##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-K/A
 Amendment No. 1
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007  Commission File Number 0-25135
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
  California
(State or jurisdiction of incorporation or organization)
    
    94-2823865
(I.R.S. Employer Identification Number)
 1901 Churn Creek Road 
Redding, California
(Address of principal executive offices)
    
    96002
(Zip Code)
  
   Common Stock, No Par Value per share
    
    NASDAQ National Market
 o þ
 o þ
 þ o
 þ
  Large accelerated filer oAccelerated filer oNon-accelerated filer þ(Do not check if a smaller reporting company)Smaller reporting company o o þ
   Class
    
    Outstanding at June 30, 2008Common Stock, No par value per share
    
    8,711,495




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1




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##### Table of Contents



Bank of Commerce Holdings Form 10-K/A
 Table of Contents
 Part I.Item 1 . Business
    
    
    4General
    
    
    4Parent Bank Holding Company Activities
    
    
    5Junior Subordinated Debentures
    
    
    5Primary market areas
    
    
    6Products and services
    
    
    6Government supervision and regulation
    
    
    7General
    
    
    7Dividends
    
    
    7Interstate Banking
    
    
    7Capital standards
    
    
    8Overview of the New Accord
    
    
    8Fiscal and Monetary Policies
    
    
    9Privacy Provisions of Gramm-Leach-Bliley Act
    
    
    9Sarbanes-Oxley Act of 2002
    
    
    9Patriot Act
    
    
    9Future Legislation
    
    
    10State regulation and supervision
    
    
    10Prompt corrective action and other enforcement
mechanisms
    
    
    10Safety and soundness standards
    
    
    11Community reinvestment act and fair lending
developments
    
    
    11Recently enacted accounting rules
    
    
    11Competition
    
    
    12Employees
    
    
    12Item 1(A) Forward Looking Statements and Risk factors
that may affect results
    
    
    13Overview
    
    
    13Lending risks associated with commercial banking
and construction activities
    
    
    14Dependence on real estate
    
    
    14Risks specific to operations in California
    
    
    14Interest rate risk
    
    
    14Potential volatility of deposits
    
    
    15Dividends
    
    
    15Government regulation and legislation
    
    
    15Economic conditions and geographical concentration
    
    
    15Reliance on key employees and others
    
    
    15Adequacy of allowance for loan and
lease losses (ALLL)
    
    
    16Certain ownership restrictions under California and
Federal law
    
    
    16Shares eligible for future sale
    
    
    16Technology and computer systems
    
    
    16Environmental risks
    
    
    17Item 1B) Unresolved staff comments
    
    
    17Item 2. Properties
    
    
    18Item 3. Legal proceedings
    
    
    18Item 4. Submission of matters to a vote of security holders
    
    
    18Part II.Item 5. Market for Registrants common equity and related
Shareholder matters and Issuer purchases of equity
securities
    
    
    19Equity compensation plan information
    
    
    20Stock Performance Chart
    
    
    21
 2




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Item 6. Selected consolidated financial data
    
    
    22Item 7. Managements discussion and analysis of financial condition
and results of operations
    
    
    23Executive overview
    
    
    23Risk Management
    
    
    24Liquidity risk management
    
    
    25Credit risk management
    
    
    26Market risk management
    
    
    29Operational risk management
    
    
    29Critical accounting policies
    
    
    29General
    
    
    29Allowance for loan and lease losses (ALLL)
    
    
    30Stock-based compensation
    
    
    30Revenue recognition
    
    
    30Fixed Assets
    
    
    31Income taxes
    
    
    31Financial highlights  Results of operations
    
    
    31Key Financial Ratios
    
    
    31Sources of Income
    
    
    32Year ended December 31, 2007 compared to
Year ended December 31, 2006
    
    
    32Year ended December 31, 2006 compared to
Year ended December 31, 2005
    
    
    33Net Interest Income and net interest margin
    
    
    33Noninterest Income
    
    
    36Noninterest Expense
    
    
    36Income taxes
    
    
    37Asset Quality
    
    
    37Nonperforming assets
    
    
    38Available-for-sale securities
    
    
    38Deposit structure
    
    
    39Capital management and adequacy
    
    
    39Lending transactions with related parties
    
    
    40Impact of inflation
    
    
    41Commitments
    
    
    41Item 7a. Quantitative and qualitative disclosures to market risk
    
    
    42Item 8. Financial Statements and supplementary data
    
    
    45Item 9. Changes in and disagreements with accountants on
accounting and financial disclosures
    
    
    82Item 9A. Controls and procedures
    
    
    82Item 9B. Other Information
    
    
    83Part III.
    
