304	)			(304	)							(304	)
Accretion on Preferred Stock							22																(22	)							—								—
Common cash dividends ($0.06 per share)																							(523	)							(523	)							(523	)
Preferred stock dividend																							(213	)							(213	)							(213	)
Compensation expense associated with stock options																			13												13								13
Issuance of new shares, net of issuance costs ($4.25 per share)															7,200,000				28,752												28,752								28,752
Balance at March 31, 2010						$	16,663			$	449				15,911,495			$	38,495			$	39,781			$	353			$	95,741			$	,2,070			$	97,811
Comprehensive Income:
Net Income		$	1,649																				1,505								1,505				144				1,649
Other Comprehensive Income:
Unrealized gains on securities, net of tax			167
Less: reclassification adjustment for gains included in net income, net of tax			(78	)
Total Other Comprehensive Income			1,738
Less: Other Comprehensive income non-controlling interest			144
Total Comprehensive Income - BOCH		$	1,594																								90				90								90
Accretion on Preferred Stock							23																(23	)
Common cash dividends ($0.06 per share)																							(1,019	)							(1,019	)							(1,019	)
Preferred stock dividend																							(213	)							(213	)							(213	)
Compensation expense associated with stock options																			14												14								14
Issuance of new shares, net of issuance costs ($4.25 per share)															1,080,000				4,361												4,361								4,361
Balance at June 30, 2010						$	16,686			$	449				16,991,495			$	42,870			$	40,031			$	443			$	100,479			$	2,214			$	102,693

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, 2010 and 2009

		June 30,				June 30,
(Dollars in thousands)		2010				2009
Cash flows from operating activities:
Net income		$	2,929			$	2,987
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses			3,850				4,481
Provision for depreciation and amortization			473				592
Goodwill Impairment			32				—
Compensation expense associated with stock options			27				38
Gain on transfer of financial assets			—				(340	)
Gross proceeds from sales of loans held for sale			291,689				115,836
Gross originations of loans held for sale			(291,276	)			(125,096	)
Gain on sale of securities available-for-sale			(1,064	)			(1,478	)
Amortization of investment premiums and accretion of discounts, net			42				(61	)
Loss on sale of other real estate owned			84				—
Write down of other real estate owned			1,249				—
Increase in deferred income taxes			(861	)			(809	)
Increase in cash surrender value of bank owned life policies			(184	)			(1,379	)
Effect of changes in:
Other assets			(3,086	)			(777	)
Deferred compensation			240				216
Deferred loan fees			(15	)			167
Other liabilities			322				(1,652	)
Net cash from (used in) operating activities			4,451				(7,275	)
Cash flows from investing activities:
Proceeds from maturities and payments of available for sale securities			14,808				19,734
Proceeds from sales of available-for-sale securities			24,205				54,427
Purchases of available-for-sale securities			(134,296	)			(16,004	)
Purchase of ITIN loan portfolio			—				(66,696	)
Purchases of home equity loan portfolio			(14,801	)			—
Loan origination, net of principal repayments			1,050				(5,267	)
Purchases of Bank premises and equipment, net			(551	)			(326	)
Proceeds from the sales of other real estate owned			175				—
Cash acquired in merger, net of cash consideration paid			—				265
Net cash from (used in) investing activities			(109,410	)			(13,867	)
Cash flows from financing activities:
Net increase (decrease) in demand deposits and savings accounts			9,673				(19,419	)
Net increase (decrease) increase in certificates of deposit			(7,112	)			31,221
Net increase (decrease) in securities sold under agreement to repurchase			3,823				(3,009	)
Net change in FHLB advances			75,000				(20,000	)
Net change in other short term borrowings			—				27,809
Cash dividends paid on common stock			(1,045	)			(1,220	)
Cash dividends paid on preferred stock			(426	)			(427	)
Net proceeds from issuance of common stock			33,113				—
Net cash from financing activities			113,026				14,955
Net increase (decrease) in cash and cash equivalents			8,067				(6,187	)
Cash and cash equivalents, beginning of period			68,240				85,191
Cash and cash equivalents, end of period		$	76,307			$	79,004
Supplemental disclosures:
Cash paid during the period for:
Income taxes		$	2,382			$	1,132
Interest			4,848				6,474
Transfer of loans to other real estate owned			667				3,229

See accompanying notes to condensed consolidated financial statements.

