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EX-31.2 - EX-31.2 - Bank of Commerce Holdingsf58543exv31w2.htm
EX-99.2 - EX-99.2 - Bank of Commerce Holdingsf58543exv99w2.htm
EX-23.1 - EX-23.1 - Bank of Commerce Holdingsf58543exv23w1.htm
EX-31.1 - EX-31.1 - Bank of Commerce Holdingsf58543exv31w1.htm
EX-32.1 - EX-32.1 - Bank of Commerce Holdingsf58543exv32w1.htm
EX-99.1 - EX-99.1 - Bank of Commerce Holdingsf58543exv99w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
Form 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR
     
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 LOGO)
(Exact name of Registrant as specified in its charter)
     
California   94-2823865
(State or jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)
     
1901 Churn Creek Road    
Redding, California   96002
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (530) 722-3952
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
     
Common Stock, No Par Value per share   NASDAQ Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No þ
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 definitions of “large accelerated filer,” “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
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
As of the last day of the second fiscal quarter of 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $75,004,921 based on the closing sale price of $4.74 as reported on the NASDAQ Global Market as of June 30, 2010.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
The number of shares of the registrant’s no par value Common Stock outstanding as of March 3, 2011 was 16,991,495
DOCUMENTS INCORPORATED BY REFERENCE
None
 
 


 

Bank of Commerce Holdings Form 10-K
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 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-99.1
 EX-99.2

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PART I
Special Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (“Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These statements are based on management’s beliefs and assumptions, and on information available to management as of the date of this document. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expects,” “anticipates,” “intend,” “plan,” “believes,” “estimate,” “consider” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. Investors are cautioned not to put undue reliance on any forward-looking statements. In addition, the Company does not have any intention and assumes no obligation to update forward-looking statements after the date of the filing of this report, even if new information, future events or other circumstances have made such statements incorrect or misleading. Except as specifically noted herein all references to the “Company” refer to Bank of Commerce Holdings, a California corporation, and its consolidated subsidiaries.
The following factors, among others, could cause our actual results to differ materially from those expressed in such forward-looking statements:
    The strength of the United States economy in general and the strength of the local economies in which we conduct operations, the duration of current financial and economic volatility and decline and actions taken by the United States Congress and governmental agencies, including the United States Department of the Treasury (the “Treasury”), to deal with challenges to the United States financial system;
 
    The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve Board
 
    Inflation, interest rate, market and monetary fluctuations, the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, investment values and liquidity;
 
    Changes in the financial performance and/or condition of our borrowers;
 
    Changes in consumer spending, borrowing and savings habits;
 
    Changes in the level of our nonperforming assets and charge-offs;
 
    Oversupply of inventory and continued deterioration in values of real estate in California and the United States generally, both residential and commercial;
 
    Changes in securities markets, public debt markets and other capital markets;
 
    Possible other-than-temporary impairments of securities held by us;
 
    The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
 
    The willingness of customers to substitute competitors’ products and services for our products and services;
 
    The impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
 
    Technological changes could expose us to new risks, including potential systems failures or fraud;
 
    The timing and effect of acquisitions we may make, if any, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;

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    Possible impairment of goodwill that has been recorded in connection with acquisitions which may have a material adverse impact on our earnings;
 
    The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;
 
    The impact of current governmental efforts to restructure the United States financial regulatory system, including changes in the scope and cost of FDIC insurance and other coverages and changes in the Treasury’s Capital Purchase Program;
 
    Ability to attract deposits and other sources of liquidity at acceptable costs;
 
    Changes in the competitive environment among financial and bank holding companies and other financial service providers;
 
    The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;
 
    Geopolitical conditions, including acts or threats of war or terrorism, actions taken by the United States or other governments in response to acts or threats of war or terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
 
    Unanticipated regulatory or judicial proceedings; and
 
    Our ability to manage the risks involved in the foregoing.
If our assumptions regarding one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this prospectus and in the information incorporated by reference in this prospectus. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.
Forward-looking statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties discussed in “BUSINESS RISK FACTORS” and in the MD&A.
ITEM 1. BUSINESS
Bank of Commerce Holdings (“Company,”, “Holding Company,” “We,” or “Us”) is a corporation organized under the laws of California and a bank holding company. Our principal business is to serve as a holding company for Redding Bank of Commercetm (“Bank”), which operates under two separate names Redding Bank of Commercetm, and Roseville Bank of Commercetm, a division of Redding Bank of Commerce, and for Bank of Commerce Mortgagetm, 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. 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 is an affiliate of LPL Financial and offers wealth management services through that affiliation.

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In order to enhance our noninterest income, 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 fourteen offices in two different states and licenses in California, Oregon, Washington, Idaho and Colorado. 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 Mortgagetm in order to enhance our name recognition throughout Northern California. The services offered by Bank of Commerce Mortgagetm include brokerage mortgages for single and multi-family residential new financing, refinancing and equity lines of credit; all loan originations are sold, servicing released to the secondary market or to correspondent relationships.
We are continuously search for both organic and external expansion opportunities, through internal growth, strategic alliances, acquisitions, establishing new offices or the delivery of new products and services.
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 vigilant 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. We have developed strategic plans that evaluate additional 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 to plan 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 Technology Steering Committee establishes technological strategies, makes technology investment decisions, and manages the implementation process. Our Asset Liability Management Committee (“ALCO”) Round Table Committee 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.

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We believe there will be 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 improve their capital metrics, 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.
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 three engagements per year to recommend action on certain loans if deemed appropriate. As of December 31, 2010, we had $22.8 million in nonperforming assets, including other real estate owned of $2.3 million, which as a percentage of total assets was 2.43%. We also seek to maintain a prudent allowance for loan losses, which at December 31, 2010 was $12.8 million, representing 2.14% of our loan portfolio, not including loans held for sale.
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 Federal Home Loan Bank 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 1901 Churn Creek Road, Redding, California and the main telephone number is (530) 722-3939.
General
Parent Bank Holding Company. As a bank holding company, the Parent is subject to regulation under the BHC Act and to inspection, examination and supervision by its primary regulator, the Board of Governors of the Federal Reserve System (“Federal Reserve Board or FRB”). The Parent is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the Securities and Exchange Commission (“SEC”). As a listed Company on the NASDAQ Global Market, the Parent is subject to the rules of the NASDAQ for listed companies.
Subsidiary Bank. The Company’s subsidiary bank is subject to regulation and examination primarily by the Federal Deposit Insurance Corporation (“FDIC”) and by the California Department of Financial Institutions (“CDFI”).
Nonbank Subsidiary. The Company’s nonbank subsidiary may be subject to the laws and regulations of the federal government and/or the State of California.

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Parent Holding Company Activities
“Financial in Nature” Requirement. As a bank holding company that has elected to become a financial holding company pursuant to the Gramm-Leach-Bliley Financial Modernization Act of 1999 (“GLB Act”), we may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. “Financial in Nature” activities include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the FRB, in consultation with the Secretary of the U.S. Treasury, determines from time to time to be financial in nature or incidental to such financial activity or is complementary to a financial activity and does not pose a safety and soundness risk.
FRB approval is not required for the Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. Notice of such acquisitions, however, must be given to the FRB within 30 days of commencing a new financial activity or acquiring a company engaged in financial in nature activities. Prior FRB approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association.
Because the Holding Company is a financial holding company, if the Bank receives a rating under the Community Reinvestment Act of 1977, as amended (“CRA”), of less than satisfactory, the Company will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Company could engage in new activities, or acquire companies engaged in activities that are closely related to banking under the BHC Act.
In addition, if the FRB finds that the Bank is not well capitalized or well managed, the Holding Company could be required to enter into an agreement with the FRB to comply with all applicable capital and management requirements and which may contain additional limitations or conditions. Until corrected, the Company would not be able to engage in any new activity or acquire companies engaged in activities that are not closely related to banking under the BHC Act without prior FRB approval. If the Company failed to correct any such condition within a prescribed period, the FRB could order the Company to divest the Bank or, in the alternative, to cease engaging in activities other than those closely related to banking under the BHC Act.
To qualify as “well-capitalized,” the Bank must, on a consolidated basis: (i) maintain a total risk-based capital ratio of 10% or greater, (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater and (iii) not be subject to any order by the FRB to meet a specified capital level. To qualify as “well-managed,” the Bank, as the Holding Company’s only controlled financial institution, must have received at its most recent examination or review a composite rating and rating for management of at least satisfactory.
In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, and future prospects including current and projected capital ratios and levels, the competence, experience, and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the CRA, and the effectiveness of the acquiring institution in combating money laundering activities.
Principal Markets
The Company operates in two distinct markets. Redding Bank of Commerce (“Bank”) has historically been a leading independent commercial bank in Redding, California, and Shasta County, California. This market has been expanding, but is still relatively small when compared to the greater Sacramento market which is the location of Roseville Bank of Commerce,a division of Redding Bank of Commerce. Management believes that these two markets complement each other, with the Redding market providing the stability and the greater Sacramento market providing growth opportunities.

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Principal Products and Services
Through the Bank and its mortgage subsidiaries, the Bank provides 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 and character in California. Products such as free checking, interest-bearing checking and savings accounts, money market deposit accounts, sweep arrangements, commercial, construction, term loans, traveler’s checks, safe deposit boxes, collection services and electronic banking activities. The Bank currently does not offer trust services or international banking services.
The services offered by our mortgage subsidiary include single and multi-family residential new financing, refinancing and equity lines of credit. All mortgage products originated through our mortgage subsidiary are brokered and are not maintained on the Bank’s books as loans held for investment purposes. Most of the Bank’s customers are small to medium sized businesses, professionals and other individuals with medium to high net worth, and most of the Bank’s deposits are obtained from such customers. The primary business strategy of the Bank is to focus on its lending activities. The Bank’s principal lines of lending are (1) commercial, (2) real estate construction, and (3) commercial real estate.
The majority of the Bank’s loans are direct loans made to individuals and small businesses in the major market areas of the Bank. A relatively small portion of the loan portfolio of the Bank consists of loans to individuals for personal, family or household purposes. The Bank accepts as collateral for loans real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and other general business assets such as accounts receivable and inventory.
The commercial loan portfolio of the Bank consists of a mix of revolving credit facilities and intermediate term loans. The loans are generally made for working capital, asset acquisition, business-expansion purposes, and are generally secured by a lien on the borrowers’ assets. The Bank also makes unsecured loans to borrowers who meet the Bank’s underwriting criteria for such loans.
The Bank manages its commercial loan portfolio by monitoring its borrowers’ payment performance and their respective financial condition, and makes periodic and appropriate adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The primary sources of repayment of the commercial loans of the Bank are the borrower’s conversion of short-term assets to cash and operating cash flow. The net assets of the borrower or guarantor and/or the liquidation of collateral are usually identified as a secondary source of repayment.
The principal factors affecting the Bank’s risk of loss from commercial lending include each borrower’s ability to manage its business affairs and cash flows, local and general economic conditions and real estate values in the Bank’s service area. The Bank manages risk through its underwriting criteria, which includes strategies to match the borrower’s cash flow to loan repayment terms, and periodic evaluations of the borrower’s operations. The Bank’s evaluations of its borrowers are facilitated by management’s knowledge of local market conditions and periodic reviews by a consultant of the credit administration policies of the Bank.
The real estate construction loan portfolio of the Bank consists of a mix of commercial and residential construction loans, which are principally secured by the underlying projects. The real estate construction loans of the Bank are predominately made for projects, which are intended to be owner occupied. The Bank also makes real estate construction loans for speculative projects. The principal sources of repayment of the Bank’s construction loans are sale of the underlying collateral or permanent financing provided by the Bank or another lending source.
The principal risks associated with real estate construction lending include project cost overruns that absorb the borrower’s equity in the project and deterioration of real estate values as a result of various factors, including competitive pressures and economic downturns.

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The Bank manages its credit risk associated with real estate construction lending by establishing maximum loan-to-value ratios on projects on an as-completed basis, inspecting project status in advance of controlled disbursements and matching maturities with expected completion dates. Generally, the Bank requires a loan-to-value ratio of no more than 80% on single-family residential construction loans.
The commercial and construction loan portfolio of the Bank consists of loans secured by a variety of commercial and residential real property. The specific underwriting standards of the Bank and methods for each of its principal lines of lending include industry-accepted analysis and modeling, and certain proprietary techniques. The Bank’s underwriting criteria are designed to comply with applicable regulatory guidelines, including required loan-to-value ratios. The credit administration policies of the Bank contain mandatory lien position and debt service coverage requirements, and the Bank generally requires a guarantee from the owners of its private corporate borrowers.
Government Supervision and Regulation
The Holding Company and Bank are subject to extensive federal and state supervision and regulation. The following discussion describes the elements of the regulatory framework applicable to financial holding companies and banks and specific information about the Holding Company and its subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund rather than for the protection of shareholders and creditors. The following discussion of laws and regulations is only a summary. This discussion is qualified in its entirety by reference to such laws and regulations.
Dividend Restrictions
The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.
In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank’s net income for its last three fiscal years (less any distributions to shareholders during such period).
In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner in an amount not exceeding the greater of the bank’s retained earnings, the bank’s net income for its last fiscal year, or the bank’s net income for its current fiscal year.
Regulators also have authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. The FRB’s policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition.
Prior to November 14, 2011, unless the Holding 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 Holding Company 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 Holding 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.

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Interstate Banking
A bank holding company may acquire banks in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and no more than 30% of such deposits in that state (or such lesser or greater amount set by state law). Banks may also merge across state lines, therefore creating interstate branches. Furthermore, a bank is now able to open new branches in a state in which it does not already have banking operations if the laws of such state permit such de novo branching. California law authorizes out-of-state banks to enter California by the acquisition of or merger with a California bank that has been in existence for at least five years, unless the California bank is in danger of failing or in certain other emergency situations, but limits interstate branching into California to branching by acquisition of an existing bank.
Capital Standards
In the United States of America, banks, thrifts and bank holding companies are subject to minimum regulatory capital requirements. Specifically, U.S. banking organizations must maintain a minimum leverage ratio and two minimum risk-based ratios. The leverage ratio measures regulatory capital as a percentage of average on-balance-sheet assets as reported in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The risk-based ratios measure regulatory capital as a percentage of both on- and off-balance-sheet credit exposures with some gross differentiation based on perceived credit risk. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans.
The current U.S. risk-based capital requirements are based on an internationally agreed framework for capital measurement that was developed by the Basel Committee on Banking Supervision (“BSC”) in 1988. The international framework (“1988 Accord”) accomplished several important objectives. It strengthened capital levels at large, internationally active banks and fostered international consistency and coordination. The 1988 Accord also reduced disincentives for banks to hold liquid, low risk assets. By requiring banks to hold capital against off-balance-sheet exposures, the 1988 Accord represented a significant step forward for regulatory capital measurement. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet items of 4%.
As of December 31, 2010, the Holding Company and the Bank exceeded the “well capitalized” requirements as follows:

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    December 31, 2010  
            Actual     Well Capitalized     Minimum Capital  
    Capital     Ratio     Requirement     Requirement  
 
The Company
                               
Leverage
  $ 115,541       12.48 %     n/a       4.00 %
Tier 1 Risk-Based
    115,541       13.74 %     n/a       4.00 %
Total Risk-Based
    126,085       15.00 %     n/a       8.00 %
 
                               
Redding Bank of Commerce
                               
Leverage
  $ 106,747       11.60 %     5.00 %     4.00 %
Tier 1 Risk-Based
    106,747       13.34 %     6.00 %     4.00 %
Total Risk-Based
    116,791       14.59 %     10.00 %     8.00 %
Since the adoption of the 1988 Accord, the world’s financial system has become increasingly more complex and the BSC has been working for several years to develop a new regulatory capital framework that recognizes new developments in financial products, incorporates advances in risk measurement and management practices, and more precisely assesses capital charges in relation to risk (“New Accord”).
The New Accord encompasses three elements: minimum regulatory capital requirements, supervisory review, and market discipline. Under the first element, a banking organization must calculate capital requirements to credit risk, operational risk and market risk. The New Accord does not change the definition of what qualifies as regulatory capital, the minimum risk-based capital ratio, or the methodology for determining capital charges for market risk. The New Accord does provide several methodologies for determining capital requirements for both credit and operational risk. For credit risk there are two general approaches; the standardized approach (based on the 1988 Accord) and the internal ratings-based (“IRB”) approach, which uses the institution’s internal estimates of key risk drivers to derive capital requirements.
The New Accord provides three methodologies for determining capital requirements for operational risk: the basic indicator approach, the standardized approach, and the advanced measurement approaches (“AMA”). Under the first two methodologies, capital requirements for operational risk are fixed percentages of specified, objective risk measures (for example, gross income.) The AMA provides the flexibility for an institution to develop its own individualized approach for measuring operational risk, subject to supervisory oversight.
The second pillar of the New Accord, supervisory review, highlights the need for banking organizations to assess their capital adequacy positions relative to overall risk (rather than to the minimum capital requirement), and the need for supervisors to review and take appropriate actions in response to those assessments. The third pillar of the New Accord imposes public disclosure requirements on institutions that are intended to allow market participants to assess key information about an institutions risk profile and its associated level of capital.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2010, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.
An institution that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound

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condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions.
The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratio actually warrants such treatment. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency.
Undercapitalized institutions must submit an acceptable capital restoration plan with a guarantee of performance issued by the holding company. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. Furthermore, the appropriate federal banking agency is required to either appoint a receiver for the institution within 90 days, or obtain the concurrence of the FDIC in another form of action.
Fiscal and Monetary Policies
The Company’s business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. The Company is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in United States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions’ deposits, and (d) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on the Company’s business, results of operations and financial condition.
Privacy Provisions of the Gramm-Leach-Bliley Act
Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) implemented a broad range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. The Holding Company is subject to Sarbanes-Oxley because it is required to file periodic reports with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley and/or its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between the Holding Company and its outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our Chief Executive Officer and Chief Financial Officer, expanded the disclosure requirements for our corporate insiders, required our management to evaluate the Holding Company’s disclosure controls and procedures and its internal control over financial reporting, and will require our auditors to issue a report on our internal control over financial reporting.

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Patriot Act and Anti-Money Laundering
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) is intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to work together to combat terrorism on a variety of fronts. The Patriot Act has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act requires the Company to implement new or revised policies and procedures relating to anti-money laundering, compliance, suspicious activities, and currency transaction reporting and due diligence on customers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.
Economic Emergency Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 (“EESA”), which was signed into law on October 3, 2008, was enacted to promote liquidity in the financial markets and to minimize further economic deterioration in the United States. The primary components of EESA are the Troubled Asset Relief Program and increase in FDIC deposit insurance limits.
EESA authorized the U.S. Treasury Department (“Treasury”) to establish the Troubled Asset Relief Program (“TARP”). Under EESA, $700 billion in total was authorized to purchase troubled assets from financial institutions, which also includes making equity investments in such qualifying institutions. The Treasury had until the end of 2009 to use the funds allocated for purchases under EESA.
Using its authority under TARP, the Treasury also created the Capital Purchase Program (“CPP”). The CPP immediately authorized the Treasury to purchase equity from qualifying financial institutions, thus moving away from purchases of troubled assets as originally contemplated by TARP. To participate, a qualifying financial institution issues to the Treasury non-voting, redeemable preferred stock, and warrants for common stock, in an amount ranging from 1%-3% of such institution’s total risk-based assets, not to exceed $25 billion. The terms of the preferred stock include payment of a dividend of 5% per annum for the first five years, and 9% per annum thereafter. In addition, the financial institution must issue to the Treasury a ten-year warrant to purchase shares of common stock, with an aggregate market price equal to 15% of the Treasury’s total investment in the financial institution. Financial institutions participating in the CPP also must comply with the executive compensation and corporate governance requirements of EESA. The Holding Company issued $17 million of Series A Preferred Stock under the CPP program.
EESA also provides that FDIC deposit insurance will be temporarily increased from $100,000 to $250,000 until December 31, 2013, regardless of whether those funds are held in interest-bearing or noninterest-bearing accounts. Deposits held at the Bank are fully insured to the extent of this higher limit.
Temporary Liquidity Guarantee Program
On October 13, 2008, FDIC adopted the Temporary Liquidity Guarantee Program (“TLGP”), using the authority contained in “systemic risk exception” to FDICIA. The aim of the TGLP was to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies, and by providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. The two core components of the TGLP are the Debt Guarantee Program and the Transaction Account Guarantee Program.
Under the Debt Guarantee Program, the FDIC guarantees all newly-issued senior unsecured debt issued by participating entities up to certain prescribed limits. The guarantee does not extend beyond June 30, 2012. As a result of this guarantee, the unpaid principal and interest of newly-issued senior unsecured debt would be paid by the FDIC if the issuing insured depository institution failed or if a bankruptcy petition were filed by its issuing holding company.

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The Transaction Account Guarantee Program (“TAGP”) provides participating financial institutions to offer depositors a temporary, full guarantee by the FDIC for funds held at FDIC-insured depository institutions in noninterest-bearing transaction accounts above the existing deposit insurance limit. This coverage became effective on October 14, 2008, and was originally scheduled to terminate on December 31, 2009. On November 9, 2010 the FDIC Board of Directors issued the final rule to implement the section of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that provides temporary unlimited coverage for noninterest bearing transaction accounts at all FDIC-insured depository institutions. The separate coverage for noninterest-bearing transaction accounts becomes effective on December 31, 2010, and terminates on December 31, 2012. Deposits held at our Bank are guaranteed to the fullest extent permitted.
Federal Deposit Insurance Premiums
On February 27, 2009, the FDIC adopted a final rule modifying its risk-based assessment system and setting initial base assessment rates beginning April 1, 2009 at 12 to 45 basis points with potential adjustments to each risk category. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, not to exceed 10 basis points times the institution’s assessment base for the second quarter of 2009. On November 12, 2009, the FDIC adopted a final rule imposing a 13-quarter prepayment of FDIC insurance premiums payable by December 30, 2009.
President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Act effects changes in the FDIC assessment base with stricter oversight. A new council of regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks must keep on hand. FDIC insurance coverage is made permanent at the $250 thousand level retroactive to January 1, 2008 and unlimited FDIC insurance is provided for noninterest-bearing transaction accounts in all banks effective December 31, 2010 through the end of 2012. Further, the Act removes the prohibition on payments of interest on demand deposit accounts as of July 21, 2011. Thus, if a depositor sweeps any amount in excess of $250 thousand from a noninterest-bearing transaction account to an interest bearing demand deposit, there is no FDIC insurance coverage on the portion that is over $250 thousand coverage limit.
The Impact of New Financial Reform Legislation
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), a landmark financial reform bill comprised of new rules and restrictions that will impact banks going forward. It includes key provisions aimed at preventing a repeat of the 2008 financial crisis and a new process for winding down failing, systemically important institutions in a manner as close to a controlled bankruptcy as possible. The Act includes other key provisions as follows:
(1) The Act establishes a new Financial Stability Oversight Council to monitor systemic financial risks. The Board of Governors of the Federal Reserve (“Fed”) are given extensive new authorities to impose strict controls on large bank holding companies with total consolidated assets equal to or in excess of $50 billion and systemically significant nonbank financial companies to limit the risk they might pose for the economy and to other large interconnected companies. The Fed can also take direct control of troubled financial companies that are considered systemically significant.
(2) The Act also establishes a new independent Federal regulatory body for consumer protection within the Federal Reserve System known as the Bureau of Consumer Financial Protection (the “Bureau”), which will assume responsibility for most consumer protection laws (except the Community Reinvestment Act). It will also be in charge of setting appropriate consumer banking fees and caps. The Office of Comptroller of the Currency will continue to have authority to preempt state banking and consumer protection laws if these laws “prevent or significantly” interfere with the business of banking.