    
    83Item 10. Directors, Executive Officers and Corporate Governance
    
    
    84Item 11. Executive compensation
    
    
    85Item 12. Security ownership of beneficial owners and management
and related stockholder matters
    
    
    85Item 13. Certain relationships and related transactions, and
Director independence
    
    
    85Item 14. Principal Accountant fees and services
    
    
    85Part IV.
    
    
    87Item 15. Exhibits, financial statements, certifications
    
    
    87EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  Documents Incorporated By Reference
  3




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PART I
 
 Item 1. BUSINESS
  Bank of Choice bank of choice
    www.bankofcommerceholdings.com www.sec.gov
 
 General
 Parent Bank Holding Company.
 Subsidiary Bank.
 Nonbank Subsidiary.
 4




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Parent Bank Holding Company Activities
 Financial in Nature Requirement.
   Regulatory Approval.
 
 Junior Subordinated Debentures
  5




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Primary Market Areas
  
 Products and Services
        6




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Government Supervision and Regulation
 The following discussion describes the elements of an extensive 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 Bank Insurance Fund rather than for
the protection of stockholders and creditors.
 
 Dividend Restrictions
    
 Interstate Banking
 de
novo
 7




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Capital Standards
    
 Overview of the New Accord
 . does not does
    8




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Fiscal and Monetary Policies
  
 Privacy Provisions of the Gramm-Leach-Bliley Act
  
 Sarbanes-Oxley Act of 2002
  
 Patriot Act
  9




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Future Legislation
  
 State Regulation and Supervision
   
 Prompt Corrective Action and Other Enforcement Mechanisms
  As of December 31, 2007, well
capitalized
 Well capitalized  Bank only
    
    Adequately capitalizedTotal risk-based capital of 10%;
    
    Total risk-based capital of 8%;Tier 1 risk-based capital of 6%; and
    
    Tier 1 risk-based capital of 4%; andLeverage ratio of 5%.
    
    Leverage ratio of 4%.Undercapitalized
    
    Significantly undercapitalizedTotal risk-based capital less than 8%;
    
    Total risk-based capital less than 6%;Tier 1 risk-based capital less than 4%; or
    
    Tier 1 risk-based capital less than 3%; orLeverage ratio less than 4%.
    
    Leverage ratio less than 3%.Critically undercapitalizedTangible equity to total assets less than 2%.
 10




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Safety and Soundness Standards
   
 Community Reinvestment Act and Fair Lending Developments
  
 Recently Enacted Accounting Rules
 On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48 Accounting for Income Tax Uncertainties (FIN 48). FIN 48 supplements Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109),
 On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements ,
 11




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On September 29, 2006, the FASB issued FAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans 
  On February 15, 2007 the FASB issued FAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement 115.
 
 Competition
    
 Employees
  12




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ITEM 1A.
 Forward Looking Statements and Risk Factors That May Affect Results
 This report includes forward-looking statements within the meaning of the Securities Exchange Act
of 1934 (the 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, including the risks discussed under the heading Risk Factors
That May Affect Results and elsewhere in this report. 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,
including those discussed under the heading Risk Factors That May Affect Results, 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 or 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.
 
 Overview
      13




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Lending Risks Associated with Commercial Banking and Construction Activities
  
 Dependence on Real Estate
   
 Risks Specific to Operations in California
  
 Interest Rate Risk
  14




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Potential Volatility of Deposits
  
 Dividends
  
 Government Regulation and Legislation
  
 Economic Conditions and Geographic Concentration
  
 Reliance on Key Employees and Others
  15




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Adequacy of Allowance for Loan and Lease Losses (ALLL)
  
 Certain Ownership Restrictions under California and Federal Law
   
 Shares Eligible for Future Sale
  
 Technology and Computer Systems
  16




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Environmental Risks
  
 ITEM 1(b) . UNRESOLVED STAFF COMMENTS
  17




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Item 2. PROPERTIES
     express
office
 
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  18




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PART II
 
 Item 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  Sales Price Per ShareQuarter Ended:
    
    High
    
    
    Low
    
    
    VolumeMarch 31, 2007
    
    $
    12.29
    
    
    $
    10.98
    
    
    
    112,197June 30, 2007
    
    $
    12.50
    
    
    $
    10.82
    
    
    