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

1. Summary of Significant Accounting Policies

Bank of Commerce Holdings 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 Bank of Commerce Holdings (the “Holding Company”) and its wholly owned subsidiaries Redding Bank of Commerce™ and Roseville 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 condensed consolidated balance sheet as of December 31, 2009, which has been derived from audited financial statements audited by Moss Adams, LLP, a registered public accounting firm, as indicated in their report not included herein, and the unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 U.S. generally accepted accounting principles (GAAP) and general practices within the banking industry. In preparing the consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions about future economic and market conditions 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. Although our estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect the Company’s results of operations and financial condition. Management has made significant estimates in several areas, including the evaluation of other-than-temporary impairment on investment securities, allowance for loan and lease losses, and income taxes. Actual results could differ from those estimates. Among other effects, such changes could result in future impairments of investment securities, increases to the allowance for loan and lease losses, and changes to tax positions.

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 2009 Annual Report on Form 10-K. The results of operations and cash flows for the 2010 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.

2. Business Combinations

A business combination occurs when an entity acquires net assets that constitute a business, or acquires equity interests in one or more other entities that are businesses and obtains control over those entities. Business combinations may be effected through the transfer of consideration such as cash, other financial or non-financial assets, debt, or common or preferred shares. The assets and liabilities of an acquired entity or business are recorded at their respective fair values as of the closing date of the transaction.

The results of operations of an acquired entity are included in our consolidated results from the closing date of the transaction, and prior periods are not restated. All business combinations are accounted for using the acquisition method.

The Company will regularly explore opportunities to acquire financial services companies and businesses. Public announcements about an acquisition opportunity are not made until a definitive agreement has been signed. In the second quarter 2009, the Company entered into a stock purchase agreement with Simonich Corporation d.b.a. BWC Mortgage Services to acquire 51% of the capital stock of Simonich Corporation. Simonich Corporation d.b.a. BWC Mortgage Services is a successful state of the art mortgage broker of residential real estate loans with ten offices in three different states and licenses in California, Oregon, Idaho and Nevada. The business was formed in 1993 and the corporate offices are located in San Ramon, California. The Corporate offices are located in San Ramon, California.

The agreement was dated May 15, 2009. The total consideration paid by the Company was $2.5 million, with $1.5 million paid at closing and the additional $1.0 million to be earned-out over a period of three years. The earn-out is based upon the mortgage company’s profits and will be paid in annual installments over the three year period. The measurement date for the earn out payments is December 31. The Company has accounted for the business combination using the acquisition method. The Company’s acquisition of 51% majority ownership interest was measured at fair value based on the total consideration transferred.

The market and income approaches were used to value the business. The total estimated fair value of the non controlling interest was estimated to be $2.06 million and was based on the following multiples: 13.27 times trailing twelve months earnings, 29.21% price to trailing twelve months gross revenues and 436.70% of total shareholders equity.

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

The agreement allows the Company to penetrate into the Mortgage Brokerage Services market through our retail outlets and to share in the income on transactions produced from other locations. Effective July 1, 2009 the Company changed its name to Bank of Commerce Mortgage™.

Purchase Price and Goodwill

The following table summarizes the purchase and resulting goodwill:

(Dollars in thousands)
Goodwill
Total consideration at fair value		$	2,465
Fair value of non-controlling interest			2,062
		$	4,527
Acquisition date fair value of net assets acquired			($800	)
Goodwill at date of acquisition		$	3,727

Total consideration paid in the acquisition consisted of $1.5 million in cash and $965 thousand in contingent consideration measured at fair value. No assets or liabilities arose out of contingencies. Goodwill totaling $3.7 million is not being amortized for book purposes under current accounting guidelines. Goodwill is not deductible for tax purposes. No other intangible assets, other than goodwill were recorded as a result of the business combination.

The following table represents the pro-forma income statement as if the acquisition had occurred on January 1, 2009:

(Dollars in thousands)						Six Months Ended June 30, 2009
Pro-Forma Income Statement		Bank				Mortgage				Parent				Intercompany				Consolidated
Interest income:
Total interest income		$	20,165				—			$	182			$	(27	)		$	20,320
Interest expense:
Total interest expense			6,015				3				431				(27	)			6,422
Net interest income			14,150				(3	)			(249	)							13,898
Provision for loan and lease losses			4,475				6				—				—				4,481
Net interest income after provision for loan losses			9,675				(9	)			(249	)			—				9,417
Noninterest income:
Mortgage brokerage fee income			8				3,939				—				—				3,947
Other noninterest income			2,758				—				—				—				2,758
Total noninterest income			2,766				3,939								—				6,705
Noninterest expense:
Salaries and related benefits			4,148				1,959				65				—				6,172
Occupancy and equipment expense			1,215				449				—				—				1,664
Other noninterest expense			2,420				699				98				—				3,217
Total noninterest expense			7,783				3,107				163				—				11,053
Income before provision for income taxes			4,658				823				(412	)			—				5,069
Provision for income taxes			1,466				173				—				—				1,639
Net Income			3,192				650				(412	)			—				3,430
Less: Net income attributable to non-controlling interest			—				319				—				—				319
Net Income attributable to Bank of Commerce Holdings		$	3,192			$	331			$	(412	)			—			$	3,111
Less: Preferred dividend and accretion on preferred stock			—				—				472				—				472
Income available to common shareholders		$	3,192			$	331			$	(884	)			—			$	2,639

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

3. Recent Accounting Pronouncements

FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310), was issued July 2010. The guidance will significantly expand the disclosures that the Company must make about the credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide financial statement users with additional information about the nature of credit risks inherent in the Company’s financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses.

The disclosures as of the end of the reporting period are effective for the Company’s interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update requires enhanced disclosures and is not expected to have a significant effect on the Company’s financial statements.

FASB ASU 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset (Topic 310), was issued April 2010 and is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending after July 15, 2010. As a result of the amendments in this Update, modification of loans within the pool does not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a trouble debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. However, loans within the scope of Subtopic 310-30 that are accounted for individually will continue to be subject to the troubled debt restructuring accounting provisions.

The provisions of this Update will be applied prospectively with early application permitted. Upon initial adoption of the guidance in this Update, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. The election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.

The Company does not have any pools of loans accounted for in accordance with Subtopic 310-30, and therefore, the adoption of this Update will not have a significant effect on the Company’s financial statements.

FASB ASU 2010-13 Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in EITF No. 09-J. The amendments to the codification clarify that an employee share-based payment award with an exercise price in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not market, performance or service condition. Therefore, equity would not classify such an award as a liability if it otherwise classifies as equity. As our current share-based payment awards are equity awards (exercise price is denominated in dollars in the U.S. where our stock is traded), this ASU does not have an impact on our financial condition or results of operations.

FASB ASU 2010-09 Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements was issued on February 24, 2010. The amendments in the ASU remove the requirement for a Securities and Exchange Commission (“SEC”) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. generally accepted accounting principals (“U.S. GAAP”). The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance, except for the use of the issued date for conduit debt obligors, which will be effective for interim or annual periods ending after June 15, 2010.

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

FASB ASU 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements was issued in January 2010. This ASU requires: (1) disclosure of the significant amount transferred in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers; and (2) separate presentation of purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures set forth in FASB Accounting Standards Codification™ (The “Codification” or “ASC”) Subtopic 820-10: (1) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (2) A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within those fiscal years. Our adoption of this ASU in the first quarter of 2010 did not have an impact on our financial condition or results of operations.

FASB ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash was also issued in January 2010 and was issued to clarify the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods beginning January 1, 2010. We currently do not make distributions to shareholders with a stock component.

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

4. Earnings per Share

Basic earnings per share 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. The following table displays the computation of earnings per share for the three and six months ended June 30, 2010 and 2009.

(Dollars in thousands, except per share data)		Three Months Ended:								Six Months Ended:
Earnings Per Share		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
Basic EPS Calculation:
Net Income attributable to Bank of Commerce Holdings		$	1,505			$	1,616			$	3,040			$	2,886
Less: dividend on Preferred Stock			213				213				426				427
Less: accretion on Preferred Stock			23				22				45				45
Numerator: Earnings available to common stockholders		$	1,269			$	1,381				2,569			$	2,414
Denominator (average common shares outstanding)			16,837				8,711				12,877				8,711
Basic earnings per Share		$	0.08			$	0.16			$	0.20			$	0.28
Diluted EPS Calculation:
Net Income attributable to Bank of Commerce Holdings		$	1,505			$	1,616			$	3,040			$	2,886
Less: dividend on Preferred Stock			213				213				426				427
Less: accretion on Preferred Stock			23				22				45				45
Numerator: Earnings available to common stockholders		$	1,269			$	1,381			$	2,569			$	2,414
Denominator:
Average common shares outstanding			16,837				8,711				12,877				8711
Plus incremental shares from assumed conversions			—
Stock Options			—				1				—				1
Warrants			—				—				—				—
			16,837				8,712				12,877				8,712
Diluted earnings per Share		$	0.08			$	0.16			$	0.20			$	0.28
Anti-dilutive options not included in EPS Calculation			282				188				282				188
Anti-dilutive warrants not included in EPS Calculation			405				405				405				405