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(3) The Act restricts the amount of trust preferred securities (“TPS”) that may be considered as Tier 1 Capital. For depository institution holding companies below $15 billion in total assets, TPS issued before May 19, 2010 will be grandfathered, so their status as Tier 1 capital does not change. However going forward, TPS will be disallowed as Tier 1 capital. Beginning January 1, 2013, Bank holding companies above $15 billion in assets will have a three-year phase-in period to fill the capital gap caused by the disallowance of the TPS issued before May 19, 2010.
(4) The Act effects changes in the FDIC assessment base with stricter oversight. A new council of regulators led by the U.S. Treasury will set higher requirements for the amount of cash banks must keep on hand. FDIC insurance coverage is made permanent at the $250 thousand level retroactive to January 1, 2008 and unlimited FDIC insurance is provided for noninterest-bearing transaction accounts in all banks effective December 31, 2010 through the end of 2012. Further, the Act removes the prohibition on payments of interest on demand deposit accounts as of July 21, 2011. Thus, if a depositor sweeps any amount in excess of $250 thousand from a noninterest-bearing transaction account to an interest bearing demand deposit, there is no FDIC insurance coverage on the portion that is over $250 thousand coverage limit.
(5) The Act places certain limitations on investment and other activities by depository institutions, holding companies and their affiliates.
The impact of the Act on our banking operations is still uncertain due to the massive volume of new rules still subject to adoption and interpretation.
Future Legislation
Congress will periodically introduce various legislation, including proposals to substantially change the financial institution regulatory system, is from time to time introduced in Congress. This legislation may change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, this legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any of this potential legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on the Company’s business, results of operations or financial condition.
State Regulation and Supervision
The Bank is a California chartered bank insured by the FDIC, and as such is subject to regulation, supervision and regular examination by the CDFI and the FDIC. As a non-member of the Federal Reserve System, the primary federal regulator of the Bank is the FDIC. The primary federal regulator of the Holding Company is the Federal Reserve Board. The regulations of these agencies affect most aspects of the Bank’s business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the Bank’s activities and various other requirements. The Bank is also subject to applicable provisions of California law, insofar as such provisions are not in conflict with or preempted by federal banking law. In addition, the Bank is subject to certain regulations of the FRB dealing primarily with check-clearing activities, establishment of banking reserves, Truth-in-Lending (“Regulation Z”), Truth-in-Savings (“Regulation DD”), and Equal Credit Opportunity (“Regulation B”).
Under California law, a state chartered bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital and reserve requirements, deposits and borrowings, shareholder rights and duties, and investment and lending activities.

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Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting, documentation, and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.
The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate-income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.
Enforcement Powers
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses, or for violation of any law, rule, regulation, or condition imposed in writing by the regulatory agency or term of a written agreement with the regulatory agency.
Enforcement actions may include: (1) the appointment of a conservator or receiver for the bank; (2) the issuance of a cease and desist order that can be judicially enforced; (3) the termination of the bank’s deposit insurance; (4) the imposition of civil monetary penalties; (5) the issuance of directives to increase capital; (6) the issuance of formal and informal agreements; (7) the issuance of removal and prohibition orders against officers, directors and other institution-affiliated parties; and (8) the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the deposit insurance fund or the bank would be harmed if such equitable relief was not granted. The Commissioner, as the primary regulator for state-chartered banks, also has a broad range of enforcement measures, from cease and desist powers and the imposition of monetary penalties to the ability to take possession of a bank, including causing its liquidation.
Competition
The Company engages in the highly competitive financial services industry. Generally, the lines of activity and markets served involve competition with other banks, thrifts, credit unions and other non-bank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance entities which offer financial services, located both domestically and through alternative delivery channels such as the Internet. Many of these competitors enjoy fewer regulatory constraints and some may have lower cost structures. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits, customer convenience and technological advances.

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Securities firms, insurance companies and brokerage houses that elect to become financial holding companies may acquire banks and other financial institutions. Combinations of this type will significantly change the competitive environment in which we conduct business.
In order to compete with major banks and other competitors in its primary service areas, the Company relies upon the experience of its executive and senior officers in serving business clients, and upon its specialized services, local promotional activities and the personal contacts made by its officers, directors and employees. For customers whose loan demand exceeds the Company’s legal lending limit, the Company may arrange for such loans on a participation basis with other banks. Competitive pressures in the banking industry significantly increase changes in the interest rate environment, and reduce net interest margins. Less than favorable economic conditions can also result in a deterioration of credit quality and an increase in the provisions for loan losses.
Employees
As of December 31, 2010 the Company employed 313 full-time equivalent employees. Of these employees, 26 were employed in the Roseville market, 96 were in the Redding market, and the remaining 191 were employed with the Company’s mortgage subsidiary. None of the employees within the Company are subject to a collective bargaining agreement. Management considers its employee relations to be excellent.
Available Information
We will provide free of charge upon request, or through links to publicly available filings accessed through our Internet website, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon as reasonably practical after such reports have been filed with the Securities and Exchange Commission. Our internet address is www.bankofcommerceholdings.com. Additionally, reports may be obtained through the Securities and Exchange Commission’s website at www.sec.gov.

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ITEM 1A. RISK FACTORS
Our business is subject to various economic risks that could adversely impact our results of operations and financial condition.
The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the United States and international credit markets, including a significant and rapid deterioration in the mortgage lending and related real estate markets and valuation levels. Unemployment nationwide and in California has increased significantly through this economic downturn and is anticipated to increase or remain elevated for the foreseeable future. Continued declines in real estate values, high unemployment and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations.
We conduct banking operations principally in Northern California. As a result, our business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in Northern California. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally, will improve in the near term, in which case we could continue to experience losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges. In addition, the State of California is currently experiencing significant budgetary and fiscal difficulties, which include terminating and furloughing state employees. The businesses operating in California and Sacramento in particular depend on these state employees for business, and reduced spending activity by these state employees could have a material impact on the success or failure of these businesses, some of which are current or potential future customers of the Bank. A further deterioration in economic conditions, particularly within our geographic region, could result in the following consequences, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations:
    Loan delinquencies may further increase causing additional increases in our provision and allowance for loan losses;
 
    Financial sector regulators may adopt more restrictive practices or interpretations of existing regulations, or adopt new regulations;
 
    Collateral for loans made by the Bank, especially real estate related, may continue to decline in value, which in turn could reduce a client’s borrowing power, and reduce the value of assets and collateral associated with our loans held for investment;
 
    Consumer confidence levels may decline and cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities and decreased demand for our products and services; and
 
    Performance of the underlying loans in the private label mortgage backed securities we hold may deteriorate due to the economic downturn, potentially causing other-than-temporary impairment markdowns to our investment portfolio.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.
As of December 31, 2010, our total nonperforming assets, including $2.3 million in other real estate owned, amounted to $22.8 million, or 2.43% of total assets. Nonperforming assets increased from $15.6 million, or 1.92% of total assets a year earlier. We experienced $11.2 million in net charge-offs in 2010 compared to $6.7 million in 2009. Our provision for loan and lease losses was $12.9 million for the twelve months ended December 31, 2010 compared to $9.5 million for the twelve months ended December 31, 2009. Nonperforming assets adversely affect our net income in various ways, including but not limited to increased loan provision expense, and forgone loan interest income.

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Until economic and market conditions improve, we may expect to continue to incur losses relating to an increase in nonperforming assets. We generally do not record interest income on nonperforming loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in 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. There can be no assurance that we will not experience future increases in nonperforming assets.
We have a concentration risk in real estate related loans.
As of December 31, 2010, approximately 77.09% of our loan portfolio was secured by real estate, the majority of which is commercial real estate. Of that amount, 6.88% of our total loan portfolio consisted of construction loans, 43.67% related to commercial real estate, 14.96% related to residential mortgage loans (including ITIN portfolio) and 11.58% involved real estate loans not classified in the preceding definitions.
As a result of increased levels of commercial and consumer delinquencies and declining real estate values, we have experienced increasing levels of net charge-offs. A large percentage of our loan portfolio is secured by commercial real estate loans which generally carry larger loan balances and historically have involved a greater degree of financial and credit risks than residential first mortgage loans. These loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower, and therefore repayment of these loans is often dependent on the cash flow of the borrower which may be unpredictable. Continued increases in commercial and consumer delinquency levels or continued declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Monitoring and servicing our Individual Tax Identification Number (“ITIN”) residential mortgage loans could prove more costly and time consuming than previously modeled.
In April 2009, we completed a loan “swap” transaction, whereby we exchanged, without recourse, certain nonperforming assets and cash in exchange for a pool of performing ITIN loans with an outstanding balance of approximately $80.4 million. These loans are residential mortgage loans made to United States residents without a social security number and are geographically dispersed throughout the United States. This is our first ITIN loan transaction, and as such, 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 would adversely affect our noninterest expense.
Future loan losses may exceed the allowance for loan losses.
We have established a reserve for possible losses expected in connection with loans in the credit portfolio. This allowance reflects estimates of the collectability of certain identified loans, as well as an overall risk assessment of total loans outstanding.

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The determination of the amount of loan loss allowance is subjective; although the method for determining the amount of the allowance uses criteria such as risk ratings and historical loss rates, these factors may not be adequate predictors of future loan performance, particularly in the current economic climate. Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the loan loss allowance will be sufficient to protect against losses that ultimately may occur. If the loan loss allowance proves to be inadequate, we will need to make additional provisions to the allowance, which is accounted for as charges to income, which would adversely impact results of operations and financial condition. Moreover, bank regulators frequently monitor banks’ loan loss allowances, and if regulators were to determine that the allowance was inadequate, they may require us to increase the allowance, which also would adversely impact results of operations and financial condition.
Defaults may negatively impact us.
A source of risk arises from the possibility that losses will be sustained if a significant number of borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans.
We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, which management believes are appropriate to minimize risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the loan portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially affect our results of operations.
Interest rate fluctuations, which are out of our control, could harm profitability.
Our income is highly dependent on “interest rate differentials” and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank’s interest-earning assets such as loans and securities, and the interest rates paid on the Bank’s interest-bearing liabilities such as deposits and borrowings). These rates 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, in particular, the Federal Reserve Board. Because of our preference for using variable rate pricing on the majority of our loan portfolio and non-interest bearing demand deposit accounts we are asset sensitive. As a result, we are generally adversely affected by declining interest rates. In addition, changes in monetary policy, including changes in interest rates, influence the origination of loans, the purchase of investments and the generation of deposits. These changes also affect the rates received on loans and securities and paid on deposits, which could have a material adverse effect on our business, financial condition and results of operations.
Changes in the fair value of our securities may reduce our shareholders’ equity and net income.
At December 31, 2010, $189.2 million of our securities were classified as available-for-sale. At such date, the aggregate net unrealized loss on our available-for-sale securities, net of tax, was $3.2 million.
We increase or decrease shareholders’ equity by the amount of change from the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio, net of the related tax, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported shareholders’ equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the event there are credit loss related impairments, the credit loss component is recognized in earnings.
Our available for sale equity holdings consist of shares of the Federal Home Loan Bank of San Francisco (“FHLB”). As of December 31, 2010, we held stock in the FHLB totaling $7.9 million. The stock is carried at cost and is subject to recoverability testing under applicable accounting standards.

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As of December 31, 2010, we did not recognize an impairment charge related to our FHLB stock holdings; however, future negative changes to the financial condition of the FHLB may require us to recognize an impairment charge with respect to such stock holdings.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, repurchase agreements, federal funds purchased, FHLB advances, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include negative operating results, a decrease in the level of our business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole, as evidenced by turmoil in the domestic and worldwide credit markets in recent years.
The condition of other financial institutions could negatively affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, public perceptions and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients.
In the event there are credit loss related impairments, the credit loss component is recognized in earnings. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.
Changes in laws, government regulation and monetary policy may have a material effect on our results of operations.
Financial institutions have been the subject of substantial legislative and regulatory changes and may be the subject of further legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations may cause our results of operations to differ materially. In addition, the cost and burden of compliance with applicable laws and regulations have significantly increased and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for us, as well as for our borrowers, particularly as implemented by the Federal Reserve Board, primarily through open market operations in United States government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on us or our borrowers, and therefore on our results of operations.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law. Pursuant to the EESA, the Treasury was granted the authority to take a range of actions for the purpose of stabilizing and providing liquidity to the United States financial markets and has proposed several programs, including the purchase by the Treasury of certain troubled assets from financial institutions and the direct purchase by the Treasury of equity of financial institutions. There can be no assurance, however, as to the actual impact that the foregoing or any other governmental program will have on the financial markets. The failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

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In addition, current initiatives of President Obama’s Administration and the possible enactment of recently proposed bankruptcy legislation may adversely affect our financial condition and results of operations. There can be no assurance, however, as to the actual impact that the foregoing or any other governmental program will have on the financial markets.
The failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit and the trading price of our common stock.
We expect to face increased regulation and supervision of our industry as a result of the existing financial crisis, and there will be additional requirements and conditions imposed on us to the extent that we participate in any of the programs established or to be established by the Treasury or by the federal bank regulatory agencies. Such additional regulation and supervision may increase our costs and limit our ability to pursue business opportunities. The effects of such recently enacted, and proposed, legislation and regulatory programs on us cannot reliably be determined at this time.
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.
On November 14, 2008, in exchange for an aggregate purchase price of $17.0 million, we issued and sold to the Treasury pursuant to the Trouble Asset Relief Program (“TARP”) Capital Purchase Program the following: (1) 17,000 shares of our newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value per share and liquidation preference $1,000 per share (“Series A Preferred Stock”), and (2) a warrant to purchase up to 405,405 shares of our common stock, no par value per share, at an exercise price of $6.29 per share, subject to certain anti-dilution and other adjustments. The warrant may be exercised for up to ten years after issuance.
In connection with the issuance and sale of our securities, we entered into a Letter Agreement including the Securities Purchase Agreement — Standard Terms, dated November 14, 2008, with the Treasury (“Agreement”). The Agreement contains limitations on the payment of quarterly cash dividends on our common stock in excess of $0.08 per share, and on our ability to repurchase our common stock.
Our Series A Preferred Stock diminishes the net income available to our common shareholders and earnings per common share.
The dividends accrued on the Series A Preferred Stock reduce the net income available to common shareholders and our earnings per common share. In 2010 our net income of $6.2 million was reduced to $5.3 million after deducting approximately $0.94 million in dividends to the Treasury plus accretion on the Series A Preferred Stock. The Series A Preferred Stock is cumulative, which means that any dividends not declared or paid will accumulate and will be payable when the payment of dividends is resumed. The dividend rate on the Series A Preferred Stock will increase from 5% to 9% per annum five years after its original issuance if not earlier redeemed. If we are unable to redeem the Preferred Stock prior to the date of this increase, the cost of capital to us will increase substantially. Depending on our financial condition at the time, this increase in the Series A Preferred Stock annual dividend rate could have a material adverse effect on our earnings and could also adversely affect our ability to pay dividends on our common shares. Shares of Series A Preferred Stock will also receive preferential treatment in the event of the liquidation, dissolution or winding up of the Company.
Finally, the terms of the Series A Preferred Stock allow the Treasury to impose additional restrictions, including those on dividends and unilateral amendments required to comply with changes in applicable federal law.

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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.
In the event that we fail to pay dividends on the Series A Preferred Stock for a total of at least six quarterly dividend periods (whether or not consecutive), the Treasury will have the right to appoint two directors to our Board of Directors until all accrued but unpaid dividends has been paid. Currently, except as required by law, holders of the Series A Preferred Stock have limited voting rights. So long as shares of Series A Preferred Stock are outstanding, in addition to any other vote or consent of shareholders required by law or our Articles of Incorporation, the vote or consent of holders of at least 66.7% of the shares of Series A Preferred Stock outstanding is required for:
    Any authorization or issuance of shares ranking senior to the Series A Preferred Stock;
 
    Any amendments to the rights of the Series A Preferred Stock so as to adversely affect the rights, preferences, privileges or voting power of the Series A Preferred Stock; or
 
    Consummation of any merger, share exchange or similar transaction unless the shares of Series A Preferred Stock remain outstanding, or if we are not the surviving entity in such transaction, are converted into or exchanged for preference securities of the surviving entity and the shares of Series A Preferred Stock remaining outstanding or such preference securities have the rights, preferences, privileges and voting power of the Series A Preferred Stock.
The holders of our Series A Preferred Stock, including the Treasury, may have different interests from the holders of our common stock, and could vote to block the foregoing transactions, even when considered desirable by, or in the best interests of, the holders of our common stock.
We rely heavily on our management team and the loss of key officers may adversely affect operations.
Our success has been and will continue to be greatly influenced by the ability to retain existing senior management and, with expansion, to attract and retain qualified additional senior and middle management. The departure of any of our senior management could have an adverse effect on us.
Our participation in the TARP Capital Purchase Program could also have an adverse effect on our ability to attract and retain qualified executive officers. Legislation and rules applicable to the TARP Capital Purchase Program participants include extensive new restrictions on our ability to pay retention awards, bonuses and other incentive compensation to our Chief Executive Officer during the period in which the Series A Preferred Stock is outstanding. Other restrictions are not limited to our Chief Executive Officer and cover other employees whose contributions to revenue and performance can be significant.
The limitations may adversely affect our ability to recruit and retain these key employees in addition to our senior executive officers, especially if we are competing for talent against institutions that are not subject to the same restrictions.
The Federal Reserve, and perhaps the FDIC, is contemplating proposed rules governing the compensation practices of financial institutions and these rules, if adopted, may adversely affect our management retention and limit our ability to promote our objectives through our compensation and incentive programs and, as a result, adversely affect our results of operations and financial condition.
The full scope and impact of these limitations is uncertain and difficult to predict. The Secretary of the Treasury has adopted standards that implement certain compensation limitations, but these standards have not yet been broadly interpreted and remain, in many respects, ambiguous. The new and potential future legal requirements and implementing standards under the Capital Purchase Program may have unforeseen or unintended adverse effects on the financial services industry as a whole, and particularly on Capital Purchase Program participants, including us. It will likely require significant time, effort and resources on our part to interpret and apply them.

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If any of our regulators believe that we are not in compliance with new and future legal requirements and implementing standards, it could subject us to regulatory actions or otherwise adversely affect our management retention and, as a result, our results of operations and financial condition.
Even if we redeem our Series A Preferred Stock and repurchase the warrant issued to the Treasury, we will continue to be subject to evolving legal and regulatory requirements that may, among other things, require increasing amounts of our time, effort and resources to ensure compliance.
Internal control systems could fail to detect certain events.
We are subject to many operating risks, including, without limitation, data processing system failures and errors, and customer or employee fraud. There can be no assurance that such an event will not occur, and if such an event is not prevented or detected by our other internal controls and does occur, and it is uninsured or is in excess of applicable insurance limits, it could have a significant adverse impact on our reputation in the business community and our business, financial condition and results of operations.
Our operations could be interrupted if third party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We depend, and will continue to depend to a significant extent, on a number of relationships with third-party service providers. Specifically, we utilize software and hardware systems for processing, essential web hosting, debit and credit card processing, merchant processing, Internet banking systems and other processing services from third-party service providers. If these third-party service providers experience difficulties or terminate their services, and we are unable to replace them with other qualified service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be materially adversely affected.
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.
The Bank provides its customers the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. The Bank’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. The Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that the Bank’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose us and the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Bank’s systems and could adversely affect its reputation and our ability to generate deposits.
Potential acquisitions may disrupt our business and dilute shareholder value.
We continuously consider merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our stock’s tangible book value and net income per common share may occur in connection with any future transaction. In addition, while loss sharing arrangements currently associated with FDIC-assisted transactions provide some level of risk reduction; these arrangements do not completely eliminate risk. To the extent we would participate in an FDIC-assisted transaction there can be no assurances that any positive expected results of such a transaction would fully materialize.

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Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations. We may seek merger or acquisition partners that are culturally similar, have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. We do not currently have any specific plans, arrangements or understandings regarding such expansion.
We cannot say with certainty that we will be able to consummate, or if consummated, successfully integrate future acquisitions or that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In attempting to make such acquisitions, we anticipate competing with other financial institutions, many of which have greater financial and operational resources than us. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
    Potential exposure to unknown or contingent liabilities of the target company;
 
    Exposure to potential asset quality issues of the target company;
 
    Difficulty and expense of integrating the operations and personnel of the target company;
 
    Potential disruption to our business;
 
    The possible loss of key employees and customers of the target company;
 
    Difficulty in estimating the value of the target company; and
 
    Potential changes in banking or tax laws or regulations that may affect the target company.
We are subject to extensive regulation which could adversely affect our business.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Given the current disruption in the financial markets and potential new regulatory initiatives, including the Obama Administration’s recent financial regulatory reform proposal, new regulations and laws that may affect us are increasingly likely. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations.
These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted in the future, which could (1) make compliance much more difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (4) otherwise adversely affect our business or prospects for business. Moreover, banking regulators have significant discretion and authority to address what regulators perceive to be unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority by banking regulators over us may have a negative impact on our financial condition and results of operations. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
We expect to pay significantly higher FDIC premiums in the future. As the large number of bank failures continues to deplete the Deposit Insurance Fund, the FDIC adopted a revised risk-based deposit insurance assessment schedule in February 2009, which raised deposit insurance premiums. In 2010, the FDIC approved a rule requiring financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010 through and including 2012 in order to re-capitalize the Deposit Insurance Fund.