5. Stock Option Plans

For the first six months of 2010, stock option compensation expense charged against income was $27,244 compared to $38,336 at June 30, 2009. At June 30, 2010, there was $60,012 of total unrecognized compensation costs related to non-vested share based payments for named officers and directors. This amount is expected to be recognized over a period of 4.2 years. No options were granted or exercised during the first six months of 2010. Stock options totaling 4,200 at an average price of 5.06 expired during the period ended June 30, 2010.

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

6. Securities Available-for-Sale

The Company’s available-for-sale securities consists of both debt and marketable equity securities. The portfolio is comprised of U.S. Treasury securities, U.S. Agency securities, mortgage-backed securities, and obligations of states and political subdivisions. Securities classified as available-for-sale are recorded at fair value. Unrealized gains and losses, after applicable income taxes, are reported in cumulative other comprehensive income. The Company uses the most current market quotations to estimate the fair value of these securities. The Company does not include federal funds sold as securities. These investments are included in cash and cash equivalents. Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold.

Total available-for-sale securities increased $96 million or 120% at June 30, 2010 compared to December 31, 2009. As of June 30, 2010, the Company has pledged a total of $42.1 million of securities for treasury, tax and loan accounts; public funds collateral; collateralized repurchase agreements and Federal Home Loan Bank borrowings.

The following table summarizes the amortized cost of the Company’s available-for-sale securities at:

						As of June 30, 2010
(Dollars in thousands)						Gross				Gross				Estimated
Available for sale securities		Amortized Costs				Unrealized Gains				Unrealized Losses				Fair Value
U.S. Treasury and agencies		$	34,734			$	86			$	(2	)		$	34,818
Obligations of state and political subdivisions			58,022				604				(291	)			58,335
Residential mortgage backed securities and collateralized mortgage obligations			77,453				492				(212	)			77,733
Other asset backed securities			5,057				58				—				5,115
Total		$	175,266			$	1,240			$	(505	)		$	176,001

						As of December 31, 2009
(Dollars in thousands)						Gross				Gross				Estimated
Available for sale securities		Amortized Costs				Unrealized Gains				Unrealized Losses				Fair Value
U.S.- Treasury and agencies		$	18,500			$	101			$	—			$	18,601
Obligations of state and political subdivisions			32,184				547				(85	)			32,646
Residential mortgage backed securities and collateralized mortgage obligations			28,278				869				(332	)			28,815
Total		$	78,962			$	1,517			$	(417	)		$	80,062

The amortized cost and estimated fair value of available-for-sale securities at June 30, 2010 are shown below.

(Dollars in thousands)		Amortized Cost				Estimated Fair Value
Due in one year or less		$	0			$	0
Due after one year through five years			18,959				19,109
Due after five years through ten years			29,334				29,447
Due after ten years			126,973				127,445
Total		$	175,266			$	176,001

An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization and Other Than Temporary Impairment (“OTTI”), otherwise defined as an unrealized loss. When an investment is impaired, we assess whether 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 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 difference 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 an OTTI has occurred for an investment. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process. The ALCO Committee’s assessment of whether an OTTI loss should be recognized incorporates both quantitative and qualitative information.

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

The ALCO Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) 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, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific outlook. Management has evaluated all securities at June 30, 2010 and has determined that no securities are other than temporarily impaired.

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

The following table presents the current fair value and associated unrealized losses on investments with unrealized losses at June 30, 2010. The table also discloses whether these securities have had unrealized losses for less than 12 months or for 12 months or longer.

As of June 30, 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		$	2,998			$	(2	)			—				—			$	2,998			$	(2	)
Obligations of state and political subdivisions			20,484				(291	)			—				—				20,484				(291	)
Residential mortgage backed securities and collateralized mortgage obligations			8,488				(76	)			4,921				(136	)			13,409				(212	)
Total temporarily impaired securities		$	31,970			$	(369	)		$	4,921			$	(136	)		$	36,891			$	(505	)

As of December 31, 2009

		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		$	3,994			$	—			$	—			$	—			$	3,994			$	—
Obligations of state and political subdivisions			8,517				(84	)			500				(1	)			9,017				(85	)
Residential mortgage backed securities and collateralized mortgage obligations			7,516				(332	)			—				—				7,516				(332	)
Total temporarily impaired securities		$	20,027			$	(416	)		$	500			$	(1	)		$	20,527			$	(417	)

U.S. Treasury and agency securities

The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities.