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Accordingly, the Bank prepaid the appropriate deposit insurance premiums and maintained an outstanding prepaid deposit insurance balance of $2.4 million at December 31, 2010, which continue to be amortized over the assessment period. There can be no assurance that the FDIC will not increase premiums or levy additional special assessments, either of which could have a material adverse effect on our results of operations and financial condition.
Shares eligible for future sale could have a dilutive effect.
Shares of our common stock eligible for future sale, including those that may be issued in connection with our various stock option and equity compensation plans, in possible acquisitions, and any other offering of our common stock for cash, and the issuance of 405,405 shares underlying the warrant issued to the Treasury pursuant to the TARP Capital Purchase Program, could have a dilutive effect on the market for our common stock and could adversely affect its market price. Our Articles of Incorporation authorize 50,000,000 shares of which 16,911,495 shares were outstanding as of December 31, 2010. There are 300,080 shares subject to common stock options outstanding with a weighted average exercise price of $8.17 per share.
Changes in accounting standards may impact how we report our consolidated financial condition and consolidated results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a restatement of prior period financial statements.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our websites, which would prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several back-up systems and protections and maintain business interruption insurance, these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business, prospects, financial condition and results of operations.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.
Stock price volatility may make it difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
    Actual or anticipated variations in quarterly results of operations;
 
    Recommendations by securities analysts;
 
    Operating and stock price performance of other companies that investors deem comparable to us;
 
    News reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the current economic downturn;
 
    Perceptions in the marketplace regarding us and/or our competitors;
 
    Public sentiments toward the financial services and banking industry generally;

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    New technology used, or services offered, by competitors;
 
    Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
 
    Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
 
    Changes in government regulations; and
 
    Geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results as evidenced by the current volatility and disruption of capital and credit markets.
Our profitability measures could be adversely affected if we are unable to effectively deploy the capital raised in our latest offering.
On February 11, 2010, we filed a Form S-1 Registration Statement (the “Registration Statement”) with the SEC to offer $30.0 million of shares of our common stock in an underwritten public offering (“Offering”). Additionally, we granted the underwriters in the Offering an option to purchase up to an additional $4.5 million of common stock to cover over-allotment, if any.
On March 23, 2010, we 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 the 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. Although we are periodically engaged in discussions with potential acquisition candidates, we are not currently party to any purchase or merger agreement.
On April 14, 2010 the Company announced that the underwriters of the Offering of common shares fully exercised their over-allotment option, which resulted in the issuance of an additional 1,080,000 shares of common stock, and approximately $4.4 million in additional net proceeds. The option was granted in connection with the Company’s public offering of 7,200,000 shares of common stock at a public offering price of $4.25 per share. With the additional proceeds from the exercise of the over-allotment option, the Company realized total net proceeds from the offering of approximately $33.0 million, after deducting the underwriting discount and offering expenses. The exercise of the over-allotment option brings the total number of shares of common stock sold by the Company in the offering to 8,280,000.
Only a limited trading market exists for our common stock, which could lead to significant price volatility.
Our common stock is traded on the NASDAQ Global Market under the trading symbol “BOCH,” but there have historically been low trading volumes in our common stock. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue.

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Anti-takeover provisions in our articles of incorporation could make a third party acquisition of us difficult.
In order to approve a merger or similar business combination with the owner of 20% or more of our common stock (an “Interested Shareholder”), our Articles of Incorporation contain provisions that would require a supermajority vote of 66.7% of the outstanding shares of the common stock (excluding the shares held by the Interested Shareholder or its affiliates). These provisions further require that the per share consideration to be paid in such a transaction would have to equal or exceed the greater of (a) the highest per share price paid by the Interested Shareholder (1) within two years of the transaction proposal announcement date, or (2) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement) and (b) the fair market value of the Common Stock on (1) the transaction proposal announcement date, or (2) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement).
The operation of these provisions could result in the Company becoming a less attractive target for a would-be acquirer. As a consequence, it is possible that shareholder would lose an opportunity to be paid a premium for their shares in an acquisition transaction.
There may be future sales or other dilutions of our equity which may adversely affect the market price of our common stock.
We are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive our common stock. In addition, we are not prohibited from issuing additional securities which are senior to our common stock. Because our decision to issue securities in any future offering will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings other than the Offering. Thus, our shareholders bear the risk of any future stock issuances reducing the market price of our common stock and diluting their stock holdings in us.
The exercise of the underwriters’ over-allotment option to be granted in connection with the Offering, the exercise of any options granted to our directors and employees, the exercise of the outstanding warrants for our common stock as referenced above, the issuance of shares of common stock in acquisitions and other issuances of our common stock could have an adverse effect on the market price of the shares of our common stock. In addition, the existence of options and warrants to acquire shares of our common stock may materially adversely affect the terms upon which we may be able to obtain additional capital in the future through the sale of equity securities. Any future issuances of shares of our common stock will be dilutive to existing shareholders.
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.
At December 31, 2010, our subsidiary trusts had outstanding $15.0 million of trust preferred securities. These securities are effectively senior to shares of common stock due to the priority of the underlying junior subordinated debt. As a result, we must make payments on our trust preferred securities before any dividends can be paid on our common stock; moreover, in the event of our bankruptcy, dissolution, or liquidation, the obligations outstanding with respect to our trust preferred securities must be satisfied before any distributions can be made to our shareholders. While we have the right to defer dividends on the trust preferred securities for a period of up to five years, if any such election is made, no dividends may be paid to our common or preferred shareholders during that time.
We are required to pay cumulative dividends on the $17.0 million in Series A Preferred Stock issued to the Treasury in the TARP Capital Purchase Program at an annual rate of 5% for the first five years and 9% thereafter, unless we redeem the shares earlier.

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We may not declare or pay dividends on our common stock or repurchase shares of our common stock without first having paid all accrued cumulative preferred dividends that are due. Until January 2012, we also may not increase our per share common stock dividend rate or repurchase shares of our common shares without the Treasury’s consent, unless the Treasury has transferred to third parties all the Series A Preferred Stock originally issued to it.
Our future ability to pay dividends and repurchase stock is subject to restrictions.
Since we are a holding company with no significant assets other than the Bank and our majority-owned mortgage company, we have no material source of income other than dividends received from the Bank and the mortgage company. Therefore, our ability to pay dividends to our shareholders will depend on the Bank’s and mortgage company’s ability to pay dividends to us.
Moreover, banks and financial holding companies are both subject to certain federal and state regulatory restrictions on cash dividends. We are also restricted from paying dividends if we have deferred payments of the interest on, or an event of default has occurred with respect to, our trust preferred securities or Series A Preferred Stock. Additionally, terms and conditions of our Series A Preferred Stock place certain restrictions and limitations on our common stock dividends and repurchases of our common stock.
Potential Volatility of Deposits
The Bank’s depositors could choose to withdraw their deposits from the Bank and then put it into alternative investments, causing an increase in our funding costs and reducing net interest income. Checking, savings and money market account balances can decrease when customers perceive that alternative investments, such as the stock market, as providing a better risk/return tradeoff. When customers move funds out of bank deposits into other investments, the Bank will lose a relatively low cost source of funds, increasing funding costs.
At December 31, 2010, time certificates of deposit in excess of $100,000 represented approximately 36% of the dollar value of the total deposits of the Company. As such, these deposits are considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits could adversely affect the liquidity of our profitability, business prospects, results of operations and cash flows. The Company monitors activity of volatile liability deposits on a quarterly basis.
Negative Publicity could Damage our Reputation
Reputation risk, or the risk to the Company’s earnings and capital from negative public opinion, is inherent in the financial services business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from actual or alleged conduct in any number of activities, including lending practices, corporate governance or acquisitions, and from actions taken by government regulators and community organizations in response to that conduct.
Mortgage banking interest rate and market risk
Changes in interest rates greatly affect the mortgage banking business. Our mortgage subsidiary originates, funds and services mortgage loans, which subjects the Company to various risks, including credit, liquidity and interest rate risks. Based on market conditions and other factors, the Company reduces unwanted credit and liquidity risks by selling some or all of the long-term fixed-rate mortgage loans and adjustable rate mortgages originated.
Notwithstanding the continued downturn in the housing sector, and the continued lack of liquidity in the nonconforming secondary markets, our subsidiary mortgage banking revenue continued to be strong. Interest rate and market risk can be substantial in the mortgage business. Changes in interest rates may potentially impact total origination fees.

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Interest rates impact the amount and timing of origination because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment, and selling the loan, interest rate changes will impact origination fees with a lag. The amount and timing of the impact on origination fees will depend on the magnitude, speed and duration of the change in interest rates. A decline in interest rates increases the propensity for refinancing.
As part of subsidiary mortgage banking activities, we enter into commitments to fund residential mortgage loans at specified times in the future. A mortgage loan commitment is an interest rate lock that binds us to lend funds to a potential borrower at a specified interest rate and within a specified period of time, up to 60 days after inception of the rate lock. Outstanding loan commitments expose the Company to the risk that the price of the mortgage loans underlying the commitments might decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan.
Mortgage banking revenue can be volatile from quarter to quarter
The Company earns revenue from fees for originating mortgage loans. When rates rise, the demand for mortgage loans tends to fall, reducing the revenue from loan originations. It is also possible that, because of the recession and deteriorating housing market, even if interest rates were to fall, mortgage originations may also fall, with a corresponding impact on origination fees.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
None to report.
ITEM 2. PROPERTIES
The Company’s principal administrative offices and technology center consists of approximately 12,000 square feet of space on property adjacent to the main office at 1901 Churn Creek Road, Redding, California 96002. The Bank’s main office is housed in a two-story building with approximately 21,000 square feet of space located at 1951 Churn Creek Road, Redding, California, 96002. The Bank owns the buildings and the 1.25 acres of land on which the buildings are situated. The Bank also owns the land and building located at 1177 Placer Street, Redding, California, 96001, in which the Bank uses approximately 11,650 square feet of space for its banking operations. The Company also leases approximately 3,787 square feet for the location of another branch which provides commercial and retail services. This branch is located at 3455 Placer Street, Redding, California. The lease agreement expires on August 21, 2017.
The Company’s Roseville Bank of Commerce is located on the first floor of a three-story building with approximately 8,550 square feet of space located at 1504 Eureka Road, Roseville, California. The Company leases the space pursuant to a triple net lease expiring on May 31, 2012.
The Company’s Bank of Commerce Mortgage is located at 3130 Crow Canyon Place, San Ramon, California. Bank of Commerce Mortgage occupies 13,613 square feet of space on the third floor of this four-story building. The office space is leased under a non-cancelable operating lease expiring December 31, 2014.
In addition, Bank of Commerce Mortgage has nine branch leases as of December 31, 2010. All of which are located in California except for one branch located in Colorado. All of these leases are on month to month terms.
We believe that the facilities are adequate to meet our current needs and that additional facilities are available to meet future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened legal actions arising in the ordinary course of business. The Company maintains reserves for losses from legal actions that are both probable and estimable. In the opinion of management the disposition of claims currently pending will not have a material effect on the Company’s consolidated financial position or results of operations.
ITEM 4. (REMOVED AND RESERVED)

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PART II
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The principal market on which the Company’s common stock is traded is the NASDAQ Global Market. The Company’s common stock is listed under the trading symbol “BOCH”. The following table sets forth the high and low closing sales prices of the Company’s common stock on the NASDAQ Global Market for the periods indicated:
Sales Price Per Share
                         
Quarter Ended:   High     Low     Volume  
March 31, 2010
  $ 5.68     $ 4.30       1,770,615  
June 30, 2010
  $ 5.45     $ 4.55       1,611,878  
September 30, 2010
  $ 4.85     $ 3.75       930,147  
December 31, 2010
  $ 4.25     $ 3.47       616,925  
 
                       
March 31, 2009
  $ 5.05     $ 3.90       123,989  
June 30, 2009
  $ 6.52     $ 4.08       74,922  
September 30, 2009
  $ 6.30     $ 4.50       129,689  
December 31, 2009
  $ 5.99     $ 5.10       156,391  
There were approximately 770 shareholders of the Company’s common stock as of December 31, 2010, including those held in street name, and the market price on that date was $4.25 per share.
Dividends
Cash dividends of $0.06 were paid on January 14, 2010, March 24, 2010, and July 7, 2010, and a cash dividend of $0.03 was paid on October 7, 2010, respectively to shareholders of record as of December 31, 2009, March 15, 2010, June 30, 2010, and September 30, 2010.
The Company’s ability to pay dividends is subject to certain regulatory requirements. The Federal Reserve Board (“FRB”) generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a financial services holding company’s financial position. The FRB’s policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.
In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank or the bank’s net income for its last three fiscal years (less any distributions to shareholders during such period). In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the Commissioner of the Department of Financial Institutions in an amount not exceeding the greatest of the bank’s retained earnings, the bank’s net income for its last fiscal year, or the bank’s net income for its current fiscal year.

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Securities Authorized for Issuance Under Equity Compensation Plans
We currently maintain one equity-based compensation plan which was approved by the shareholders in 2008. The following table sets forth, for each of the Company’s equity-based compensation plan, the number of shares of common stock subject to outstanding options and rights, the weighted-average exercise price of outstanding options, and the number of shares available for future award grants as of December 31, 2010:
                         
                    Number of securities
                    remaining available for
                    future issuance under
    Number of securities to           equity compensation
    be issued upon exercise   Weighted average   plans (excluding
    of outstanding options,   exercise price of   securities reflected in
Plan Category   warrants and rights   outstanding options   column (a))
Equity compensation plans approved by security holders
    300,080     $ 8.17       586,500  
Equity compensation plans not approved by security holders
  None     None     None  
 
Total
    300,080     $ 8.17       586,500  
 

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Stock Performance Graph
The following graph compares the Company’s cumulative total return to shareholders during the past five years with that of the NASDAQ Composite Stock Index and the SNL Securities $500-$1 billion Bank Asset-Size Index (the “SNL Securities Index”). The stock price performance shown on the following graph is not necessarily indicative of future performance of the Company’s Common Stock.
Bank of Commerce Holdings
Five – Year Performance Graph
(PERFORMANCE GRAPH)
Stock Performance Graph (1)
SNL Securities LC (C) 2010   (888) 275-2822
 
(1)   Assumes $100 invested on December 31, 2005, in the Company’s Common Stock, the NASDAQ, and the SNL Securities Index. The model assumes reinvestment of dividends. Source: SNL Securities (share prices for the Company’s Common Stock was furnished to SNL Securities through the NASDAQ).
Sales of Unregistered Securities
Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement — Standard Terms (“Securities Purchase Agreement”) the Company issued to the United States Department of the Treasury (“Treasury”) 17,000 shares of our Series A Preferred Stock for a total price of $17.0 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. Except under limited circumstances, the Series A Preferred Stock is non-voting.

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As part of its purchase of the Series A Preferred Stock, the Treasury received a warrant (“Warrant”) to purchase 405,405 shares of our 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. Pursuant to the Securities Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
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. Upon the request of the Treasury 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. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer.
Prior to November 14, 2011, unless we have redeemed the Series A Preferred Stock or the Treasury has transferred the Series A Preferred Stock to a third party, the consent of the Treasury 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 proceeds from the Treasury were allocated based on 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 valuation model which incorporates assumptions including our common stock price, dividend yield, stock price volatility and the risk-free interest rate. The fair value is determined based on assumptions regarding the discount rate (market rate) on our Series A Preferred Stock which was estimated to be approximately 9% at the date of issuance. The discount will be accreted to par value over a five-year term, which is the expected life of our Series A Preferred Stock. Capital Purchase Program participants may “opt out” by repaying the capital without raising additional capital subject to consultation with the appropriate federal regulator.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
No shares were repurchased during 2010.
                                 
                            (d)
                    (c)   Maximum
                    Total Number of   Number of Shares
                    Shares Purchased   That May Yet be
    (a)   (b)   As Part of Publicly   Purchased Under
    Total Number of   Average Price   Announced Plans   the Plans or
2010 Period   Shares Purchased   Paid Per Share   or Programs   Programs
Total
                       
 

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ITEM 6.   SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for the five years ended December 31, 2010, have been derived from the Company’s audited consolidated financial statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s audited consolidated financial statements and notes thereto, included elsewhere in this report.
                                         
In Thousands (Except Ratios and Per Share Data)   2010     2009     2008     2007     2006  
Statements of Income
                                       
Total Interest Income
  $ 42,391     $ 41,329     $ 37,690     $ 41,128     $ 37,610  
Net Interest Income
    32,993       28,994       21,348       22,012       22,035  
Provision for Loan Losses
    12,850       9,475       6,520       3,291       226  
Total Noninterest Income
    19,818       10,063       2,623       4,535       1,928  
Total Noninterest Expense
    30,328       20,624       15,296       15,744       13,333  
Total Revenues
    62,209       51,392       40,313       45,753       39,539  
Net Income
  $ 6,220     $ 6,005     $ 2,194     $ 6,107     $ 6,568  
 
                                       
Balance Sheets
                                       
Total Assets
  $ 939,133     $ 813,406     $ 774,214     $ 618,327     $ 583,442  
Total Gross Portfolio Loans
    600,796       601,439       527,463       494,748       414,191  
Allowance for Loan Losses
    12,841       11,207       8,429       8,233       4,904  
Total Deposits
    648,702       640,464       555,282       473,631       439,407  
Shareholders’ Equity
  $ 103,727     $ 68,807     $ 62,578     $ 46,164     $ 43,916  
 
                                       
Performance Ratios 1
                                       
Return on Average Assets 2
    0.69 %     0.75 %     0.33 %     1.04 %     1.20 %
Return on Average Shareholders’ Equity 3
    6.50 %     9.01 %     4.99 %     13.39 %     15.59 %
Dividend Payout
    41.18 %     34.81 %     127.04 %     46.47 %     40.36 %
Average Equity to Average Assets
    10.55 %     8.28 %     8.91 %     9.43 %     9.49 %
Tier 1 Risk-Based Capital — Holding Company 4
    13.74 %     12.06 %     11.58 %     9.97 %     11.42 %
Total Risk-Based Capital — Holding Company
    15.00 %     13.31 %     12.84 %     11.22 %     12.54 %
Net Interest Margin 5
    4.06 %     3.94 %     3.47 %     3.98 %     4.26 %
Average Earning Assets to Total Average Assets
    89.63 %     91.42 %     92.86 %     93.74 %     94.20 %
Nonperforming Assets to Total Assets 6
    2.43 %     1.92 %     2.98 %     2.01 %     0.00 %
Net Charge-offs to Average Loans
    1.84 %     1.14 %     1.22 %     0.00 %     -0.09 %
Allowance for Loan Losses to Total Loans
    2.14 %     1.86 %     1.60 %     1.66 %     1.18 %
Nonperforming Loans to Allowance for Loan Losses
    159.73 %     113.50 %     239.10 %     150.72 %     0.00 %
Efficiency Ratio 7
    57.43 %     52.80 %     63.81 %     59.31 %     55.64 %
Share Data
                                       
Average Common Shares Outstanding — basic
    14,951       8,711       8,713       8,858       8,760  
Average Common Shares Outstanding — diluted
    14,951       8,711       8,724       8,938       8,932  
Book Value Per Common Share
  $ 4.97     $ 5.72     $ 5.23     $ 5.27     $ 4.96  
Basic Earnings Per Common Share
  $ 0.35     $ 0.58     $ 0.25     $ 0.69     $ 0.75  
Diluted Earnings Per Common Share
  $ 0.35     $ 0.58     $ 0.25     $ 0.68     $ 0.74  
Cash Dividends Per Common Share
  $ 0.18     $ 0.24     $ 0.32     $ 0.33     $ 0.29  
 
1   Regulatory Capital Ratios and Asset Quality Ratios are end of period ratios. With the exception of end of period ratios, all ratios are based on average daily balances during the indicated period.
 
2   Return on average assets is net income divided by average total assets.
 
3   Return on average equity is net income divided by average shareholders’ equity.
 
4   Regulatory capital ratios are defined in detail in the table on page 67
 
5   Net interest margin equals net interest income as a percent of average interest-earning assets.
 
6   Nonperforming assets include all nonperforming loans (nonaccrual loans, loans 90 days past due and still accruing interest and restructured loans that are nonperforming) and real estate acquired by foreclosure.
 
7   The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and noninterest income. The efficiency ratio measures how the Company spends in order to generate each dollar of net revenue.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition as of December 31, 2010 and 2009 and results of operations for each of the years in the three-year period ended December 31, 2010 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II Item 8 of this report. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.
The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and Item 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report.
2010 Highlights
Due to conservative loan underwriting, active servicing of problem credits and maintenance of a healthy net interest margin, we have remained profitable during the economic downturn and have positioned our Company to take advantage of growth opportunities in the coming years. During 2010 we recorded net income of $6.2 million, and net income to common shareholders of $5.3 million, or $0.35 per diluted share, after deducting preferred dividend payments made to the Treasury and accretion of preferred shares under the TARP Capital Purchase Program. Net income for 2010 was marginally better than 2009 results of $6.0 million. During 2010, the Company successfully completed a public offering of common shares, which resulted in the sale of 8,280,000 shares of common stock, resulting in net proceeds of $33.0 million. The increase in common shares outstanding caused diluted earnings per share to decrease by $0.23 per share from $0.58 per share in 2009. The Company continued to pay dividends on common stock in 2010, but decreased the per share amount from $0.06 to $0.03 to ensure that dividend payout ratios remain consistent to periods prior to the common stock offering. As of December 31, 2010, the Company had total assets of $939.1 million, total portfolio loans of $600.7 million, an allowance for loan and lease losses of $12.8 million, or 2.14% of total loans, deposits outstanding of $648.7 million and shareholders’ equity of $103.7 million.
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 shareholders.
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. We have developed strategic plans that evaluate additional 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.

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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.
Risk Management
Overview
Through our corporate governance structure, risk and return is evaluated to produce sustainable revenues, reduce risks of earnings volatility and increase shareholder value. The financial services industry is exposed to four major risks; liquidity, credit, market and operational. Liquidity risk is the inability to meet liability maturities and withdrawals, fund asset growth and otherwise meet contractual obligations at reasonable market rates. Credit risk is the inability of a customer to meet its repayment obligations. Market risk is the fluctuation in asset and liability values caused by changes in market prices and yields, and Operational risk is the potential for losses resulting from events involving people, processes, technology, legal issues, external events, regulation, or reputation.
Board Committees
Our corporate governance structure begins with our Board of Directors. The Board of Directors evaluates risk through the Chief Executive Officer (CEO) and four Board Committees:
  Loan Committee reviews credit risks and the adequacy of the allowance for loan and lease losses.
 
  ALCO reviews liquidity and market risks.
 
  Audit and Qualified Legal Compliance Committee reviews the scope and coverage of internal and external audit activities; and
 
  Nominating and Corporate Governance Committee evaluates corporate governance structure, charters, committee performance and acts in best interests of the corporation and its shareholders with regard to the appointment of director nominees.
These committees review reports from management, the Company’s auditors, and other outside sources. On the basis of materials that are available to them and on which they rely, the committees review the performance of the Company’s management and personnel, and establish policies, but neither the committees nor their individual members (in their capacities as members of the Board of Directors) are responsible for daily operations of the Company. In particular, risk management activities relating to individual loans are undertaken by Company personnel in accordance with the policies established by the committees of the Board of Directors.
Senior Leadership Committees
To ensure that our risk management goals and objectives are accomplished, oversight of our risk taking and risk management activities are conducted through five Senior Leadership committees comprised of members of management:

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  The Senior Leadership Committee establishes short and long-term strategies and operating plans. The committee establishes performance measures and reviews performance to plan on a monthly basis:
 
  The Credit Round Table Committee recommends corporate credit administration practices and limits including industry concentration limits, approval requirements, and exceptions:
 
  The Technology Steering Committee establishes technological strategies, makes technology investment decisions, and manages the implementation process:
 
  The ALCO Round Table Committee establishes and monitors liquidity ranges, pricing, maturities, investment goals, and interest spread on balance sheet accounts: and
 
  The SOX 404 Compliance Committee 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.
Risk Management Controls
We use various controls to manage risk exposure within the Company. Budgeting and planning processes provide for early indication of unplanned results or risk levels. Models are used to estimate market risk and net interest income sensitivity. Segmentation analysis is used to estimate expected and unexpected credit losses. Compliance with regulatory guidelines plays a significant role in risk management as well as corporate culture and the actions of management. Our code of ethics provides the guidelines for all employees to conduct themselves with the highest integrity in the delivery of service to our clients.
Liquidity Risk Management
Liquidity Risk
Liquidity risk is the inability to meet liability maturities and withdrawals, fund asset growth and otherwise meet contractual obligations at reasonable market rates. Liquidity management involves maintaining ample and diverse funding capacity, liquid assets and other sources of cash to accommodate fluctuations in asset and liability levels due to business shocks or unanticipated events. ALCO is responsible for establishing our liquidity policy and the accounting department is responsible for planning and executing the funding activities and strategies.
Sources of liquid assets consist of the repayments and maturities of loans, selling of loans, short-term money market investments, and cashflows, maturities and sales from the available-for-sale security portfolio. Increased available-for-sale security balances were responsible for the major use of liquidity, followed by growth in the loan portfolio. The weighted-average life of the available-for-sale security portfolio is 7.7 years.
Liquidity is generated from liabilities through deposit growth and Federal Home Loan Bank borrowings. We emphasize preserving and maximizing customer deposits and other customer-based funding sources. Deposit marketing strategies are reviewed for consistency with liquidity policy objectives.
We have available correspondent banking lines of credit through correspondent relationships totaling approximately $10.0 million and available secured borrowing lines of approximately $46.6 million with the Federal Home Loan Bank of San Francisco. In addition, we periodically obtain secured borrowings from the Federal Reserve Bank of San Francisco (“Reserve Bank”) and had $44.5 million in available borrowing lines at the Reserve Bank. While these sources are expected to continue to provide significant amounts of liquidity in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions. Liquidity is also provided through cash flows generated through our operations.
Our liquid assets (cash and amounts due from banks, interest bearing deposits held at other banks, and available-for-sale securities) totaled $252.5 million or 26.89% of total assets at December 31, 2010, $148.3 million or 18.2% of total assets at December 31, 2009 and $216.9 million or 28.01% of total assets at December 31, 2008. In 2010, the Holding Company’s primary sources of funding were proceeds from the issuance of common stock, and cash dividends from the Bank.

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The Holding Company expects to receive dividends from the Bank in 2011. See Note 24 to the Consolidated Financial Statements for a discussion of the restrictions on the Bank’s ability to pay dividends.
To accommodate future growth and business needs, we develop an annual capital expenditure budget during strategic planning sessions. We expect that our earnings, acquisition of core deposits and wholesale borrowing arrangements will be sufficient to support liquidity needs in 2011.
Other Borrowings
We actively use Federal Home Loan Bank (“FHLB”) advances as a source of wholesale funding to provide liquidity and to implement leverage strategies. At December 31, 2010, the Company had three short term advances outstanding. Two of the advances were fixed rate, and one floated to three month LIBOR plus one basis point. The advances did not contain call or put features. As of December 31, 2010, the Company had $141.0 million in FHLB advances outstanding compared to $70.0 million at December 31, 2009 and $120.0 million at December 31, 2008.
                         
    2010     2009     2008  
Securities sold under agreements to repurchase with weighted average interest rates of 0.34%, 0.49% and 0.62% at December 31, 2010, 2009 and 2008, respectively
  $ 13,547,562     $ 9,620,867     $ 13,853,255  
 
                       
Federal Home Loan Bank borrowings with weighted average interest rates of 0.29%, 0.85% and 2.41% at December 31, 2010, 2009 and 2008, respectively
    141,000,000       70,000,000       120,000,000  
 
                 
Total Other Borrowings
  $ 154,547,562     $ 79,620,867     $ 133,853,255  
 
                         
    2010     2009     2008  
Securities sold under agreements to repurchase:
                       
Maximum outstanding at any month end
  $ 18,820,233     $ 12,359,119     $ 14,581,881  
Average balance during the year
    12,274,351       11,006,007       13,038,870  
Weighted average interest rate during year
    0.42 %     0.46 %     1.32 %
 
                       
Federal Home Loan Bank borrowings:
                       
Maximum outstanding at any month end
  $ 147,000,000     $ 130,000,000     $ 120,000,000  
Average Balance during the year
    112,783,562       103,317,808       83,048,645  
Weighted average interest rate during year
    0.56 %     1.93 %     3.40 %
Credit Risk Management
Credit risk arises from the inability of a customer to meet its repayment obligations. Credit risk exists in our outstanding loans, letters of credit and unfunded loan commitments. We manage credit risk based on the risk profile of the borrower, repayment sources and the nature of underlying collateral given current events and conditions.
Commercial portfolio credit risk management
Commercial credit risk management begins with an assessment of the credit risk profile of the individual borrower based on an analysis of the borrower’s financial position in light of current industry, economic or geopolitical trends.
As part of the overall credit risk assessment of a borrower, each commercial credit is assigned a risk grade and is subject to approval based on existing credit approval standards. Risk grading is a substantial factor in determining the adequacy of the allowance for loan and lease losses.

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Credit decisions are determined by Credit Administration to certain limitations and approvals from the Loan Committee above certain limitations. Credit risk is continuously monitored by Credit Administration for possible adjustment if there has been a change in the borrower’s ability to perform under its obligations. Additionally, we manage the size of our credit exposure through loan sales and loan participation agreements. The primary sources of repayment of our commercial loans are from the borrowers’ operating cash flows and the borrowers’ conversion of short-term assets to cash. The net assets of the borrower or guarantor are usually identified as a secondary source of repayment. The principal factors affecting our risk of loss from commercial lending include each borrower’s ability to manage its business affairs and cash flows, local and general economic conditions and real estate values in our service area. We manage our commercial loan portfolio by monitoring our borrowers’ payment performance and their respective financial condition and make periodic adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. Our evaluations of our borrowers’ are facilitated by management’s knowledge of local market conditions and periodic reviews by a consultant of our credit administration policies.
Real estate portfolio credit risk management
The principal source of repayment of our real estate construction loans is the sale of the underlying collateral or the availability of permanent financing from the Company or other lending source. The principal risks associated with real estate construction lending include project cost overruns that absorb the borrower’s equity in the project and deterioration of real estate values as a result of various factors, including competitive pressures and economic downturns.
We manage our credit risk associated with real estate construction lending by establishing a loan-to-value ratio on projects on an as-completed basis, inspecting project status in advance of disbursements, and matching maturities with expected completion dates. Generally, we require a loan-to-value ratio of not more than 80% on single family residential construction loans. Our specific underwriting standards and methods for each principal line of lending include industry-accepted analysis and modeling and certain proprietary techniques. Our underwriting criteria are designed to comply with applicable regulatory guidelines, including required loan-to-value ratios. Our credit administration policies contain mandatory lien position and debt service coverage requirements, and the Bank generally requires a guarantee from individuals owning 20% or more of the borrowing entity.
Concentrations of credit risk
Portfolio credit risk is evaluated with the goal that concentrations of credit exposure do not result in unacceptable levels of risk. Concentrations of credit exposure can be measured in various ways including industry, product, geography, and customer relationship. We review non-real estate commercial loans by industry and real estate loans by geographic location and property type.
Nonperforming assets
Our 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 include impaired loans which may be on nonaccrual, are 90 days past due and still accruing, or have been restructured and are not in compliance with their modified terms.
Allowance for loan and lease losses (ALLL)
The allowance for loan and lease losses represents management’s best estimate of probable losses in the loans and leases portfolio.

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Within the allowance, reserves are allocated to segments of the portfolio based on specific formula components. Changes to the allowance for credit losses are reported in the Consolidated Statement of Income in the provision for loan and lease losses.
We perform periodic and systematic detailed evaluations of our lending portfolio to identify and estimate the inherent risks and assess the overall collectability. We evaluate general conditions such as the portfolio composition, size and maturities of various segmented portions of the portfolio such as secured, unsecured, construction, and Small Business Administration (“SBA”). We also evaluate concentrations of borrowers, industries, geographical sectors, loan product, loan classes and collateral types, volume and trends of loan delinquencies and nonaccrual; criticized and classified assets and trends in the aggregate in significant credits identified as watch list items.
Our allowance for loan and lease losses is the accumulation of various components that are calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation based on certain observable data that management believes most reflects the underlying credit losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data, taking into account the interaction of the components over time.
An essential element of the methodology for determining the allowance for loan and lease losses is our credit risk evaluation process, which includes credit risk grading of individual, commercial, construction, commercial real estate, and consumer loans. Loans are assigned credit risk grades based on our assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Loans are reviewed on an annual or rotational basis or as management become aware of information affecting the borrower’s ability to fulfill its obligations. Credit risk grades carry a dollar weighted risk percentage.
For individually impaired loans, we measure impairment based on the present value of expected future principal and interest cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. When developing the estimate of future cash flows for a loan, we consider all available information reflecting past events and current conditions, including the effect of existing environmental factors. In addition to the ALLL, an allowance for unfunded loan commitments and letters of credit is determined using estimates of the probability of funding and the associated inherent credit risk. This reserve is carried as a liability on the consolidated balance sheet.
We make provisions to the ALLL on a regular basis through charges to operations that are reflected in our consolidated statements of income as provision expense for loan losses. When a loan is deemed uncollectible, it is charged against the allowance. Any recoveries of previously charged-off loans are credited back to the allowance. There is no precise method of predicting specific losses or amounts that ultimately may be charged-off on particular categories of the loan portfolio.
Various regulatory agencies periodically review our ALLL as an integral part of their examination process. Such agencies may require us to provide additions to the allowance based on their judgment of information available to them at the time of their examination. There is uncertainty concerning future economic trends. Accordingly, it is not possible to predict the effect future economic trends may have on the level of the provisions for possible loan losses in future periods. The ALLL should not be interpreted as an indication that charge-offs in future periods will occur in the stated amounts or proportions.

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Market Risk Management
General
Market risk is the potential loss due to adverse changes in market prices and interest rates. Market risk is inherent in our operating positions and activities including customers’ loans, deposit accounts, securities and long-term debt. Loans and deposits generate income and expense, respectively, and the value of cash flows changes based on general economic levels, and most importantly, the level of interest rates.
The goal for managing our assets and liabilities is to maximize shareholder value and earnings while maintaining a high quality balance sheet without exposing the Company to undue interest rate risk. The absolute level and volatility of interest rates can have a significant impact on our profitability. Market risk arises from exposure to changes in interest rates, exchange rates, commodity prices, and other relevant market rate or price risk. We do not operate a trading account, and do not hold a position with exposure to foreign currency exchange. We face market risk through interest rate volatility. Net interest income or margin risk is measured based on rate shocks over different time horizons versus a current stable interest rate environment. Assumptions used in these calculations are similar to those used in the planning and budgeting model. The overall interest rate risk position and strategies are reviewed on an ongoing basis with ALCO.
Securities Portfolio
The securities portfolio is central to our asset liability management strategies. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and regulatory requirements. We classify our securities as “available-for-sale” or “held-to-maturity” at the time of purchase. We do not engage in trading activities. Securities held-to-maturity is carried at cost adjusted for the accretion of discounts and amortization of premiums. Securities available-for-sale may be sold to implement our asset liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. Securities available-for-sale are recorded at fair value and unrealized gains or losses, net of income taxes, are reported as a component of accumulated other comprehensive income(loss), in a separate component of shareholders’ equity. Gain or loss on sale of securities is based on the specific identification method.
Operational Risk Management
Operational risk is the potential for loss resulting from events involving people, processes, technology, legal or regulatory issues, external events, and reputation. In keeping with the corporate governance structure, the Senior Leadership committee is responsible for operational risk controls. Operational risks are managed through specific policies and procedures, controls and monitoring tools. Examples of these include reconciliation processes, transaction monitoring and analysis and system audits. Operational risks fall into two major categories, business specific and company wide. The Senior Leadership committee works to ensure consistency in policies, processes and assessments. With respect to company wide risks, the Senior Leadership committee works directly with members of our Board of Directors to develop policies and procedures for information security, business resumption plans, compliance and legal issues.
Critical Accounting Policies
General
Our significant accounting principles are described in Note 2 to the consolidated financial statements and are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Bank of Commerce Holdings’ consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

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The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. Some of our accounting principles require significant judgment to estimate values of assets or liabilities. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to transactions to determine the most appropriate treatment.
Valuation of Investments and Impairment of Securities
Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the fair value of these assets, it is possible that changes in risks in the near term could have a material adverse impact on our results of operations or equity.
Our investment portfolio is subject to market declines below amortized cost that may be other-than-temporary. A significant judgment in the valuation of investments is the determination of when an “other-than-temporary” impairment has occurred. The ALCO Committee reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Any decline that is determined to be other-than-temporary is recorded as an “other-than-temporary” impairment (“OTTI”) loss in the results of operations in the period in which the determination occurred.
An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary. 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 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 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.
The ALCO Committee’s assessment of whether an OTTI loss should be recognized incorporates both quantitative and qualitative information. 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) our intent and ability to retain the 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.
Allowance for Loan and Lease Losses (ALLL)
The allowance for loan and lease losses is management’s best estimate of the probable losses that may be sustained in our loan portfolio at the balance sheet date. The allowance is based on two basic principles of accounting: (1) that losses be accrued when they are probable of occurring and estimable and (2) that losses be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

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We perform periodic and systematic detailed evaluations of our lending portfolio using several analytical tools and benchmarks to calculate a range of probable outcomes and estimate the inherent risks and assess the overall collectability. Although, no single statistic or measurement determines the adequacy of the allowance, we consider general conditions such as the portfolio composition, size and maturities of various segmented portions of the portfolio.
Additional factors include concentrations of borrowers, industries, geographical sectors, loan product, loan classes and collateral types; volume and trends of loan delinquencies and nonaccrual; criticized and classified assets and trends in the aggregate in significant credits identified as watch list items. There are several components to the determination of the adequacy of the ALLL. Each of these components is determined based upon estimates that can and do change when the actual events occur. For those segments that require an ALLL, we estimate loan losses on a monthly basis based upon its ongoing loan review process and analysis of loan performance. We follow a systematic and consistently applied approach to select the most appropriate loss measurement methods and support our conclusions and rationale with written documentation. One method of estimating loan losses for groups of loans is through the application of loss rates to the groups’ aggregate loan balances. Such rates typically reflect historical loss experience for each group of loans, adjusted for relevant economic factors over a defined period of time. We evaluate and modify our loss estimation model as needed to ensure that the resulting loss estimate is consistent with GAAP.
When a loan is individually impaired, we measure impairment based on the present value of expected future principal and interest cash flows discounted at the loan’s effective interest rate, except that as a practical expedient we may measure impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. When developing the estimate of future cash flows for a loan, we consider all available information reflecting past events and current conditions, including the effect of existing environmental factors.
Stock-Based Compensation
We measure the cost of employee services received in exchange for an award of equity instruments. The cost is determined based on the fair value of the award on the grant date. The grant date fair value is measured using the Black Scholes option-pricing model with assumptions made regarding volatility, the risk-free interest rate, expected dividends, assumed forfeiture rate and expected term. The grant date fair value is recognized in the statement of income over the service period of the award.
Revenue recognition
Our primary source of revenue is net interest income, which is the difference between the interest income it receives on interest-earning assets and the interest expense it pays on interest-bearing liabilities. Another source of revenue is fee income, which includes fees earned on deposit services, income from SBA lending, electronic-based cash management services, mortgage brokerage fee income and merchant credit card processing services. Interest income is recorded on an accrual basis. Note 2 to the Consolidated Financial Statements offers an explanation of the process for determining when the accrual of interest income is discontinued on an impaired loan.
Income Taxes
We account 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. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced.

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Mortgages Held for Sale
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, 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 of 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.
Derivative Loan Commitments
Our 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. Our 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.
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 non-recurring basis, such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily impaired. These non-recurring 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 25 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Other Real Estate Owned
Real estate acquired by foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated selling costs.

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Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired, less costs to sell, by a charge to the allowance for loan losses, if necessary. Fair value of other real estate is generally determined based on an appraisal of the property. Any subsequent write-downs are charged against noninterest expenses. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.
Gain recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. This includes the buyer’s initial and continuing investment, the degree of continuing involvement by the Company with the property after the sale, and other matters. Under certain circumstances, revenue recognition may be deferred until these criteria are met.
Financial Highlights — Results of Operations
The following discussion and analysis provides a comparison of the results of operations for the five years ended December 31, 2010. This discussion should be read in conjunction with the consolidated financial statements and related notes.
Key Financial Ratios
                                         
    2010     2009     2008     2007     2006  
Profitability
                                       
Return on average assets
    0.69 %     0.75 %     0.33 %     1.04 %     1.20 %
Return on average equity
    6.50 %     9.01 %     4.99 %     13.39 %     15.59 %
Average earning assets to total average assets
    89.63 %     91.42 %     92.86 %     93.74 %     94.20 %
Interest Margin
                                       
Net interest margin
    4.06 %     3.94 %     3.47 %     3.98 %     4.26 %
Asset Quality
                                       
Allowance for loan losses to total loans
    2.14 %     1.86 %     1.60 %     1.66 %     1.18 %
Nonperforming assets to total assets
    2.43 %     1.92 %     2.98 %     2.01 %     0.00 %
Net charge-offs to average loans
    1.84 %     1.14 %     1.22 %     0.00 %     -0.09 %
Liquidity
                                       
Loans to deposits
    92.60 %     93.87 %     93.28 %     102.67 %     93.08 %
Liquidity ratio
    41.86 %     38.84 %     22.56 %     18.49 %     27.96 %
Capital
                                       
Tier 1 risk-based capital — Bank
    13.34 %     11.57 %     11.58 %     9.97 %     11.42 %
Total risk-based capital — Bank
    14.59 %     12.83 %     12.84 %     11.22 %     12.54 %
Efficiency
                                       
Efficiency ratio
    57.43 %     52.80 %     63.81 %     59.31 %     55.64 %
The above table represents key financial performance ratios that our Senior Leadership Team monitors on a monthly basis in comparison with Uniform Bank Performance Report peer data. Uniform Bank Performance Reports are available on all Federal Deposit Insurance Corporation insured financial institutions and are used to measure quality performance to peer groupings and may be obtained online at www.fdic.gov. Management monitors the high-performing sector of the peer group and uses this data to examine strategies of other high-performing financial institutions and to establish the financial performance goals of the Company on an annual basis. These goals are then communicated through budgets, strategies, planning and projections to the Senior Leadership Team for implementation. Results are monitored both to plan and to peer group at the Board of Directors level on a monthly basis.

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Balance Sheet
The Company’s total assets were $939.1 million as of December 31, 2010 compared to $813.4 million as of December 31, 2009. The $125.7 million or 15.5% increase in total assets was centered in the investment portfolio and to a lesser extent, the Company’s held for sale loan portfolio. The investment portfolio increased $109.2 million while the held for sale mortgage portfolio increased $15.7 million. Management executed a investment leverage strategy in 2010 and invested in highly liquid agency mortgage-backed securities and other agency debt, highly credit rated municipal securities, and highly credit rated corporate securities. The increase in held for sale mortgage portfolio reflects significant increases in mortgage loan originations associated with the Company’s affiliate, Bank of Commerce Mortgage. The held for investment loan portfolio remained flat to the prior year and reflected tepid loan demand in the Company’s markets.
Total deposits increased $8.2 million or 1.29% over December 31, 2009. While deposit growth was modest in 2010, management made solid gains in core deposit growth. Management defines core deposits as non-maturity deposits including interest and non-interest bearing demand deposits, money market accounts, and savings accounts. Demand deposits increased $20.0 million or 8.6% when compared to December 31, 2009 while money market and savings accounts increased $18.2 million or 27.9% over the same period. Time deposits decreased $30.0 million or 8.8% over December 31, 2009 and reflects the planned maturity and non-renewal of brokered time deposits along with some deposit mitigation to non-maturity deposits.
Asset Quality
Our loan portfolio remains strained. The commercial and industrial, and real estate portfolios continued to experience deterioration in 2010. Both portfolios have been negatively impacted by the current economic recession and significant weakness in the real estate market. Net charge-offs were $11.2 million for the year ended December 31, 2010 as compared to $6.7 million for the year ended December 31, 2009. The charge-offs were generally equally divided between in the Company’s residential, commercial real estate, and commercial and industrial portfolios. Management remains committed to working with our customers experiencing financial difficulties to find potential solutions that benefit both parties.
Capital
The capital ratios of Bank of Commerce Holdings continue to be above the well-capitalized guidelines established by regulatory agencies. The Company successfully raised $33.0 million in net equity proceeds in 2010. The increased level of capital increased the Company’s total risk-based capital ratio to 15.00% as compared to 13.31% on December 31, 2009. The Company’s strong equity position will allow management to continue to pursue and evaluate strategic opportunities within our markets and consider opportunities outside of our current footprint.
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. 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 considered asset sensitive. Consequently, we benefit in a rising rate environment and we are affected adversely by declining interest rates.