Obligations of state and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and not due to the credit quality of the securities. These investments are exclusively investment grade and were underwritten in accordance with our investment standards prior to the decision to purchase, without relying on a bond insurer’s guarantee in making the investment decision.

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

These securities will continue to be monitored as part of our ongoing impairment analysis, but are expected to perform, even if the rating agencies reduce the credit rating of the bond insurers. We expect to recover the entire amortized cost basis of these securities.

Residential mortgage-backed securities and collateralized mortgage obligations

The unrealized losses associated with federal agency mortgage-backed securities are primarily driven by changes in interest rates and not due to credit losses. These securities are issued by U.S. government or government sponsored entities and do not have any credit losses given the explicit government guarantee.

7. Mortgages held for sale

Bank of Commerce Mortgage™ originates residential mortgage loans within Bank of Commerce’s footprint and on a nationwide basis. Mortgage loans 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, Freddie Mac, and Ginnie Mae) and to third party investors including the servicing rights. Mortgages held for sale are carried at the lower of cost or fair value. 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.

8. Goodwill

As a result of the stock purchase agreement and acquisition of 51% of the capital stock of Simonich Corporation, d.b.a. BOC Mortgage Services, the Company has recorded goodwill (See note 2). The following table summarizes the changes in the Company’s goodwill for the years ended December 31, 2008, 2009, and the period ending June 30, 2010. All recorded goodwill is related to the Mortgage Services segment.

		Mortgage Services
						Accumulated
(Dollars in thousands)		Gross				Impairment				Total
Balance, December 31, 2008		$	—			$	—			$	—
Net additions			3,727				—				3,727
Amortization			—				—				—
Balance, December 31, 2009			3,727				—				3,727
Net additions			—				—				—
Amortization			—				(32	)			(32	)
Balance, June 30, 2010		$	3,727			$	(32	)		$	3,695

At June 30, 2010, the Company had recorded goodwill of $3,695 as compared to $3,727 at December 31, 2009. The goodwill recorded in connection with the acquisition of mortgage services represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment.

The Company performs a goodwill impairment analysis on an annual basis as of April 30th. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in our expected cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by regulator; and unanticipated competition.

The goodwill impairment test involves a two-step process. The first step compares the fair value of a reporting unit to its carrying value. If the reporting unit’s fair value is less than its carrying value, the Company would be required to proceed to the second step. In the second step the Company calculates the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, based on their relative fair values, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the reporting unit is the price paid to acquire it.

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

Any excess of the estimated fair value of the company over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss would be recognized as a charge to earnings in an amount equal to that excess.

The Company performed its annual goodwill impairment analysis of the Mortgage Brokerage Services operating segment as of April 30, 2010. The Company engaged an independent valuation consultant to assist in determining whether and to what extent our goodwill asset was impaired. The results of the Company’s and valuation specialist’s step one impairment test indicated that the reporting unit’s fair value was less than its carrying value, and therefore the Company performed step two of the analysis.

In the second step of the goodwill impairment analysis, we calculated the fair value of the reporting unit’s assets and liabilities. There were no unrecognized identifiable intangible assets associated with the reporting unit. We determined the implied fair value of goodwill pertaining to the reporting unit was less than the carrying amount of goodwill recorded. In accordance to accounting standards, the carrying amount of goodwill was written down to its implied fair value. Accordingly, the Company recognized an impairment loss of $32,039.

9. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust

During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware statutory business trust, Bank of Commerce Holdings Trust (the “grantor trust”), which issued $5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings’ junior subordinated debentures (the “trust notes”) to the public and $155,000 common securities to the Company. These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.

The proceeds from the issuance of the trust notes were transferred from the grantor trust to the Holding Company and from the Holding Company to the Bank as surplus capital. The trust notes accrue and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (“LIBOR”) plus 3.30%. The rate at June 30, 2010 was 3.60%. The rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the trust note is March 18, 2033, and the debt allows for prepayment after five years on the quarterly payment date.