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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 re-pricing opportunities of our liabilities, causing our net interest margin to contract until the re-pricing 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.
Mortgage brokerage services are performed by Bank of Commerce Mortgage™ subsidiary. Mortgage brokerage services offers residential real estate loans with fourteen offices in two different states and licenses in California, Oregon, Washington, Idaho and Colorado. Mortgages that are originated are sold, servicing included, in the secondary market or directly to correspondent financial institutions. We derive fee income from our mortgage brokerage services.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
We reported net income of $6.2 million and net income to common shareholders of $5.3 million for the year ended December 31, 2010, representing an increase of approximately $200,000 or 3.33%, over net income of $6.0 million and net income to common shareholders of $5.1 million for the year ended December 31, 2009. During 2010, our net interest margin increased modestly as the Company continued to fund earning assets with low cost deposits and wholesale borrowings. The downward repricing of wholesale borrowings continued to provide positive benefit to our net interest margin. Consistent with 2009, gains on the sale of securities contributed significantly to our 2010 earnings. In 2010, the Company also benefited from the settlement of the irrevocable loss guarantee (Put Reserve) associated with the ITIN loan portfolio (see Note 28), which increased noninterest income by $1.8 million.
During 2010, we increased provisions for loan and lease losses significantly. Increased provisions are directly attributed to further deterioration in the Commercial and Industrial portfolio and continuing weakness in our real estate portfolio. Our provision for loan and lease losses increased to $12.9 million in 2010 from $9.5 million in 2009. Ongoing credit quality reviews and current appraisals identified impairment within the portfolio and significantly contributed to increased provisions in 2010.

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Nonperforming assets as a percentage of total assets increased to 2.43% compared to 1.92% in 2009. The majority of the increase in nonperforming assets is primarily related to the ITIN loan portfolio. The current recession with the accompanying depressed residential real estate market continues to stress these assets. Accordingly, management has taken an aggressive and prudent stance in monitoring these credits, and will continue to do so in 2011.
Return on average assets (ROA) was 0.69% in 2010 and 0.75% in 2009. Return on average common equity (ROE) was 6.50% in 2010 compared 9.01% in 2009. Diluted earnings per share for 2010 and 2009 were $0.35 and $0.58, respectively, which was a year-over-year decrease of 39.7%. The decrease in diluted earnings per share is a direct result from the additional common shares outstanding. During 2010, the Company successfully completed a public offering of common stock, whereby issuing 8,280,000 of common stock at $4.25 per share with net equity proceeds of $33.0 million.
Our average total assets increased to $906.1 million in 2010 or 12.7% from $804.2 million in 2009. Total deposits grew by $8.2 million or 1.3% over 2009; the deposit growth was centered in noninterest bearing demand accounts and savings accounts. Total gross loans decreased by $0.6 million or 0.11% over 2009; decreases in the real estate construction portfolio were offset by increases to the home equity line portfolio, the remaining mix remained consistent with 2009. During the first quarter of 2010 the Company purchased a pool of performing home equity revolving and non revolving loans which accounted for the majority of the increase in the home equity portfolio.
The yield on the loan portfolio decreased 30 basis points to 5.78% compared to 6.08% in 2009. Yields on all earning assets decreased 40 basis points to 5.22% compared to 5.62% in 2009. Our income is highly dependent on “interest rate differentials” and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank’s interest-earning assets such as loans and securities, and the interest rates paid on the Bank’s interest-bearing liabilities such as deposits and borrowings).
These rates 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, in particular, the Federal Reserve Board (“FRB”). Because of our predisposition to variable rate pricing on our assets and level of time deposits, 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. As such, we are currently considered liability sensitive in the 100bp to 300bp upward rate shock, and asset sensitive for 400bp 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.
During 2010, the Company entered into a series of deferred starting interest rate swap contracts to mitigate a portion of future interest rate risk. The contracts were forward starting with the first one becoming effective on March 1, 2012. Management designated the deferred interest rate swap contracts as cash flow hedges of interest payments. During 2011, the Company settled the deferred interest rate swap contracts and removed the hedge designation. As a result of the settlement of the deferred interest rate swap contracts, the Company realized $3.0 million in cash proceeds from the counterparty. Management intends on reclassifying the gains realized on the hedge instruments into earnings from other comprehensive income, as a reduction of interest expense, in the same periods during which the hedged forecasted transaction affects earnings on the basis it is probable the forecasted transaction will occur. As such, the Company’s margin will benefit from the future reclassifications of these gains by lowering interest expense on Federal Home Loan advances. This benefit is expected to begin in March 2012.
Funding costs decreased by 50 basis points to 1.37% compared with 1.87% in 2009, reflecting the current lower cost rate environment.

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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
We reported net income of $6.0 million and net income to common shareholders of $5.1 million for the year ended December 31, 2009, representing an increase of approximately $2.87 million or 130.7%, over net income of $2.19 million for the year ended December 31, 2008.
The increase can be primarily attributed to loan growth funded with low cost deposits and re-pricing wholesale borrowings with the resulting effect expanding our net interest margin and net income for the year.
During 2009, we increased provisions for loan and lease losses significantly. Increased provisions are directly attributed to deterioration in the Commercial and Industrial portfolio and continuing weakness in our real estate portfolio.
Our provision for loan and lease losses increased to $9.5 million in 2009 from $6.5 million in 2008. Ongoing credit quality reviews identified impairment within the portfolio and greatly contributed to the increased provisions in 2009.
Nonperforming assets as a percentage of total assets decreased to 1.92% compared to 2.98% in 2008. The decrease in nonperforming assets is primarily attributed to a bulk sale of nonperforming assets in the second quarter of 2009. On April 17, 2009, we completed a “Loan Swap” transaction which included the purchase of a portfolio of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The ITIN portfolio was purchased from a private equity firm in exchange for a combination of approximately $14.0 million in nonperforming loans and cash of approximately $67.0 million. The nonperforming loans were transferred without recourse. At the settlement date, the mortgage loan pool contained 859 single family residential mortgages with an average principal balance of approximately $96,596, a weighted average credit score of 647, a weighted average loan to value ratio of 89%, a weighted average yield of 7.44% and all loans were fully documented. The ITIN mortgage pool is geographically dispersed throughout the United States.
Return on average assets (ROA) was 0.75% in 2009 and 0.33% in 2008. Return on average common equity (ROE) was 9.01% in 2009 compared 4.99% in 2008. Diluted earnings per share for 2009 and 2008 were $0.58 and $0.25, respectively, which was a year-over-year increase of 132.0%. Our average total assets increased to $804.2 million in 2009 or 21.4% from $662.3 million in 2008. Total deposits grew by $85.2 million or 15.3% over 2008; the deposit growth was centered in certificates of deposit followed by interest-bearing checking accounts. Total loans grew by $73.9 million or 14.0% over 2008; loan growth was centered in residential mortgage loans.
The yield on the loan portfolio decreased 39 basis points to 6.08% compared to 6.47% in 2008. Yields on total earning assets decreased 51 basis points to 5.62% compared to 6.13% in 2008. Our income is highly dependent on “interest rate differentials” and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank’s interest-earning assets such as loans and securities, and the interest rates paid on the Bank’s interest-bearing liabilities such as deposits and borrowings).
These rates 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, in particular, the Federal Reserve Board (“FRB”). Because of our predisposition to variable rate pricing on our assets and level of time deposits, we are considered asset sensitive. Consequently, we benefit in a rising rate environment and we are adversely affected by declining interest rates.
Funding costs decreased 115 basis points to 1.87% compared with 3.02% in 2008, reflecting the current lower cost rate environment.

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Net Interest Income and Net Interest Margin
Our primary source of income is derived from net interest income. Net interest income represents the excess of interest and fees earned on assets (loans, securities and federal funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets.
Net interest income increased $4.0 million to $33.0 million in 2010 compared to $29.0 million in 2009 and $21.3 million in 2008, representing a 13.79% increase in 2010 over 2009, and a 35.82% increase in 2009 over 2008. The average balance of total earning assets increased to $812.1 million in 2010 compared to $735.2 million in 2009, which reflects a 10.46% increase.
Portfolio loans, the largest component of average earning assets, increased $50.9 million or 8.63% compared with the prior year period. During the period, yields on average earning assets decreased by 40 basis points to 5.22%.
The decrease in yields on average earning assets is primarily due to two factors; relatively higher yielding loans either maturing or being reclassified as nonaccrual and current year additions to the available for sale investment portfolio at relatively lower market rates.

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The following table sets forth our daily average balance sheet, related interest income or expense and yield or rate paid for the periods indicated. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
                                                                         
(Dollars in thousands)   2010     2009     2008  
    Average                     Average                     Average              
    Balance     Interest     Yield/Rate     Balance     Interest     Yield/Rate     Balance     Interest     Yield/Rate  
Interest Earning Assets
                                                                       
Portfolio loans1
  $ 640,213     $ 37,000       5.78 %   $ 589,336     $ 35,860       6.08 %   $ 518,759     $ 33,582       6.47 %
Tax-exempt securities
    42,172       1,692       4.01 %     28,384       1,164       4.10 %     24,399       1,197       4.91 %
US government securities
    27,423       617       2.25 %     8,606       343       3.99 %     13,637       553       4.06 %
Mortgage backed securities
    48,972       1,466       2.99 %     53,722       3,107       5.78 %     37,328       1,916       5.13 %
Federal funds sold
    995       2       0.20 %     13,438       32       0.24 %     17,987       303       1.68 %
Other securities
    52,322       1,614       3.08 %     41,305       823       1.99 %     2,918       139       4.76 %
 
                                                     
Average Earning Assets
  $ 812,097     $ 42,391       5.22 %   $ 734,791     $ 41,329       5.62 %   $ 615,028     $ 37,690       6.13 %
Cash & due from banks
    28,748                       26,841                       16,298                  
Bank premises
    9,814                       10,322                       11,097                  
Other assets
    55,440                       32.257                       19,866                  
 
                                                                 
Average Total Assets
  $ 906,099                     $ 804,211                     $ 662,289                  
 
                                                                 
Interest Bearing Liabilities
                                                                       
Interest bearing demand
  $ 141,983     $ 968       0.68 %   $ 145,542     $ 1,015       0.70 %   $ 138,743     $ 2,173       1.57 %
Savings deposits
    76,718       921       1.20 %     62,846       963       1.53 %     56,914       1,576       2.77 %
Certificates of deposit
    321,051       6,151       1.92 %     317,417       7,628       2.40 %     234,493       8,552       3.65 %
Repurchase agreements
    12,274       52       0.42 %     11,006       51       0.46 %     13,043       173       1.33 %
Other borrowings
    134,255       1,306       0.97 %     122,057       2,678       2.19 %     98,518       3,868       3.93 %
 
                                                     
Average Interest Liabilities
  $ 686,281     $ 9,398       1.37 %   $ 658,868     $ 12,335       1.87 %   $ 541,711     $ 16,342       3.02 %
Noninterest bearing demand
    92,433                       69,250                       70,933                  
Other liabilities
    31,748                       9,467                       5,660                  
Shareholders’ equity
    95,637                       66,626                       43,985                  
 
                                                                 
Average Liabilities and Shareholders’ Equity
  $ 906,099                     $ 804,211                     $ 662,289                  
 
                                                                 
 
                                                                       
Net Interest Income and Net Interest Margin
          $ 32,993       4.06 %           $ 28,994       3.94 %           $ 21,348       3.47 %
 
                                                                 
Interest income on loans includes fee income (expense) of approximately $250,475, ($21,607) and $76,857 for the years ended December 31, 2010, 2009 and 2008 respectively.
During the year ending December 31, 2010, the Company leveraged the net proceeds from the common stock issuance by purchasing approximately $100.0 million in agencies and highly credit rated available for sale securities. Pursuant to these transactions, the available for sale portfolio was repositioned to mitigate interest rate risk. Accordingly, some existing portfolio securities with higher stated yields were sold, while the securities purchased carried lower stated yields. As a result, for the year ending December 31, 2010 the weighted average yield on the available for sale investment portfolio decreased by ninety seven basis points compared to year ending December 31, 2009.
Average deposits and borrowings increased by $27.4 million over the same period a year ago. The yield on funding costs decreased to 1.37% compared with 1.87% for the same period a year ago. The Company utilizes retail deposits, brokered deposits and FHLB borrowings as its main sources of funding.
 
1   Average nonaccrual loans and average loans held for sale of $20.5 and $30.6 million are included respectively

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The following tables set forth changes in interest income and expense for each major category of interest earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the periods indicated. Changes not solely attributable to rate or volume has been allocated to volume. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.
Analysis of Changes in Net Interest Income
Years ended December 31,
                                                 
(Dollars in thousands)   2010 over 2009     2009 over 2008  
    Variance     Variance             Variance     Variance        
    due to     due to             due to     due to        
    Average     Average             Average     Average        
    Volume     Rate     Total     Volume     Rate     Total  
Increase (Decrease)
                                               
In Interest Income:
                                               
Portfolio loans
  $ 2,490       ($1,350 )   $ 1,140     $ 3,791       ($1,512 )   $ 2,279  
Tax-exempt securities
    547       (19 )     528       115       (147 )     (32 )
US government securities
    386       (112 )     274       (203 )     (7 )     (210 )
Mortgage backed securities
    (517 )     (1,124 )     (1,641 )     1,009       182       1,191  
Federal funds sold
    (26 )     (4 )     (30 )     (8 )     (99 )     (107 )
Other securities
    453       338       791       480       38       518  
 
                                   
Total Increase (Decrease)
    3,333       (2,271 )     1,062       5,184       (1,545 )     3,639  
 
                                   
 
                                               
(Decrease) Increase
                                               
In Interest Expense:
                                               
Interest bearing demand
    (30 )     (17 )     (47 )     (254 )     (904 )     (1,158 )
Savings accounts
    114       (156 )     (42 )     (85 )     (528 )     (613 )
Certificates of deposit
    (317 )     (1,160 )     (1,477 )     1,263       (2,188 )     (925 )
Repurchase agreements
    4       (3 )     1       (37 )     (84 )     (121 )
Other borrowings
    (164 )     (1,208 )     (1,372 )     5       (1,195 )     (1,190 )
 
                                   
Total Increase (Decrease)
    (393 )     (2,544 )     (2,937 )     892       (4,899 )     (4,007 )
 
                                   
 
                                               
Net Increase (Decrease)
  $ 3,726     $ 273     $ 3,999     $ 4,292     $ 3,354     $ 7,646  
 
                                   
A combination of reduced funding costs and an increase in the volume of earning assets improved the Company’s net interest margin. The increased volume of earning assets contributed an additional $3.3 million in interest income.
The majority of the increase in earning assets resulted from increases in average portfolio loans, and to a lesser extent the available for sale investment portfolio. In addition, the continued decline in interest rates on earning assets resulted in a reduction of $2.3 million to interest income. Accordingly, the net effect of changes in rate and volume of earning assets resulted in $1.1 million increase in interest income.
The Company’s volume in average deposits and borrowings did not increase significantly for the year ending December 31, 2010 compared to the year ending December 31, 2009. However, the Company did benefit from the continued decline in interest expense relating to retail and wholesale funding. These benefits were mainly derived from the refinancing of existing FHLB borrowings at lower interest rates, and the maturing of certificates of deposits that carried higher rates than the market currently offered. As a result, the Company realized a decrease in interest expense of $2.5 million. Accordingly, the net effect of changes in rate and volume of interest bearing liabilities resulted in a decrease of $2.9 million in interest expense.

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Noninterest Income
The following table sets forth a summary of noninterest income for the periods indicated.
                         
(Dollars in thousands)   Years Ended December 31,  
    2010     2009     2008  
Noninterest income:
                       
Service charges on deposit accounts
  $ 260     $ 390     $ 311  
Payroll and benefit processing fees
    448       452       453  
Earnings on cash surrender value-
                       
Bank owned life insurance
    438       418       340  
Net gain on sale of securities available-for-sale
    1,981       2,438       628  
Net loss on sale of derivative swap transaction
                (225 )
Net gain on transfer of financial assets
          341        
Gain on settlement of put reserve
    1,750              
Mortgage brokerage fee income
    14,214       5,327       21  
Other income
    727       697       1,095  
 
                 
 
                       
Total Noninterest income
  $ 19,818     $ 10,063     $ 2,623  
 
                 
Noninterest income includes service charges on deposit accounts, payroll processing fees, earnings on key life investments, gains on the sale of securities investments, mortgage brokerage fee income, and income pertaining to the settlement of the put reserve.
Noninterest income for 2010 was $19.8 million or 31.9% of total gross revenues compared to $10.1 million or 19.6% of total gross revenues in 2009. The increase in noninterest income is primarily due to an increase in mortgage brokerage fee income associated with our purchase of an equity interest in the Simonich Corporation, and the settlement of the put reserve.
Mortgage brokerage fee income is primarily derived from origination fees on residential mortgage loans and from the sale of mortgage loans to financial institutions. Loan origination fees and sales fees earned on brokered loans are recorded as income when the loans are sold. Mortgage Services brokerage fee income increased substantially as a result of increased origination volume, due to the historically low interest rate environment. In addition, for the year ending December 31, 2010, the Company recognized a full twelve months of mortgage broker fee income compared to approximately seven months for the year ending December 31, 2009.
In August of 2010, the Company settled and terminated the put reserve provided on the ITIN loan pool purchase. Prior to the release, the put reserve carried a balance of $2.1 million; at termination the Company received $1.8 million in cash and returned $0.3 million 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.
The “put reserve” was part of the April 17, 2009 loan “swap” transaction in which the Company purchased a pool of Individual Tax Identification Number (“ITIN”) residential mortgages in exchange for a combination of certain nonperforming loans and cash. The put reserve was 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. 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 the settlement with the seller to eliminate the loss guarantee arrangement.

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Our investment strategy requires that we reposition our investment portfolio within certain parameters to minimize risks to comprehensive income, and to mitigate interest rate risk. Accordingly, the Company continued to reposition the portfolio during year ending December 31, 2010. As a result, the Company realized gain on sales of securities of $2.0 million during 2010.
Noninterest Expense
The following table sets forth a summary of noninterest expense for the periods indicated.
                         
(Dollars in thousands)   Years ended December 31,  
    2010     2009     2008  
Salaries & related benefits
  $ 15,903     $ 10,882     $ 7,751  
Occupancy & equipment expense
    3,660       3,405       2,501  
Write down of other real estate owned
    1,571       161       735  
FDIC insurance premium
    1,016       1,274       383  
Data processing fees
    270       282       276  
Professional service fees
    1,726       820       667  
Deferred compensation expense
    493       478       461  
Stationery & supplies
    258       185       262  
Postage
    198       147       134  
Directors’ expenses
    266       299       294  
Goodwill impairment
    32              
 
                 
Other expenses
    4,935       2,691       1,832  
 
                 
Total Noninterest expense
  $ 30,328     $ 20,624     $ 15,296  
 
                 
Noninterest expense includes salaries and benefits, occupancy, write down of other real estate owned, FDIC insurance assessments, director fees, and other expenses.
Noninterest expense increased $9.7 million or 47.1% to $30.3 million in 2010. The increase in noninterest expense is primarily due to increased salaries and related benefits pertaining to the Mortgage Services subsidiary, write downs of other real estate owned, professional fees associated with loan credit quality evaluations, and a full twelve months consolidation of the Mortgage Services subsidiary.
The increase in salaries and related benefits is primarily due to the timing of the purchase of an equity interest in the Simonich Corporation. The Company consolidated an additional $4.6 million in related salaries and benefits of the Mortgage Services for the year ending December 31, 2010 compared to a consolidation of seven months of expense for the year ending December 31, 2009. In addition, in 2010, Mortgage Services transitioned existing independent contractors to FTE’s, and increased staff due to growth in general operations. As a result, the Company experienced an increase in salaries and related benefits for the period.
In 2010, the Company determined a valuation adjustment to the carrying value of the Company’s other real estate owned was necessary. The values were adjusted downward, reflecting the continued deterioration in local real estate market conditions. As a result, the Company recognized a $1.6 million impairment charge to earnings.
For the year ending December 31, 2010, professional fees increased approximately $1.0 million. During the reporting period, the Company increased the solicitation of outside professionals to conduct credit quality reviews pertaining to the Company’s loan portfolio. In addition, during the reporting period, the Company increased the engagements of legal counsel. The increase in these services coincides with the continued monitoring of the Company’s nonperforming loans.

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Other expenses increased by $2.3 million during 2010. The increase is primarily due to increased credit administration expenses including appraisal expense associated with the Company’s real estate loan portfolio, prior period tax expenses, and overall increased activities associated with the Mortgage Services general operations. Furthermore, due to the timing of the purchase of Simonich Corporation, the Company consolidated twelve months of Mortgage Services related other expenses, compared to approximately seven months in the prior period. Other expenses recorded by Mortgage Services include expenses for business travel, telephone, insurance and licensing fees.
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)   Years Ended December 31,  
    2010     2009     2008  
Income tax provision (benefit)
  $ 3,159     $ 2,690       ($40 )
Effective tax rate
    32.79 %     30.02 %     -1.83 %
Non-controlling interests are presented in the income statement such that the consolidated income statement includes income and income tax expense from both the Company and non-controlling interests. The effective tax rate is calculated by dividing income tax expense by income before tax expense for the consolidated entity.
Asset Quality
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. Although we have a diversified loan portfolio, a significant portion of our borrowers’ ability to repay the loans is dependent upon the professional services and investor commercial real estate sectors.
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. The Company’s dependence on real estate increases the risk of loss in the loan portfolio of the Company and its holdings of other real estate owned as economic conditions in California continue to deteriorate in the future. 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 recent slowdown in residential development and construction markets has led to an increase in nonperforming loans which has made it prudent to strengthen our reserve position at this time.

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Management has taken cautious steps to ensure the proper funding of loan reserves. Credit quality, expense control and the bottom line remain management’s top focus.
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. 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 non-accruals is the bank’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 go more than 90 days past due. In accordance to this policy, management does not expect to classify any of the loans from this pool as nonaccrual. Management believes that charging the loan off at the time it becomes impaired would be more conservative than placing it in nonaccrual status.
The following table sets forth the amounts of loans outstanding by category as of the dates indicated:
                                                                                 
(Dollars in
thousands)
  As of December 31,  
    2010     %     2009     %     2008     %     2007     %     2006     %  
Commercial & industrial
  $ 133,199       22.17 %   $ 133,080       23.13 %   $ 164,083       31.11 %   $ 173,704       35.11 %   $ 125,725       30.36 %
Real Estate loans
                                                                               
Construction
    41,327       6.88 %     59,524       9.90 %     84,218       15.97 %     106,977       21.62 %     110,693       26.73 %
Commercial
    262,340       43.67 %     260,024       42.23 %     217,914       41.31 %     175,013       35.37 %     159,370       38.48 %
ITIN loan pool
    70,585       11.75 %     78,250       13.04 %                                    
Other first lien mortgages
    19,299       3.21 %     20,525       3.38 %     20,285       3.85 %     10,787       2.18 %     4,278       1.04 %
Equity loans
    69,590       11.58 %     45,601       7.58 %     39,915       7.57 %     26,818       5.42 %     12,986       3.14 %
Installment
    2,303       0.38 %     2,223       0.37 %     145       0.03 %     226       0.05 %     202       0.05 %
Other loans
    2,153       0.36 %     2,212       0.37 %     903       0.16 %     1,223       0.25 %     937       0.20 %
 
                                                           
Gross Loans
    600,796       100.00       601,439       100.00       527,463       100.00 %     494,748       100.00 %   $ 414,191       100.00 %
Less:
                                                                               
Deferred loan fees and costs
    90               209               87               232               298          
Allowance for Loan losses
    12,841               11,207               8,429               8,233               4,904          
 
                                                                     
 
Net Loans
  $ 587,865             $ 590,023             $ 518,947             $ 486,283             $ 408,989          
 
                                                                     

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The following table provides a breakdown of our real estate construction portfolio as of December 31, 2010:
(Dollars in thousands)
                 
            Percent of gross loan  
Loan Type   Balance     portfolio  
 
Commercial real estate — construction
  $ 18,356       3.06 %
Commercial lots
    14,951       2.49 %
1-4 family subdivision loans
    5,592       0.93 %
1-4 family individual residential lots
    1,757       0.29 %
1-4 family construction speculative
    671       0.11 %
 
Total Real estate-construction
  $ 41,327       6.88 %
 
The following table provides a breakdown of commercial real estate portfolio as of December 31, 2010:
(Dollars in thousands)
                 
            % of Gross loan  
Loan Type   Balance     portfolio  
 
Commercial- investor
  $ 194,285       32.34 %
Commercial-owner occupied
    68,055       11.33 %
 
Total Commercial
    262,340       43.67 %
 
Net portfolio loans decreased by $2.2 million or 0.37% to $587.9 million at December 31, 2010 compared to $590.0 million at December 31, 2009. Decreases in real estate construction, and the ITIN pool were offset by an increase in home equity loans.
Home equity loans increased by $24.0 million for the year ending December 31, 2010 compared to December 31, 2009. A substantial portion of the increase can be attributed to the purchase of a pool of home equity term loans and lines of credit in 2010. On March 12, 2010, the Company purchased a pool of residential mortgage home equity loans with a par value of $22.0 million. At the settlement date the mortgage home equity loan pool consisted of 562 loans with an average principle balance of approximately $39,200, a weighted average credit score of 744, a weighted average loan to value of 86.44%, 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. The purchased home equity loan pool was recorded at a fair value of $21.7 million.
The other considerable change is reflected in the real estate construction portfolio; the real estate construction portfolio reflects 6.88% of the loan mix versus 9.90% at December 31, 2009. The decrease in the mix of real estate construction loans was due to lower origination volume, and the maturing of the existing portfolio.
Mortgages held for sale
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, 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.

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Mortgages held for sale are carried at the lower of cost of 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 December 31, 2010, the Company had $43.0 million in mortgages are held for sale. These loans are not included in net portfolio loans listed in the table above.
Nonperforming Assets
The following table sets forth a summary of our nonperforming assets, including other real estate owned as of the dates indicated:
(Dollars in thousands)
                                         
    As of December 31,  
Nonperforming assets   2010     2009     2008     2007     2006  
 
Commercial & industrial
  $ 2,302     $ 237     $ 2,279     $     $  
Secured by 1-4 family, closed end 1st lien
  1,166       623       1,047              
Secured by 1-4 family — revolving
    97       199       350       83        
Secured by RE - 1-4 construction
    242       849       6,989       9,022        
Secured by RE — other construction
    100             9,489       3,304        
Secured by NFNR
    7,066       5,759                    
     
Nonaccrual loan portfolio
  $ 10,973     $ 7,667     $ 20,154     $ 12,409     $  
 
Nonaccrual — ITIN loan pool
  $ 9,538     $     $     $     $  
Nonaccrual — home equity loan pool
                             
90 days past due and still accruing interest
          5,052                    
Other real estate owned
    2,288       2,880       2,934              
     
Total nonperforming assets
  $ 22,799     $ 15,599     $ 23,088     $ 12,409     $  
 
Nonperforming assets adversely affect our net income in various ways. Until economic and 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 other real estate owned, 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 December 31, 2010, the Company has allocated $758 thousand towards this pool or 4.25% 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 probable losses in the home equity portfolio.

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As of December 31, 2010, the remaining put reserve totals $1.2 million or 6.57% of the outstanding principal balance. The put reserve is an irrevocable first loss guarantee from the seller that provided us the right to put back delinquent home equity loans to the seller that were 90 days or more delinquent up to an aggregate amount of $1.5 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 in the Company’s balance sheet. At the end of the term of this loss guarantee, the Company is required to return the cash deposit to the seller to the extent not used to fund losses in the home equity portfolio.
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 the 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 $0.3 million 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 Allowance for Loan Losses (ALLL) 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 ALLL related to the ITIN loans was necessary; the following factors were considered in determining the specific ALLL allocation to the ITIN Portfolio:
    Increasing delinquencies — 20% of the portfolio was delinquent 30 days or more as of 12/31/2010
 
    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 other real estate owned (OREO) — An emerging trend in the lengthening disposition of ITIN other real estate owned had developed including the potential for decreased recoveries and consequently increased net charge offs.
The specific ITIN ALLL allocation now represents approximately 4.05% of total outstanding principal compared to 1.56% as of December 31, 2009.
Nonperforming assets were 2.43% of total assets as of December 31, 2010 compared to 1.92% at December 31, 2009. For the year ending December 31, 2010, there were $33.9 million in impaired loans of which $20.5 million were in nonaccrual status.

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Of these, $9.5 million or one hundred and seven are ITIN loans with a weighted average balance of approximately $89,142 each, and all in various stages of collection; the majority, or $6.5 million, of the nonperforming ITINs are classified as Troubled Debt Restructurings and on nonaccrual status. The remaining balance of $3.0 million is in the process of foreclosure.
The remaining nonaccrual loans consist of five commercial and industrial loans, one commercial lot loan, two residential lot loans, seven commercial real estate loans, four residential mortgages, and one home equity line of credit.
The Company periodically restructures loans and grants concessions to borrowers due to economic or legal reasons relating to the borrower’s financial condition that it would not otherwise consider. Accordingly, loans restructured in these situations are classified as troubled debt restructurings.
The Company does not necessarily place a troubled debt restructuring 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 December 31, 2010, the Company has ninety three restructured loans that qualified as troubled debt restructurings, of which fifty were performing according to their restructured terms. As of December 31, 2010, the Company had $24.6 million in troubled debt restructurings compared to $10.7 million as of December 31, 2009.
The following table sets forth a summary of the Company’s restructured loans that qualify as troubled debt restructurings:
(Dollars in thousands)
                 
Troubled debt restructurings   December 31, 2010     December 31, 2009  
 
Nonaccrual
  $ 11,977     $ 4,937  
Accruing
    12,668       5,730  
 
Total troubled debt restructurings
  $ 24,645     $ 10,667  
 
Troubled debt restructurings (TDRs) represented 4.10% of total portfolio loans as of December 31, 2010 compared to 1.77% at December 31, 2009. The increase in TDRs was centered in our ITIN portfolio which accounted for $6.5 million of the $14.0 million increase from December 31, 2009. As of December 31, 2010, thirty-four or $3.4 million of the sixty-six ITIN TDRs are accruing and considered performing assets. The balance of the year-over-year increase in TDRs was primarily in commercial real estate loans. All of the Company’s restructured loans met the terms for TDR classification.
Refer to Note 6 in the consolidated financial statements for further discussion pertaining to the key features of the modifications, including the significant terms modified.

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The following table summarizes the activity in the ALLL reserves for the periods indicated.
                                         
(Dollars in thousands)   2010     2009     2008     2007     2006  
 
Beginning balance
  $ 11,207     $ 8,429     $ 8,233     $ 4,904     $ 4,316  
Provision for loan loss charged to expense
    12,850       9,475       6,520       3,291       226  
Loans charged off
    (12,089 )     (6,871 )     (6,329 )           (299 )
Loan loss recoveries
    873       174       5       38       661  
     
Ending balance
  $ 12,841     $ 11,207     $ 8,429     $ 8,233     $ 4,904  
 
                                       
Gross portfolio loans outstanding at period end
  $ 600,707     $ 601,230     $ 527,376     $ 494,516     $ 413,893  
 
                                       
Ratio of allowance for loan losses to total loans
    2.14 %     1.86 %     1.60 %     1.66 %     1.18 %
Nonaccrual loans at period end:
                                       
Commercial
  $ 2,302     $ 237     $ 2,279     $     $  
Construction
    342       849       16,478       12,326        
Commercial real estate
    7,066       5,759                    
Residential real estate
    10,704       623       1,047              
Home equity
    97       199       350       83        
     
Total nonaccrual loans
  $ 20,511     $ 7,667     $ 20,154     $ 12,409     $  
Accruing troubled-debt restructured loans
                                       
Construction
  $ 2,804     $ 2,219     $     $     $  
Commercial real estate
    3,621       3,511                    
Residential real estate
    6,243                          
     
Total accruing restructured loans
  $ 12,668     $ 5,730     $     $     $  
 
                                       
All other accruing impaired loans
    737                   1,576        
 
                                       
     
Total impaired loans
  $ 33,916     $ 13,397     $ 20,154     $ 13,985     $  
     
 
                                       
Allowance for loan losses to nonaccrual loans at period end
    62.61 %     146.17 %     41.82 %     66.35 %     0.00 %
 
                                       
Nonaccrual loans to total loans
    3.41 %     1.28 %     3.82 %     2.51 %     0.00 %
Allocation of Allowance for Loan and Lease Losses by product type:
(Dollars in thousands)
                                                                                 
    Dec. 31, 2010   Dec. 31, 2009   Dec. 31, 2008   Dec. 31, 2007   Dec. 31, 2006
            %           %           %           %           %
            Loan           Loan           Loan           Loan           Loan
    Amount   Category   Amount   Category   Amount   Category   Amount   Category   Amount   Category
 
Balance at end of period applicable to:
                                                                               
Commercial and financial
  $ 4,393       34.21 %   $ 5,306       47.35 %   $ 3,249       38.55 %   $ 1,946       23.64 %   $ 2,111       43.05 %
Commercial real estate — constructions
    1,271       9.90 %   $ 1,188       10.60 %   $ 1,913       22.70 %   $ 4,627       56.20 %   $ 1,244       25.37 %
Commercial real estate — other
    2,422       18.86 %   $ 2,348       20.95 %   $ 2,225       26.40 %   $ 1,295       15.73 %   $ 1,210       24.67 %
ITIN loan pool
    2,857       22.25 %     1,227       10.95 %                                    
Other residential
    1,632       12.71 %     853       7.61 %   $ 692       8.21 %   $ 213       2.59 %   $ 139       2.83 %
Consumer
    46       0.36 %     35       0.31 %   $ 42       0.50 %   $ 41       0.50 %   $ 24       0.49 %
Unallocated
    220       1.71 %     250       2.23 %   $ 308       3.64 %   $ 111       1.34 %   $ 176       3.59 %
 
Total allowance for loan and lease losses
  $ 12,841       100.00 %   $ 11,207       100.00 %   $ 8,429       100.00 %   $ 8,233       100.00 %   $ 4,904       100.00 %
 

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Loan Maturity Schedule
The following table sets forth the maturity and repricing distribution of our commercial, real estate and other loans outstanding as of December 31, 2010, which, based on remaining scheduled repayments of principal, were due within the periods indicated.
                                 
       
(Dollars in thousands)   Within One Year        After One Through Five Years     After Five Years     Total  
 
Commercial & financial
  $ 64,181     $ 40,002     $ 29,016     $ 133,199  
Real estate loans
                               
Construction
    25,841       11,099       4,387       41,327  
Commercial
    10,800       74,068       177,472       262,340  
ITIN loan pool
                70,585       70,585  
Other mortgage
    1,029       5,176       13,094       19,299  
Equity lines
    994       21,430       47,166       69,590  
Installment
    2,142       161             2,303  
Other loans
    781       1,272       100       2,153  
     
Total gross loans
  $ 105,768     $ 153,208     $ 341,820     $ 600,796  
     
 
                               
Loans due after one year with:
                               
Fixed Rates
  $     $ 61,857     $ 110,137     $ 171,994  
Variable Rates
          91,351       231,683       323,034  
     
Total
  $     $ 153,208     $ 341,820     $ 495,028  
 
Available-for-sale securities
The following table presents information regarding the amortized cost, and maturity structure of the investment portfolio at December 31, 2010:
                                                                                 
                    Over One through     Over Five through              
(Dollars in thousands)   Within One Year     Five Years     Ten Years     Over Ten Years     Total  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  
 
U.S. government & agencies
  $           $ 7,054       1.35 %   $ 19,760       2.37 %   $           $ 26,814       2.10 %
Obligations of state and political subdivisions
                            7,543       3.56 %     59,461       4.34 %     67,004       4.25 %
Mortgage backed securities and collateralized mortgage obligations
    7,963       1.42 %     38,547       2.84 %     7,364       3.36 %     11,178       3.69 %     65,052       2.87 %
Corporate securities
                12,212       3.21 %     16,807       3.79 %                 29,019       3.54 %
Other asset backed securities
                                        4,569       1.74 %   $ 4,569       1.74 %
 
Total
  $ 7,963       1.42 %   $ 57,813       2.74 %     51,474       3.15 %   $ 75,208       4.08 %   $ 192,458       3.32 %
 
The maturities for the collateralized mortgage obligations and mortgage backed securities are presented by expected average life, rather than contractual maturity. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.

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Deposit Structure
We obtain deposits primarily from local businesses and professionals as well as through certificates of deposits, savings and checking accounts. The following table sets forth the distribution of our average daily balances for the periods indicated.
(Dollars in thousands)
                                                 
    Years Ended December 31,  
    2010             2009             2008        
    Amount     Yield     Amount     Yield     Amount     Yield  
 
NOW accounts
  $ 38,843       0.58 %   $ 58,437       0.51 %   $ 51,215       0.88 %
Savings
    76,718       1.20 %     62,846       1.53 %     56,914       2.77 %
Money market accounts
    103,140       0.72 %     87,105       0.84 %     87,528       1.97 %
Certificates of deposit
    321,051       1.92 %     317,417       2.40 %     234,493       3.65 %
 
                                   
Interest bearing deposits
    539,752       1.49 %     525,805       1.83 %     430,150       2.87 %
Noninterest bearing deposits
    92,433               69,250               70,933          
 
                                         
Average total deposits
  $ 632,185             $ 595,055             $ 501,083          
 
                                               
Average other borrowings
  $ 146,529       0.93 %   $ 133,063       2.06 %   $ 111,561       3.62 %
The following table sets forth the remaining maturities of certificates of deposit in amounts of $100,000 or more as of December 31, 2010:
Deposit Maturity Schedule
(Dollars in thousands)
         
    2010  
 
Maturing in:
       
Three months or less
  $ 67,135  
Three through six months
    42,820  
Six through twelve months
    47,165  
Over twelve months
    76,570  
 
Total
  $ 233,690  
 
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 our 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 ALLL). The minimum ratio of total risk-based capital to risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of the total risk-based capital is to be comprised of common equity; the balance may consist of debt securities and a limited portion of the ALLL.

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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 as of December 31, 2010 and 2009, that the Company and the Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2010, 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 are presented in the table.
(Dollars in thousands)
                                 
                    Well     Minimum  
            Actual     Capitalized     Capital  
December 31, 2010   Capital     Ratio     Requirement     Requirement  
 
The Company
                               
Leverage
  $ 115,541       12.48 %     n/a       4.00 %
Tier 1 Risk-Based
    115,541       13.74 %     n/a       4.00 %
Total Risk-Based
    126,085       15.00 %     n/a       8.00 %
 
                               
The Bank
                               
Leverage
  $ 106,747       11.60 %     5.00 %     4.00 %
Tier 1 Risk-Based
    106,747       13.34 %     6.00 %     4.00 %
Total Risk-Based
    116,791       14.59 %     10.00 %     8.00 %
Cash dividends of $0.06 were paid on January 14, 2010, March 24, 2010, July 7, 2010, to shareholders of record as of December 31, 2009, March 15, 2010, and June 30, 2010, respectively. Cash dividends of $0.03 were paid on October 7, 2010, to shareholders of record as of September 30, 2010.
The United States Department of Treasury (“Treasury”) introduced the Capital Purchase Program on October 14, 2008, under which the Treasury was authorized 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. This capital investment enabled us to leverage into both investments and residential loans intended to support the housing markets, as well as to increase local lending limits to support our communities.
On March 23, 2010, we 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.
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 find significantly more opportunities now for loan growth, investment portfolio purchases and attractive loan and asset purchases.

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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.
Lending Transactions with Related Parties
The business we conduct with directors, officers, significant shareholders and other related parties (collectively, “Related Parties”) is restricted and governed by various laws and regulations, including Regulation O as promulgated and enforced by the Federal Reserve. Furthermore, it is our policy to conduct business with Related Parties on an arm’s length basis at current market prices with terms and conditions no more favorable than we provide in the normal course of business.
Some of our directors, officers and principal shareholders of the Company and their associates were customers of and had banking transactions with the Bank in the ordinary course of business during 2010 and the Bank expects to have such transactions in the future. All loans and commitments to loans included in such transactions were made in compliance with the applicable laws on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and in our opinion did not involve more than a normal risk of collectability or present other unfavorable features.
The following table presents a summary of aggregate activity involving related party borrowers for the years ended December 31, 2010 and 2009:
(Dollars in thousands)
                 
    Years Ended December 31,  
    2010     2009  
 
Balance at beginning of year
  $ 9,469     $ 7,911  
New loan additions
    1,248       1,418  
Advances on existing lines of credit
    15,704       11,497  
Principal repayments
    (17,017 )     (11,642 )
Reclassification
    (176 )     285  
 
           
Balance at end of year
  $ 9,228     $ 9,469  
 
Impact of Inflation
Inflation affects our financial position as well as operating results. It is our opinion that the effects of inflation for the three years ended December 31, 2010 on the financial statements have not been material.
Commitments
Off-Balance Sheet Financial Instruments - In the ordinary course of business, we enter into various types of transactions which involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and stand-by letters of credit, which are not reflected in the 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.

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Our off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and stand-by letters of credit. We apply the same credit standards to these contracts we use for loans recorded on the balance sheet.
(Dollars in thousands)
                 
    Years Ended December 31,  
    2010     2009  
 
Off-balance sheet commitments:
               
Commitments to extend credit
  $ 146,915     $ 122,872  
Standby letters of credit
    3,509       4,844  
Guaranteed commitments outstanding
    1,299       1,325  
 
 
  $ 151,723     $ 129,041  
 
Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by us 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 generally includes real estate, securities, and cash.
Standby letters of credit are conditional commitments issued by us 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 us 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.
We have mortgage loan purchase agreements with various mortgage bankers. We are obligated to perform certain procedures in accordance with these agreements.
The agreements provide for conditions whereby we 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) we breach any term of the agreement and (3) an early payment default occurs from a mortgage originated by us. 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 March 1, 2010 through January 30, 2011. Upon failure to deliver minimum loan volume quarterly, the Company is responsible to pay a non-delivery fee to the purchaser. As of December 31, 2010, the Company met the volume commitments.

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Commitments and Contingent Liabilities
The following table presents a summary of significant contractual obligations extending beyond one year as of December 31, 2010, and maturing as indicated:
(Dollars in thousands)
                                                 
            Less than                   More than 5   Indeterminate
    Total   One Year   1–3 Years   3–5 Years   years   Maturity (1)
 
Preferred Stock and Warrants
  $ 17,000     $     $     $ 17,000     $     $  
Junior Subordinated Debentures
    15,465                         15,465        
FHLB Borrowings
    141,000       126,000       15,000                      
Operating lease obligations
    2,802       775       1,094       663       270        
Repurchase Agreements
    13,548       13,548                          
Deposits (1)
    648,702       204,551       98,408       8,808             336,935  
 
Total
  $ 838,517     $ 344,874     $ 114,502     $ 26,471     $ 15,735     $ 336,935  
 
 
(1)   Represents interest-bearing and non-interest bearing checking, money market, savings accounts, and time deposits.