On July 29, 2005, Bank of Commerce Holdings (the “Company”) participated in a private placement to an institutional investor of $10 million of fixed rate trust preferred securities (the “Trust Preferred Securities”); through a newly formed Delaware trust affiliate, Bank of Commerce Holdings Trust II (the “Trust”). The Trust Preferred Securities mature on September 15, 2035, and are redeemable at the Company’s option on any March 15, June 15, September 15 or December 15 on or after September 15, 2010.

In addition, the Trust Preferred Securities require quarterly distributions by the Trust to the holder of the Trust Preferred Securities at a rate of 6.12%, until September 10, 2010 after which the rate will reset quarterly to equal 3-Month LIBOR plus 1.58%. The Trust simultaneously issued $310,000 of the Trust’s common securities of beneficial interest to the Company.

The proceeds from the sale of the Trust Preferred Securities were used by the Trust to purchase from the Company the aggregate principal amount of $10,310,000 of the Company’s floating rate junior subordinate notes (the “Notes”). The net proceeds to the Company from the sale of the Notes to the Trust will be used by the Company for general corporate purposes, including funding the growth of the Company’s various financial services. During September 2008, $1,200,000 in proceeds from the issuance of the trust notes was transferred from the Holding Company to the Bank as surplus capital.

The Notes were issued pursuant to a Junior Subordinated Indenture (the “Indenture”), dated July 29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association, as trustee. Like the Trust Preferred Securities, the Notes bear interest at a fixed rate, at 6.12% until September 10, 2010, after which the rate will reset on a quarterly basis to equal 3-Month LIBOR plus 1.58%. The interest payments by the Company will be used to pay the quarterly distributions payable by the Trust to the holder of the Trust Preferred Securities.

However, so long as no event of default, as described below, has occurred under the Notes, the Company may, at any time and from time to time, defer interest payments on the Notes (in which case the Trust will be entitled to defer distributions otherwise due on the Trust Preferred Securities) for up to twenty (20) consecutive quarters. No payments to date have been deferred.

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

The Notes are subordinated to the prior payment of other indebtedness of the Company that, by its terms, is not similarly subordinated. Although the Notes will be recorded as a long term liability on the Company’s balance sheet, for regulatory purposes, the Notes are expected to be treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve Board, the Company’s primary federal regulatory agency.

The Notes mature on September 15, 2035, but may be redeemed at the Company’s option at any time on or after September 15, 2010, or at any time upon certain events, such as a change in the regulatory capital treatment of the Notes, the Trust being deemed to be an investment company or the occurrence of certain adverse tax events. In each case, the Company may redeem the Notes for their aggregate principal amount, plus accrued interest.

10. Preferred Stock and Warrants

Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement — Standard Terms the Company issued to the United States Department of the Treasury (“Treasury Department”) 17,000 shares of Bank of Commerce Holdings Series A Fixed Rate Perpetual Preferred Stock, without par value (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000 for a total price of $17 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company may not redeem the Series A Preferred Stock during the first three years except with the proceeds from a “qualified equity offering. After three years, the Company may, at our option, redeem the Series A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock is generally non-voting. Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of the Treasury Department will be required for the Company to increase our common stock dividend or repurchase our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. A consequence of the Series A Preferred Stock purchase includes certain restrictions on executive compensation that could limit the tax deductibility of compensation we pay to executive management.

As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant (the “Warrant”) to purchase 405,405 shares of the Company’s common stock at an initial per share exercise price of $6.29.

The Warrant provides for the adjustment of the exercise price and the number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of our common stock, and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date. If, on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less than $17 million from “qualified equity offerings” announced after November 14, 2008, the number of shares of common stock issuable pursuant to the Treasury Department’s exercise of the Warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Securities Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

The preferred stock proceeds from the Treasury Department was allocated based upon the relative fair value of the warrant as compared with the fair value of the preferred stock. The fair value of the warrant was determined using a Black-Sholes pricing model incorporating assumptions including our common stock price, dividend yield, stock price volatility and risk-free interest rate. We determined the fair value of the preferred stock based on assumptions regarding the discount rate (market rate) on the preferred stock which was estimated to be approximately 9.0% at the date of issuance. The discount on the preferred stock is being accreted to par value over a five-year term which is the expected life of the preferred stock. The proceeds of $17.0 million were allocated between the preferred stock and warrant with $16.6 million allocated to preferred stock and $449,000 allocated to the warrant based on their relative fair value at the time of issuance.

Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1 capital. The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Upon the request of the Treasury Department at any time, we have agreed to promptly enter into a deposit arrangement pursuant to which the Series A Preferred Stock may be deposited and depositary shares (“Depositary Shares”) may be issued.

In the Securities Purchase Agreement, the Company agreed that, until such time as the Treasury Department ceases to own any securities acquired from us pursuant to the Securities Purchase Agreement, the Company will take all necessary action to ensure that our benefit plans with respect to our senior executive officers comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (“EESA”) as implemented by any guidance or regulation under Section 111(b) of EESA that has been issued and is in effect as of the date of issuance of the Series A Preferred Stock and the Warrant and not adopt any benefit plans with respect to, or which cover, our senior executive officers that do not comply with EESA. The applicable executives have consented to the foregoing.

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

Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of the Treasury Department will be required for us to (1) declare or pay any dividend or make any distribution on our common stock (other than regular quarterly cash dividends of not more than $0.08 per share of common stock) or (2) redeem, purchase or acquire any shares of the Company’s common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement.

The Company may “opt out” by repaying the capital without raising additional capital subject to consultation with the appropriate Federal regulator.

11. 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, 2010 are below:

(Dollars in thousands) Operating Leases
2010		$	417
2011			775
2012			606
2013			488
2014			498
Thereafter			447
Total		$	3,231

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 Federal Home Loan Bank of San Francisco (“FHLB”) totaling $145,000,000 as of June 30, 2010 and $100,000,000 as of June 30, 2009. The Company has one $130,000,000 FHLB overnight advance bearing a fixed rate of 0.08%. In addition, the Company has one floating rate advance for $15,000,000. The floating rate adjusts quarterly to 3 month LIBOR plus 1 basis point, and interest on the principal is payable quarterly. The following table illustrates borrowings outstanding at the end of the period:

(Dollars in thousands) FHLB Advances
Advance Amount				Interest Rate				Maturity
$	130,000				0.08	%			7/1/2010
$	15,000				0.55	%			3/5/2013

These borrowings are secured by an investment in FHLB stock and certain real estate mortgage loans which have been specifically pledged to the FHLB pursuant to their collateral requirements. Based upon the level of FHLB advances, the Company was required to hold an investment in FHLB stock of $6,110,000. Furthermore, the Company has pledged $193,198,071 of its commercial and real estate mortgage loans and $99,855,619 of its securities portfolio to the FHLB as collateral as of June 30, 2010. At June 30, 2010, the Bank had available borrowing lines at the FHLB of $94,641,110 and a federal fund borrowing line at a correspondent bank totaling $10,000,000.

FRB Advances — The Company may periodically obtain secured borrowings from the Federal Reserve Bank of San Francisco (“FRB”). FRB borrowings outstanding were $0 as of June 30, 2010 and $20,000,000 as of June 30, 2009. The FRB’s discount window credit facility is limited to overnight borrowings. The Company has pledged $83,737,554 in commercial and industrial loans as collateral as of June 30, 2010, and had available borrowing lines at the FRB of $50,242,532.

Off-Balance Sheet Financial Instruments - In the ordinary course of business, the Company enters 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.

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

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) Credit Commitments		June 30, 2010				June 30, 2009
Unfunded loan commitments		$	128,828			$	144,215,
Standby letters of credit			3,634				5,733,
Guaranteed commitments outstanding			1,299				1,325,
		$	133,761			$	151,273,

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 either (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. The mortgage loan repurchase agreements are consistent with the standard representations and warranties of the loan sales agreements and the impact is considered immaterial to the consolidated financial statements.

The Company entered into a mandatory forward loan volume commitment agreement with a purchaser of mortgage loans. Under the agreement, the Company is committed to deliver $264,000,000 loan volume over the period from April 1, 2010 through May 31, 2011. Upon failure to deliver minimum loan volume quarterly, the Company is responsible to pay a non-delivery fee to the purchaser.

The Company, through its majority owned subsidiary, Bank of Commerce Mortgage, enters into best efforts 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 best efforts forward delivery contracts with investors associated with mortgage loans receivable held for sale. The Company’s derivative instruments consist primarily of best efforts IRLC’s executed with borrowers which are offset against best efforts 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. The net impact of the best efforts IRLC’s and commitments to deliver is not considered significant. At June 30, 2010 the Company did not maintain any open positions or any other outstanding derivative loan commitments.

12. Accounting for Income Tax and Uncertainties