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ITEM 7A. 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. We have an Asset/Liability Management Committee (“ALCO”) which 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. As such, we are currently considered liability sensitive in the 100bp to 300bp upward rate shock, and asset sensitive for 400bp 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

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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. The most recent model results, at December 31, 2010, indicate the estimated annualized reduction in net interest income attributable to a 100, 200, 300 and 400 basis point declines in the federal funds rate was $156,137, $1,224,031, $1,941,061 and $2,133,823 respectively. At December 31, 2009, the estimated annualized reduction in net interest income attributable to a 100, 200 and 300 basis point decline in the federal funds rate was $1,239,230, $1,901,994 and $2,458,129 respectively, with a similar and opposite results attributable to a 100, 200 or 300 basis point increase in the federal funds rate.
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, as December 31, 2010, indicate the estimated annualized decrease in net interest income attributable to a 100, 200, 300 basis point increases in the federal funds rate was $384,223, $370,357, and $52,930 respectively. The 400 basis point increase results in an estimated increase in annualized net interest income of $348,804.
The 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.
The following table sets forth the most recent model results relating to the distribution of repricing opportunities for the Bank’s earning assets and interest-bearing liabilities. It also reports the GAP (different volumes of rate sensitive assets and liabilities) repricing interest earning assets and interest-bearing liabilities at different time intervals, the cumulative GAP, the ratio of rate sensitive assets to rate sensitive liabilities for each repricing interval, and the cumulative GAP to total assets.
(Dollars in thousands)
                                         
                    GAP Analysis              
    Within 3     3 Months to     One Year to     Over Five        
    Months     One Year     Five Years     Years     Total  
 
Interest-Earning Assets
                                       
 
Available-for-sale securities
  $ 13,374     $ 6,514     $ 53,932     $ 115,415     $ 189,235  
Other investments
    11,655       28,815                   40,470  
Loans, gross
    163,033       148,148       162,426       127,190       600,797  
 
                             
Total Interest-earning Assets
  $ 188,062     $ 183,477     $ 216,358     $ 242,605     $ 830,502  
 
                             
 
                                       
Interest-Bearing Liabilities
                                       
Demand — interest bearing
  $ 23,921     $ 40,564     $ 57,208     $ 40,565     $ 162,258  
Savings accounts
    6,705       20,951       35,102       20,894       83,652  
Certificates of deposit
    79,792       124,759       107,216             311,767  
Other borrowings
    44,013       126,000                   170,013  
 
                             
Total Interest-bearing Liabilities
  $ 154,431     $ 312,274     $ 199,526     $ 61,459     $ 727,690  
 
                             
 
                                       
GAP in dollars
  $ 33,631     $ (128,797 )   $ 16,832     $ 181,146     $ 102,812  
Cumulative GAP in dollars
  $ 33,631     $ (95,166 )   $ (78,334 )   $ 102,812     $ 102,812  
As a percentage of earning assets:
                                       
GAP Ratio
    1.22       0.59       1.08       3.95       1.14  
Cumulative GAP Ratio
    1.22       0.80       0.88       1.14       1.14  
 
                                       
Gap as % of Earning Assets
    4.05 %     -15.51 %     2.03 %     21.81 %     12.38 %
Cumulative Gap as % of Earning Assets
    4.05 %     -11.46 %     -9.43 %     12.38 %     12.38 %
The model utilized by management to create the analysis described in the preceding paragraph uses balance sheet simulation to estimate the impact of changing rates on our projected annual net interest income Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

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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.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Bank of Commerce Holdings
We have audited the accompanying consolidated balance sheets of Bank of Commerce Holdings and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting and Compliance with Applicable Laws and Regulations. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed 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. A 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, 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bank of Commerce Holdings and subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows each of the three years in the period ended December 31, 2010, in conformity with generally accepted accounting principles in the United States of America.

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Also in our opinion, Bank of Commerce Holdings maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
Stockton, California
March 4, 2011

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March 4, 2011
To the Shareholders:
Management’s Report on Internal Control over Financial Reporting and Compliance with Applicable Laws and Regulations
Management of the Bank of Commerce Holdings and its subsidiaries (“the Company”) is responsible for preparing the Company’s annual consolidated financial statements in accordance with generally accepted accounting principles. Management is also responsible for establishing and maintaining internal control over financial reporting, including controls over the preparation of regulatory financial statements, and for complying with the designated safety and soundness laws and regulations pertaining to insider loans and dividend restrictions. The Company’s internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Management has assessed the Company’s internal control over financial reporting encompassing both consolidated financial statements prepared in accordance with generally accepted accounting principles and those prepared for regulatory reporting purposes as of December 31, 20010. The assessment was based on criteria for effective internal control over financial reporting described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, Management believes that, as of December 31, 2010, the Company maintained effective internal control over financial reporting encompassing both consolidated financial statements prepared in accordance with generally accepted accounting principles and those prepared for regulatory reporting purposes in all material respects. Management also believes that the Company complied with the designated safety and soundness laws and regulations pertaining to insider loans and dividend restrictions during 2010.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 has been audited by Moss Adams LLP, an independent registered public accounting firm, as stated in their report which appears on the previous page.
     
/s/ Patrick J. Moty
 
Patrick J. Moty, President and Chief Executive Officer
   
 
   
/s/ Samuel D. Jimenez
 
Samuel D. Jimenez, SVP and Chief Financial Officer
   

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 and 2009
(Dollars in thousands)
                 
    2010     2009  
ASSETS
               
 
               
Cash and due from banks
  $ 23,786     $ 36,902  
Interest bearing due from banks
    39,470       31,338  
 
           
Cash and cash equivalents
    63,256       68,240  
Securities available-for-sale (including pledged collateral of $101,248 at December 31, 2010 and $55,672 at December 31, 2009)
    189,235       80,062  
Mortgage loans held for sale
    42,995       27,288  
Loans, net of the allowance for loan and lease losses of $12,841 at December 31, 2010 and $11,207 at December 31, 2009
    587,865       590,023  
Premises and equipment, net
    9,697       9,980  
Goodwill
    3,695       3,727  
Other real estate owned
    2,288       2,880  
Other assets
    40,102       31,206  
 
           
 
               
TOTAL ASSETS
  $ 939,133     $ 813,406  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits:
               
Demand — noninterest bearing
  $ 91,025     $ 69,447  
Demand — interest bearing
    162,258       163,814  
Savings accounts
    83,652       65,414  
Certificates of deposit
    311,767       341,789  
 
           
Total deposits
    648,702       640,464  
 
               
Securities sold under agreements to repurchase
    13,548       9,621  
Federal Home Loan Bank borrowings
    141,000       70,000  
Other liabilities
    16,691       9,049  
Junior subordinated debt payable to unconsolidated subsidiary grantor trust
    15,465       15,465  
 
           
Total liabilities
    835,406       744,599  
 
               
Commitments and contingencies (Note 23)
               
 
               
Shareholders’ equity:
               
Preferred stock (liquidation preference of $1,000 per share; issued 2008); 2,000,000 shares authorized; 17,000 shares issued and outstanding in 2010 and 2009
    16,731       16,641  
 
               
Common stock, no par value; 50,000,000 shares authorized; 16,991,495 shares issued and outstanding in 2010 and 8,711,495 outstanding in 2009
    42,755       9,730  
Common stock warrant
    449       449  
Retained earnings
    41,722       39,004  
Accumulated other comprehensive (loss) income, net of tax
    (509 )     658  
 
           
Total Equity — Bank of Commerce Holdings
    101,148       66,482  
Non controlling interest in subsidiary
    2,579       2,325  
 
           
Total shareholders’ equity
    103,727       68,807  
 
           
 
               
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 939,133     $ 813,406  
 
           
See accompanying notes to consolidated financial statements

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
                         
(Dollars in thousands, except per share data)   2010     2009     2008  
Interest income:
                       
Interest and fees on loans
  $ 37,000     $ 35,860     $ 33,582  
Interest on tax-exempt securities
    1,692       1,164       1,197  
Interest on U.S. government securities
    2,083       3,450       2,469  
Interest on federal funds sold and securities purchased under agreement to resell
    2       32       303  
Interest on other securities
    1,614       823       138  
 
                 
Total interest income
    42,391       41,329       37,689  
 
                 
Interest expense:
                       
Interest on demand deposits
    968       1,015       2,173  
Interest on savings deposits
    921       963       1,576  
Interest on certificates of deposit
    6,151       7,628       8,552  
Interest on securities sold under repurchase agreements
    52       51       173  
Interest on FHLB borrowings
    626       1,833       2,812  
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trusts
    680       845       1,056  
 
                 
Total interest expense
    9,398       12,335       16,342  
 
                 
Net interest income
    32,993       28,994       21,347  
Provision for loan and lease losses
    12,850       9,475       6,520  
 
                 
Net interest income after provision for loan and lease losses
    20,143       19,519       14,827  
 
                 
Noninterest income:
                       
Service charges on deposit accounts
    260       390       311  
Payroll and benefit processing fees
    448       452       453  
Earnings on cash surrender value — Bank owned life insurance
    438       418       340  
Net gain on sale of securities available-for-sale
    1,981       2,438       628  
Net loss on sale of derivative swap transaction
                (225 )
Net gain transfer of financial assets
          341        
Gain on settlement of put reserve
    1,750              
Mortgage brokerage fee income
    14,214       5,327       21  
Other income
    727       697       1,095  
 
                 
Total noninterest income
    19,818       10,063       2,623  
 
                 
Noninterest expense:
                       
Salaries and related benefits
    15,903       10,882       7,751  
Occupancy and equipment expense
    3,660       3,405       2,501  
Write down of other real estate owned
    1,571       161       735  
FDIC insurance premium
    1,016       1,274       383  
Data processing fees
    270       282       276  
Professional service fees
    1,726       820       667  
Deferred compensation expense
    493       478       461  
Stationery and supplies
    258       185       262  
Postage
    198       147       134  
Directors’ expenses
    266       299       294  
Goodwill impairment
    32              
Other expenses
    4,935       2,691       1,832  
 
                 
Total noninterest expense
    30,328       20,624       15,296  
 
                 
Income before provision (benefit) for income taxes
    9,633       8,958       2,154  
Provision (benefit) for income taxes
    3,159       2,690       (40 )
 
                 
Net income
    6,474       6,268       2,194  
 
                 
Less: Net income attributable to non-controlling interest
    254       263        
Net income attributable to Bank of Commerce Holdings
  $ 6,220     $ 6,005     $ 2,194  
 
                 
Less: preferred dividend and accretion on preferred stock
    940       942        
Income available to common shareholders
  $ 5,280     $ 5,063     $ 2,194  
Basic earnings per share
  $ 0.35     $ 0.58     $ 0.25  
Weighted average shares — basic
    14,950,838       8,711,495       8,712,873  
Diluted earnings per share
  $ 0.35     $ 0.58     $ 0.25  
Weighted average shares — diluted
    14,950,838       8,711,495       8,774,550  
Cash dividends declared
  $ 0.18     $ 0.24     $ 0.29  
See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AS OF DECEMBER 31, 2010, 2009 AND 2008
                                                                                 
                                                    Accumulated     Subtotal     Non        
                                                    Other     Bank of     Controlling        
    Comprehensive     Preferred             Common     Stock     Retained     Comprehensive     Commerce     Interest in        
(Dollars in Thousands)   Income     Amount     Warrant     Shares     Amount     Earnings     (Loss) Income     Holdings     Subsidiary     Total  
Balance at December 31, 2007
                            8,757     $ 9,996     $ 36,605     $ (437 )   $ 46,164             $ 46,164  
 
                                                                   
Comprehensive Income:
                                                                               
Net Income
  $ 2,194                                       2,194               2,194               2,194  
Other Comprehensive Income:
                                                                               
Unrealized gains on securities and derivatives , net of tax
    711                                                                          
Reclassification adjustment for gains included in net income, net of tax
    (355 )                                                                        
 
                                                                             
Total Comprehensive Income — BOCH
  $ 2,550                                               356       356               356  
 
                                                                             
Preferred stock issued
            16,551                                               16,551               16,551  
Warrants
                    449                                       449               449  
Common cash dividends ($0.29 per share)
                                            (2,790 )             (2,790 )             (2,790 )
 
Compensation expense associated with stock options
                                    116                       116               116  
Share repurchase
                            (59 )     (504 )                     (504 )             (504 )
Stock options exercised
                            13       42                       42               42  
Balance at December 31, 2008
          $ 16,551     $ 449       8,711     $ 9,650     $ 36,009     $ (81 )   $ 62,578             $ 62,578  
 
                                                               
 
                                                                               
Comprehensive Income:
                                                                               
Net Income
  $ 6,268                                       6,005               6,005       263       6,268  
Other Comprehensive Income:
                                                                               
Unrealized gains on securities and derivatives, net of tax
    2,173                                                                          
Reclassification adjustment for gains included in net income, net of tax
    (1,434 )                                                                        
 
                                                                             
Total Other Comprehensive Income
    7,007                                                                          
Less: Other Comprehensive income non-controlling interest
    (263 )                                                                        
 
                                                                             
Total Comprehensive Income — BOCH
  $ 6,744                                               739       739               739  
 
                                                                             
Accretion on Preferred Stock
            90                               (67 )             23               23  
Common cash dividends ($0.24 per share)
                                            (2,091 )             (2,091 )             (2,091 )
Preferred stock dividend
                                            (852 )             (852 )             (852 )
Compensation expense associated with stock options
                                    80                       80               80  
Fair value of non-controlling interest
                                                                    2,062       2,062  
Balance at December 31, 2009
          $ 16,641     $ 449       8,711     $ 9,730     $ 39,004     $ 658     $ 66,482     $ 2,325     $ 68,807  
 
                                                             

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(continued)
AS OF DECEMBER 31, 2010, 2009 AND 2008
                                                                                 
                                                    Accumulated     Subtotal     Non        
                                                    Other     Bank of     Controlling        
    Comprehensive     Preferred             Common     Stock     Retained     Comprehensive     Commerce     Interest in        
(Dollars in Thousands)   Income     Amount     Warrant     Shares     Amount     Earnings     (Loss) Income     Holdings     Subsidiary     Total  
Balance at December 31, 2009
          $ 16,641     $ 449       8,711     $ 9,730     $ 39,004     $ 658     $ 66,482     $ 2,325     $ 68,807  
 
                                                             
 
                                                                               
Comprehensive Income:
                                                                               
Net Income (loss)
  $ 6,474                                       6,220               6,220       254       6,474  
Other Comprehensive Income:
                                                                               
Unrealized loss on securities and derivatives, net of tax
    (1 )                                                                        
Reclassification adjustment for gains included in net income, net of tax
    (1,166 )                                                                        
 
                                                                             
Total Other Comprehensive income
    5,307                                                                          
Less: Other Comprehensive income non-controlling interest
    (254 )                                                                        
 
                                                                             
Total Comprehensive Income-BOCH
  $ 5,053                                               (1,167 )     (1,167 )             (1,167 )
 
                                                                             
Accretion on preferred stock
            90                               (90 )                                
Common cash dividends ($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  
 
                                                             
See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
                         
(Dollars in thousands)   2010     2009     2008  
Cash flows from operating activities:
                       
Net income
  $ 6,474     $ 6,268     $ 2,194  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Provision for loan and lease losses
    12,850       9,475       6,520  
Provision for depreciation and amortization
    959       1,222       1,145  
Goodwill impairment
    32              
Compensation expense associated with stock options
    54       80       116  
Gain on sale of securities available-for-sale
    (1,981 )     (2,438 )     (628 )
Amortization (accretion) of investment premiums and discounts, net
    492       (227 )     98  
Gain on transfer of financial assets
          (341 )      
Gross proceeds from sales of loans held for sale
    764,752       449,280        
Gross originations of loans held for sale
    (780,459 )     (445,269 )      
Gain on settlement of put reserve
    (1,750 )            
(Gain) loss on sale of fixed assets
    (1 )     1       3  
Loss (gain) loss on sale of other real estate owned
    126       (20 )      
Write down of other real estate owned
    1,571       161       735  
Loss on sale of derivative
                225  
(Increase) decrease in deferred income taxes
    (1,538 )     (1,159 )     29  
Increase in cash surrender value of bank owned life policies
    (372 )     (1,564 )     (286 )
Increase in other assets
    (4,263 )     (4,250 )     (9,607 )
Increase in deferred compensation, net
    433       449       392  
(Decrease) increase in deferred loan fees
    (119 )     122       (128 )
Increase (decrease) in other liabilities
    9,406       (485 )     (1,064 )
 
                 
Net cash provided (used) by operating activities
    6,666       11,305       (256 )
 
                 
 
                       
Cash flows from investing activities:
                       
Proceeds from maturities and payments of available-for-sale securities
    58,978       32,699       9,126  
Proceeds from sale of available-for-sale securities
    79,680       78,773       44,828  
Purchases of available-for-sale securities
    (250,665 )     (55,928 )     (105,861 )
Purchases of ITIN loan portfolio
          (66,694 )      
Purchases of home equity loan portfolio
    (14,801 )            
Loan originations, net of principal repayments
    (332 )     (33,334 )     (39,056 )
Maturities of held-to-maturity securities
                98  
Purchase of premises and equipment
    (676 )     (374 )     (865 )
Proceeds on sale of fixed assets
    1       0       5  
Proceeds from the sale of other real estate owned
    3,454       315       1,200  
Cash acquired in acquisition, net of cash consideration paid
          265        
 
                 
Net cash used in investing activities
    (124,361 )     (44,278 )     (90,525 )
 
                 
 
                       
Cash flows from financing activities:
                       
Net increase in demand deposits and savings accounts
    38,260       7,680       31,080  
Net (decrease) increase in certificates of deposit
    (30,022 )     77,502       50,570  
Net increase (decrease) in securities sold under agreements to repurchase
    3,927       (4,233 )     (1,660 )
Federal Home Loan Bank advances
    752,000       475,140       215,000  
Federal Home Loan Bank advance repayments
    (681,000 )     (525,140 )     (155,000 )
Net change in other short term borrowings
          (11,810 )      
Cash dividends paid on common stock
    (2,575 )     (2,265 )     (2,790 )
Cash dividends paid on preferred stock
    (850 )     (852 )      
Proceeds from stock options exercised
                42  
Common stock repurchased
                (504 )
Proceeds from issuance of preferred stock and warrants
                17,000  
Net proceeds from the issuance of common stock
    32,971              
 
                 
Net cash provided by financing activities
    112,711       16,022       153,738  
 
                 
Net (decrease) increase in cash and cash equivalents
    (4,984 )     (16,951 )     62,957  
 
                       
Cash and cash equivalents at beginning of year
    68,240       85,191       22,234  
 
                 
Cash and cash equivalents at end of year
  $ 63,256     $ 68,240     $ 85,191  
 
                 
See accompanying notes to financial statements

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008 (Continued)
                         
(Dollars in thousands)   2010   2009   2008
Supplemental disclosures of non cash investment activities:
                       
Cash paid during the period for:
                       
Income taxes
  $ 3,711     $ 3,496     $ 316  
Interest
  $ 9,505     $ 12,415     $ 16,510  
Transfer of loans to OREO
  $ 4,559     $ 402     $ 4,869  
Changes in unrealized (loss) gain on investment securities available for sale
  $ 4,323     $ (1,255 )   $ (582 )
Changes in deferred tax asset related to the changes in unrealized (loss) gain on investment securities
  $ (1,777 )   $ 516     $ 226  
Changes in accumulated other comprehensive income due to changes in unrealized (loss) gain on investment securities
  $ (2,546 )   $ 739     $ 356  
Reclassification of held-to-maturity securities to available for sale
              $ 8,805  
Acquisition at fair value:
                       
Assets Acquired
        $ 14,857        
Liabilities Assumed
        $ 14,057        
See accompanying notes to consolidated financial statements.

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE BUSINESS OF THE COMPANY
Bank of Commerce Holdings (the “Holding Company”), is a bank holding company (“BHC”) with its principal offices in Redding, California. The Holding Company’s wholly-owned subsidiaries are Redding Bank of Commercetm, and Roseville Bank of Commercetm, a division of Redding Bank of Commerce. The Holding Company’s majority owned subsidiary is Bank of Commerce Mortgage (the “Mortgage Company”) (collectively the “Company”). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust and Bank of Commerce Holdings Trust II. The Bank is principally supervised and regulated by the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”). Substantially all of the Company’s activities are carried out through the Bank and the Mortgage Company. The Bank was incorporated as a California banking corporation on November 25, 1981. The Bank operates four full service branches in Redding, and Roseville, California.
The Bank conducts a general commercial banking business in the counties of El Dorado, Placer, Shasta, Sacramento, and Tehama, California. The Company considers Northern California to be the major market area of the Bank. The services offered by the Bank include those traditionally offered by commercial banks of similar size and character in California, including checking, interest-bearing NOW, savings and money market deposit accounts; commercial, real estate, and construction loans; travelers checks, safe deposit boxes, collection services and electronic banking activities. The primary focus of the Bank is to provide services to the business and professional community of its major market area, including Small Business Administration loans, payroll and accounting packages, benefit administration and billing programs. The Bank does not offer trust services or international banking services and does not plan to do so in the near future. Most of the customers of the Bank are small to medium sized businesses and individuals with medium to high net worth.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
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 and lease losses, the valuation of goodwill and other real estate owned, other than temporary impairment of investment securities, share based payments, accounting for income taxes, and fair value measurements are discussed in the notes to consolidated financial statements. Actual results could differ from those estimates. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation. The results of reclassifications are not considered material and have no effect on previously reported net income and earnings per share.

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation — The consolidated financial statements include the accounts of the Holding Company, the Bank and Bank of Commerce Mortgage. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents — For purposes of reporting cash flows, cash and cash equivalents include amounts due from correspondent banks, including interest bearing deposits in correspondent banks, and the Federal Reserve Bank, federal funds sold and securities purchased under agreements to resell. Generally, federal funds sold are 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.
Securities Purchased under Agreements to Resell — The Company enters into purchases of securities under agreements to resell substantially identical securities. Securities purchased under agreements to resell consist primarily of U.S. Treasury, Agency and Municipal Securities. The amounts advanced under these agreements are reflected as assets in the consolidated balance sheet. It is the Company’s policy to take possession of securities purchased under agreements to resell. Agreements with third parties specify the Company’s rights to request additional collateral, based on its monitoring of the fair value of the underlying securities on a daily basis. The securities are delivered by appropriate entry into the Company’s account maintained at the Federal Reserve Bank or into a third-party custodian’s account designated by the Company under a written custodial agreement that explicitly recognizes the Company’s interest in the securities.
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 we 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.

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an other-than-temporary impairment has occurred for an investment. The Company follows a consistent and systematic process for determining and recording an 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 an other-than-temporary impairment loss should be recognized incorporates both quantitative and qualitative information including, but not limited to: (a) the length of time and the extent of 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.
Loans — Loans are stated at the principal amounts outstanding less deferred loan fees and costs and the allowance for loan losses. Interest on commercial, installment and real estate loans is accrued daily based on the principal outstanding. Loan origination and commitment fees and certain origination costs are deferred and the net amount is amortized over the contractual life of the loans as an adjustment of their yield. A loan is impaired when, based on current information and events, management believes it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.
Impairment is measured based upon the present value of future cash flows discounted at the loan’s effective rate, the loan’s observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis, and only when the principal is not considered impaired.
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. 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 non-accruals is the bank’s pool of home equity loans and lines purchased from a private equity firm.

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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 go more than 90 days past due. In accordance to this policy, management does not expect to classify any of the loans from this pool as nonaccrual. Management believes that charging the loan off at the time it becomes impaired would be more conservative than placing it in nonaccrual status.
Allowance for Loan and Lease Losses — The allowance for loan and lease losses are established through a provision charged to expense. Loans are charged off against the allowance for loan and lease losses when management believes that the collectability of the principal is unlikely. The allowance for loan and lease losses is an amount that management believes will be adequate to absorb losses inherent in existing loans and overdrafts based on evaluations of collectability and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Material estimates relating to the determination of the allowance for loan and lease losses are particularly susceptible to significant change in the near term. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, the FDIC and DFI, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. The FDIC or DFI may require the Bank to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.
Premises and Equipment — Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Expenditures for major renewals and improvements are capitalized and those for maintenance and repairs are charged to expense as incurred.
Securities Sold under Agreements to Repurchase — At December 31, 2010, and 2009, securities sold under agreements to repurchase consist of commercial repurchase agreements, where the Company has an agreement with the depositor to sell and repurchase, on a daily basis, a proportionate interest in U.S. Treasury and agency issued securities. These securities are held as collateral for non-FDIC insured deposits.
Federal Home Loan Bank Borrowings — As part of its asset/liability management strategy the Company has obtained advances from the Federal Home Loan Bank (FHLB) of San Francisco. The Company has pledged collateral of commercial real estate loans, one to four family residential loans, and specific securities to support the borrowings. As a member of the FHLB system, the Company is required to maintain an investment in the capital stock of the FHLB. The investment is carried at cost. The balance of FHLB stock was $7,943,000 and $6,110,000 at December 31, 2010 and 2009, respectively. The FHLB stock is included as a component of other assets on the consolidated balance sheets.
Goodwill and Other Intangibles — Goodwill is recorded in business combinations under the acquisition method of accounting when the purchase prices are higher than the fair value of net assets acquired, including identifiable intangible assets.

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The Company will evaluate goodwill for impairment annually, and more frequently in certain circumstances. Impairment exists when the carrying amount of the goodwill exceeds its fair value.
The Company will recognize impairment losses as a charge to noninterest expense and an adjustment to the carrying value of the goodwill assets. Goodwill is formally tested for impairment annually in April.
Earnings Per Share — The proceeding table illustrates basic earnings per share excluding dilution, and is computed by dividing net income available to common shareholders 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, converted into common stock, or resulted in the issuance of common stock that subsequently shared in the earnings of the entity. Diluted EPS are calculated using the weighted average diluted shares. The number of potential common shares included in annual diluted EPS is a year-to-date weighted average of the number of potential common shares included in each quarterly diluted EPS computation under the treasury stock method.
The following table reconciles the numerator and denominator used in computing both basic earnings per share and diluted earnings per share for the years ended December 31.
(Amounts in thousands, except per share data)
                         
Earnings Per Share   2010     2009     2008  
 
Basic EPS Calculation:
                       
Net income attributable to Bank of Commerce Holdings
  $ 6,220     $ 6,005     $ 2,194  
Less: dividend on preferred stock
    850       852        
Less: accretion on preferred stock
    90       90        
 
                 
Numerator: earnings available to common shareholders
  $ 5,280     $ 5,063     $ 2,194  
 
                       
Denominator (average common shares outstanding)
    14,950,838       8,711,495       8,712,873  
Basic earnings per share
  $ 0.35     $ 0.58     $ 0.25  
 
                       
Diluted EPS Calculation:
                       
Net income
  $ 6,220     $ 6,005     $ 2,194  
Less: dividend on preferred stock
    850       852        
Less: accretion on preferred stock
    90       90        
 
                 
Numerator: earnings available to common shareholders
  $ 5,280     $ 5,063     $ 2,194  
 
                       
Denominator:
                       
Average common shares outstanding
    14,950,838       8,711,495       8,712,873  
Plus incremental shares from assumed conversions
                       
Stock options
                11,677  
Warrants
                 
 
                 
 
    14,950,838       8,711,495       8,724,550  
 
                 
 
                       
Diluted earnings per share
  $ 0.35     $ 0.58     $ 0.25  
Anti-dilutive options not included in EPS calculation
    300,080       282,080       185,666  
Anti-dilutive warrants not included in EPS calculation
    405,405       405,405       405,405  

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Other Real Estate Owned — Real estate acquired by foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired, less costs to sell, by a charge to the allowance for loan losses, if necessary.
Fair value of other real estate is generally determined based on an appraisal of the property. Any subsequent write-downs are charged against noninterest expenses. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.
Gain recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. This includes the buyer’s initial and continuing investment, the degree of continuing involvement by the Company with the property after the sale, and other matters. Under certain circumstances, revenue recognition may be deferred until these criteria are met.
Segment Reporting — Reportable operating segments are generally defined as components of an enterprise for which discrete financial information is available, whose operating results are regularly reviewed by the organizations management and whose revenue is 10 percent or more of total revenue.
Under this definition the Company reports on two operating segments, Commercial Banking and Mortgage Brokerage Services. In the year 2008, the Company accounted for its operations as one operating segment.
Income Taxes — The Company accounts for income taxes under the liability method. Under the 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.
Stock Option Plan — The Company recognizes in the income statement the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over their requisite service period (generally the vesting period). The fair value of options granted is determined on the date of the grant using a Black Sholes option-pricing model.
Description of Stock-Based Compensation Plan — The 2008 Stock Option Plan (“the Plan”) was approved by the Company’s shareholders on May 15, 2007. A total of 620,000 shares of the Company’s common stock are reserved for grant under the Plan. At December 31, 2010, 586,500 shares were available for future grants under the Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Plan provides for awards in the form of options, which may constitute incentive stock options (“Incentive Options”) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the “Code”), or non-statutory stock options (“NSOs”) to key personnel of the Company, including directors. The Plan provides that Incentive Options under the Plan may not be granted at less than 100% of fair market value of the Company’s common stock on the date of the grant. The strike price of NSOs may not be granted at less than 85% of the fair market value of the common stock on the date of the grant.
The Company’s stock option plans provide for awards of incentive and nonqualified stock options. Incentive options must have an exercise price at or above fair market value of the stock at the date of the grant and a term of no more than 10 years. Options generally become exercisable over five years from the date of the grant. Nonqualified stock options must have an exercise price of no less than 85% of the fair market value of the stock at the date of the grant and for a term of no more than 10 years. Nonqualified stock options generally become exercisable over five years from the date of the grant.
The total intrinsic value, which is the amount by which the stock price exceeded the exercise price, of options exercised during the year ended December 31, 2010, 2009, and 2008 was $0, $0, and $40,863, respectively.
Comprehensive Income (Loss) — Comprehensive income (loss) represents net earnings and any revenues, expenses, gains and losses that, under accounting principles generally accepted in the United States of America, are excluded from net earnings and recognized directly as a component of shareholders’ equity. The Company’s sources of other comprehensive income (loss) include unrealized gains and losses on securities available-for-sale and unrealized gains and losses on derivative activities. Reclassification adjustments result from gains or losses on securities that were realized and included in net income of the current period that also had been included in other comprehensive income (loss) as unrealized holding gains or losses in the period in which they arose.
Transfer of Financial Assets — Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets (or beneficial interests), and (3) the Company does not maintain effective control over the transferred assets or third party beneficial interests through an agreement to repurchase them before their maturity.
On April 17, 2009, the Company transferred certain nonperforming loans, without recourse, and cash in exchange for the acquisition of a pool of Individual Tax Identification Number (“ITIN”) residential mortgage loans. The acquired ITIN loan portfolio was initially recorded at an estimated fair value of $80.7 million. The initial fair value of the ITIN loan portfolio was measured using a Level 3 valuation approach due to the illiquid market for this type of loan portfolio. As a result of the transfer of financial assets and the acquisition of the ITIN loan portfolio, the Company recorded a gain of $340 thousand, which is included as a component of noninterest income on the consolidated statement of income.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 principle balance of approximately $39,200, a weighted average credit score of 744, a weighted average loan to value of 86.44%, 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.
The Company services for others, SBA loans that are sold with a principal balance of $556 thousand, and $622 thousand as of December 31, 2010 and December 31, 2009 respectively. In addition, the Company services for others, a pool of home equity loans with a principal balance of $475 thousand at December 31, 2010. The servicing agreements have not resulted in a net servicing asset or net servicing liability because the servicing fees approximate the servicing costs.
Preferred Stock — The Company is authorized to issue up to 2,000,000 shares of preferred stock with no par value. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference, but have no voting rights. The Emergency Economic Stabilization Act (“EESA”) authorizes the United States Department of the Treasury (“Treasury”) to use appropriated funds to restore liquidity and stability to the U.S. financial system.
As part of this authority, and pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement — Standard Terms, the Company issued to the Treasury 17,000 shares of Bank of Commerce Holdings Series A Fixed Rate Perpetual Preferred Stock, with no par value (“Series A Preferred Stock”), having a liquidation amount per share equal to $1,000 for a total price of $17 million.
Warrants — As part of its purchase of the Series A Preferred Stock, the Treasury received a warrant (“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 the Company’s 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 the Company’s common stock, and upon certain issuances of the Company’s common stock at or below a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date.
Mortgages Loans Held for Sale — The Company, through its majority owned subsidiary, 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” (FNMA), “Freddie Mac” (FHLMC), and “Ginnie Mae” (GNMA)) and to third party investors including the servicing rights.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgages held for sale are carried at the lower of cost or fair value. Cost generally approximates market 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 interest income upon sale of a loan. The Company generally sells 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.
Advertising Costs — For the years ending December 31, 2010, 2009, and 2008, advertising costs were $322 thousand, $265 thousand, and $326 thousand respectively. Advertising costs were expensed as incurred.
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 December 31, 2010, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
FASB ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, the guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. The amendments in this Update do not affect nonpublic entities. The Company has adopted this Update during 2010. As this ASU is disclosure-related only, our adoption of this ASU did not impact our consolidated financial condition or results of operations.
FASB ASU No. 2010-29, Business Combinations (Topic 805)—Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 provides clarification regarding the acquisition date that should be used for reporting the pro forma financial information disclosures required by Topic 805 when comparative financial statements are presented. ASU 2010-29 also requires entities to provide a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. ASU 2010-29 is effective for the Company prospectively for business combinations occurring after December 31, 2010.
FASB ASU No. 2010-28, Intangibles—Goodwill and Other (Topic 350)—When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The adoption of this Update is not expected to have a significant effect on the Company’s consolidated financial statements.
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 required enhanced disclosures and did not have a significant effect on the Company’s consolidated 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 an effect on the Company’s consolidated 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 consolidated 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 principles (“U.S. GAAP”).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Our adoption of this update did not have a significant impact on our consolidated financial conditions or results of operations.
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.
FASB 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 consolidated 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 and 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. 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 fourteen offices in two different states and licenses in California, Oregon, Washington, Idaho and Colorado. The business was formed in 1993 and 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. As a result of the acquisition, goodwill of approximately $3.7 million was recorded. The Company tested goodwill for impairment during 2010 and recorded an impairment charge of approximately $32 thousand. Goodwill is not deductible for tax purposes. No other intangible assets, other than goodwill, were recorded as a result of the business combination.
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.
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™.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Price and Goodwill
The following table summarizes the purchase and resulting goodwill:
         
(Dollars in thousands)        
 
Cash paid — at fair value
  $ 1,500  
Earn out payable — at fair value
    965  
 
     
Total consideration at fair value
    2,465  
Fair value of non-controlling interest
    2,062  
 
     
 
  $ 4,527  
 
       
Net acquisition date fair value of 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. 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 balance sheet summarizes the amount assigned for each major asset category of Simonich Corporation, d.b.a. BWC Mortgage Services, at the date of acquisition, May 15, 2009. The carrying amount of the acquired assets and liabilities approximated fair value. Accordingly, no fair value adjustments to the acquired assets and liabilities were recorded.
         
(Dollars in thousands)        
 
Cash and cash equivalents
  $ 1,765  
Accounts receivable
    10  
Other receivables
    437  
Loans held for sale
    12,006  
Prepaid expenses
    57  
Notes receivable
    414  
 
     
Total Current Assets:
    14,689  
Fixed assets
    155  
Other assets
    13  
 
     
TOTAL ASSETS
  $ 14,857  
 
     
Accounts payable
  $ 99  
Accrued expenses
    232  
Branch payables
    191  
 
     
Total Payables:
    522  
Current portion capital lease
    39  
Impounds payable
    67  
Mortgage warehouse lines of credit
    11,810  
 
     
Total Other Current Liabilities:
    11,916  
Total Current Liabilities:
    12,438  
Long term capital lease payable
    15  
Due to shareholder
    224  
Notes payable
    1,380  
 
     
Total Long Term Liabilities:
    1,619  
TOTAL LIABILITIES
  $ 14,057  
 
     
Net assets
  $ 800  
 
     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revenue and net earnings of Bank of Commerce Mortgage from the acquisition date through December 31, 2009, included in the consolidated statements of income, totaled $5.3 million and $0.5 million, respectively.
The following unaudited pro forma consolidated results of operations for the years ended December 31, 2009 and 2008 have been prepared as if the acquisition had occurred at January 1, 2009 and 2008, respectively, for each year (unaudited):
                 
(Dollars in thousands)   2009     2008  
 
Net interest income
  $ 28,965     $ 21,283  
Provision for loan and lease losses
    9,475       6,520  
Noninterest income
    12,776       7,523  
Noninterest expense
    22,863       20,030  
 
           
Income before income tax
    9,403       2,256  
Provision (benefit) for income tax
    2,691       60  
 
           
Net Income
    6,712       2,196  
Less: income attributable to non-controlling interest
    481       (58 )
 
           
Net income attributable to Bank of Commerce Holdings
  $ 6,231     $ 2,254  
 
           
 
               
Net income per common share — basic
  $ 0.60     $ 0.26  
Net income per common share — diluted
  $ 0.60     $ 0.25  
 
NOTE 4. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank maintains compensating balances with its primary correspondent, which totaled $250,000, at December 31, 2010, and $0 at December 31, 2009. The Company did not maintain any unguaranteed balances at correspondent banks as of December 31, 2010 and 2009.
NOTE 5. SECURITIES
The amortized cost and estimated fair value of securities available for sale are summarized as follows:
                                 
(Dollars in thousands)   As of December 31, 2010  
            Gross     Gross        
            Unrealized     Unrealized     Estimated  
Available for sale securities   Amortized 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  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 
(Dollars in thousands)   As of December 31, 2009  
            Gross     Gross        
            Unrealized     Unrealized     Estimated  
Available for sale securities   Amortized Costs     Gains     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 table below presents the maturities of investment securities at December 31, 2010:
                 
    Available for Sale
(Dollars in thousands)   Amortized Cost     Fair Value  
 
AMOUNTS MATURING IN:
               
One year or less
  $ 7,963     $ 8,092  
One year through five years
    57,813       57,708  
Five years through ten years
    51,473       51,006  
After ten years
    75,209       72,429  
 
 
  $ 192,458     $ 189,235  
 
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 December 31, 2010, the Company held $101.2 million in securities with safekeeping institutions for pledging purposes. Of this amount, $31.5 million are currently pledged for treasury, tax and loan accounts; public funds collateral; collateralized repurchase agreements; Federal Home Loan Bank borrowings and interest rate swap contracts.
As of December 31, 2009, the Company held $55.7 million in securities with safekeeping institutions for pledging purposes. Of this amount, $35.5 million were pledged for treasury, tax and loan accounts; public funds collateral; collateralized repurchase agreements; Federal Home Loan Bank borrowings and interest rate swap contracts.
Gross realized gains and gross realized losses, respectively, on available-for-sale securities were approximately $2.0 million and $12 thousand in 2010, $2.7 million and $260 thousand in 2009, and $633 thousand and $5 thousand 2008.
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the amount due to factors not credit related is recognized in other comprehensive income.
We do not have the intent to sell the securities that are temporarily impaired, 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 December 31, 2010 and December 31, 2009. The tables also illustrate whether these securities have had unrealized losses for less than 12 months or for 12 months or longer.
                                                 
    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. government 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 )
 
                                                 
    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. government and agencies
  $ 3,994     $ (1 )   $     $     $ 3,994     $ (1 )
Obligations of state and political subdivisions
    8,517       (84 )     500       (1 )     9,017       (85 )
Residential mortgage backed securities and collateralized mortgage obligations
    7,516       (331 )                 7,516       (331 )
Corporate securities
                                   
Other asset backed securities
                                   
 
Total temporarily impaired securities
  $ 20,027     $ (416 )   $ 500     $ (1 )   $ 20,527     $ (417 )
 
At December 31, 2010 and 2009, 159 and 19 securities, respectively were in an unrealized loss position.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unrealized losses associated with debt securities of U.S. government agencies are primarily driven by changes in interest rates and not due to the credit quality of the securities. Further, securities backed by GNMA, FNMA, or FHLMC have the explicit 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 at December 31, 2010.
The unrealized losses associated with corporate securities, asset backed securities and CMO’s are primarily related to securities backed by residential mortgages. All of these securities were above investment grade at December 31, 2010 and 2009, as rated by at least one major rating agency. 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 at December 31, 2010.
NOTE 6. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Outstanding loan balances consist of the following at December 31, 2010 and 2009:
                 
(Dollars in thousands)
    2010     2009  
Commercial and industrial loans
  $ 133,199     $ 133,080  
Real estate — construction loans
    41,327       59,524  
Real estate — commercial (investor)
    194,285       197,023  
Real estate — commercial (owner occupied)
    68,055       63,001  
Real estate — ITIN loans
    70,585       78,250  
Real estate — mortgage
    19,299       20,525  
Real estate — equity lines
    69,590       45,601  
Installment loans
    2,303       2,223  
Other
    2,153       2,212  
 
           
 
  $ 600,796       601,439  
Less:
               
Deferred loan fees, net
    90       209  
Allowance for loan and lease losses
    12,841       11,207  
 
 
  $ 587,865     $ 590,023  
 

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Age analysis of past due loans, segregated by class of loans, as of December 31, 2010 and 2009 were as follows:
                                                         
(Dollars in thousands)   As of December 31,
                                                    Recorded
            60-89                                   Investment
    30-59   Days   Greater                           > 90 Days
    Days   Past   Than 90   Total                   and
    Past Due   Due   Days   Past Due   Current   Total   Accruing
 
2010
                                                       
Commercial
  $ 1,625     $     $ 677     $ 2,302     $ 130,897     $ 133,199     $  
Commercial real estate:
                                                       
Construction
    342                   342       40,985       41,327        
Other
    5,168             2,520       7,688       254,652       262,340        
Residential:
                                                       
1-4 family
    7,857       2,404       6,720       16,981       72,903       89,884        
Home equities
    450                   450       69,140       69,590        
Consumer
    19                   19       4,437       4,456        
 
Total
  $ 15,461     $ 2,404     $ 9,917     $ 27,782     $ 573,014     $ 600,796          
 
 
                                                       
2009
                                                       
Commercial
  $ 237     $     $ 5     $ 242     $ 132,836     $ 133,080     $ 5  
Commercial real estate:
                                                       
Construction
    719             130       849       58,675       59,524        
Other
                5,759       5,759       254,265       260,024        
Residential:
                                                       
1-4 family
    4,236       2,221       5,047       11,504       87,272       98,775       5,047  
Home equities
    102       104       97       303       45,298       45,601        
Consumer
                            4,436       4,435        
 
Total
  $ 5,294     $ 2,325     $ 11,038     $ 18,657     $ 582,782     $ 601,439     $ 5,052  
 
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 go more than 90 days past due.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management believes that charging the loan off at the time it becomes impaired would be more conservative than placing it in nonaccrual status.
As of December 31, 2010 the bank had a put reserve balance of $1.2 million remaining on the portfolio of home equity loans and lines purchased from the private equity firm totaling $18.1 million.
It is the Company’s policy to apply all payments received on all loans on nonaccrual status to principal until such time the loan is reclassified to accrual status. It is our 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 $501 thousand in 2010, $319 thousand in 2009, and $147 thousand in 2008.
Year-end nonaccrual loans, segregated by class of loans, were as follows:
                 
(Dollars in thousands)   December 31,  
    2010     2009  
 
Commercial
  $ 2,302     $ 237  
Commercial real estate:
               
Construction
    342       849  
Other
    7,066       5,759  
Residential:
               
1-4 family
    10,704       623  
Home equities
    97       199  
Consumer
           
 
Total
  $ 20,511     $ 7,667  
 
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 as impaired.
The Company generally applies all cash payments received on impaired loans towards the reduction of outstanding principal. It is the Company’s policy to recognize interest income on only those impaired loans that are also classified as troubled debt restructurings (TDRs); the following criteria is also 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.

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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the circumstances when a TDR loan is delinquent 90 or more days at the date of the modification, it is the Company’s policy to maintain the loan on nonaccrual status and apply all cash payments received to principal until such time the TDR borrower has made a minimum 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.
Year-end impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired, other than performing TDR’s as noted in the previous paragraph.
                                         
(Dollars in thousands)   As of December 31, 2010  
            Unpaid             Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Investment     Balance     Allowance     Investment     Recognized  
 
With no related allowance recorded:
                                       
Commercial
  $ 120     $ 120     $     $ 445     $  
Commercial real estate:
                                       
Construction
    718       947             2,002       2  
Other
    9,527       12,421             9,942       10  
Residential:
                                       
1-4 family
    8,067       9,745             8,393       78  
Home equities
    97       105             236        
 
                             
Total with no related allowance recorded
  $ 18,529     $ 23,338     $     $ 21,018     $ 90  
With an allowance recorded:
                                       
Commercial
  $ 2,182     $ 9,372     $ 449     $ 2,532     $  
Commercial real estate:
                                       
Construction
    2,428       3,347       139       2,374       74  
Other
    1,160       3,022       111       923       27  
Residential:
                                       
1-4 family
    8,716       9,298       599       4,562       30  
Home equities
    901       901       90              
 
                             
Total with an allowance recorded
  $ 15,387     $ 25,940     $ 1,388     $ 10,391     $ 131  
Subtotal:
                                       
Commercial
  $ 2,302     $ 9,492     $ 449     $ 2,977     $  
Commercial real estate
  $ 13,833     $ 19,737     $ 250     $ 15,241     $ 113  
Residential
  $ 17,781     $ 20,049     $ 689     $ 13,191     $ 108  
 
                             
Total
  $ 33,916     $ 49,278     $ 1,388     $ 31,409     $ 221  
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                         
(Dollars in thousands)   As of December 31, 2009  
            Unpaid             Average     Interest  
    Recorded     Principal     Related     Recorded     Income  
    Investment     Balance     Allowance     Investment     Recognized  
 
With no related allowance recorded:
                                       
Commercial
  $     $     $     $ 111     $  
Commercial real estate:
                                       
Construction
    672       4,576             5,483        
Other
    8,740       9,172             5,273