    55,221September 30, 2007
    
    $
    11.54
    
    
    $
    9.45
    
    
    
    447,215December 31, 2007
    
    $
    11.64
    
    
    $
    8.45
    
    
    
    381,865March 31, 2006
    
    $
    10.64
    
    
    $
    9.14
    
    
    
    174,479June 30, 2006
    
    $
    11.00
    
    
    $
    10.00
    
    
    
    97,655September 30, 2006
    
    $
    10.95
    
    
    $
    10.00
    
    
    
    178,380December 31, 2006
    
    $
    12.49
    
    
    $
    10.85
    
    
    
    150,795
    maximum
 19




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Equity Compensation Plan Information
  Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnPlan category
    
    and rights
    
    
    and rights
    
    
    (a)).(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    279,430
    
    
    $
    8.65
    
    
    
    62,077Equity compensation
plans not approved
by security holders
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    279,430
    
    
    $
    8.65
    
    
    
    62,077
  Purchase of Equity Securities by the Issuer and Affiliated Purchasers
 (c)
    
    
    (d)Total number of
    
    
    Maximum number ofshares purchased as
    
    
    shares that may yet(a)
    
    
    (b)
    
    
    part of publicly
    
    
    be purchased underTotal number of
    
    
    Average price
    
    
    announced plans or
    
    
    the plans orPeriod
    
    shares purchased
    
    
    paid per share
    
    
    programs
    
    
    programsSeptember 10, 2007
September 28, 2007
    
    
    170,645
    
    
    $
    11.31
    
    
    
    170,645
    
    
    
    29,355October 1, 2007
    
    
    29,355
    
    
    $
    11.60
    
    
    
    29,355
    
    
    
    -0-Total
    
    
    200,000
    
    
    $
    11.35
    
    
    
    200,000
    
    
    
    -0-
  20




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Stock Price Performance Graph
  Bank of Commerce Holdings
Five  Year Performance Graph
 
 Stock Performance Graph(1)
 SNL Securities LC © 2007
    
    (804) 977-1600
 
 (1)
    
    Assumes $100 invested on December 31, 2002, in the Companys Common Stock, the NASDAQ, the S&P
500 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). 21




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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
  In Thousands (Except Ratios and Per Share Data)
 As of and for the years ended December 31,
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Statements of IncomeTotal Interest Income
    
    $
    41,128
    
    
    $
    37,610
    
    
    $
    27,864
    
    
    $
    20,996
    
    
    $
    19,279Net Interest Income
    
    $
    22,012
    
    
    $
    22,035
    
    
    $
    20,238
    
    
    $
    16,887
    
    
    $
    14,694Provision for Loan Losses
    
    $
    3,291
    
    
    $
    226
    
    
    $
    448
    
    
    $
    554
    
    
    $
    515Total Noninterest Income
    
    $
    4,535
    
    
    $
    1,928
    
    
    $
    2,124
    
    
    $
    2,196
    
    
    $
    2,150Total Noninterest Expense
    
    $
    15,744
    
    
    $
    13,333
    
    
    $
    11,749
    
    
    $
    10,620
    
    
    $
    9,660Total Revenues
    
    $
    45,753
    
    
    $
    39,539
    
    
    $
    29,988
    
    
    $
    23,192
    
    
    $
    21,429Net Income
    
    $
    6,107
    
    
    $
    6,568
    
    
    $
    6,278
    
    
    $
    4,978
    
    
    $
    4,183Balance SheetsTotal Assets
    
    $
    618,327
    
    
    $
    583,442
    
    
    $
    511,644
    
    
    $
    438,545
    
    
    $
    401,158Total Net Loans
    
    $
    486,283
    
    
    $
    408,989
    
    
    $
    363,305
    
    
    $
    318,801
    
    
    $
    278,204Allowance for Loan Losses
    
    $
    8,233
    
    
    $
    4,904
    
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675Total Deposits
    
    $
    473,631
    
    
    $
    439,407
    
    
    $
    372,116
    
    
    $
    352,878
    
    
    $
    327,539Stockholders Equity
    
    $
    46,164
    
    
    $
    43,916
    
    
    $
    39,138
    
    
    $
    35,283
    
    
    $
    30,511Performance Ratios1Return on Average Assets2
    
    
    1.04
    %
    
    
    1.20
    %
    
    
    1.34
    %
    
    
    1.22
    %
    
    
    1.10
    %Return on Average Stockholders Equity3
    
    
    13.39
    %
    
    
    15.59
    %
    
    
    18.35
    %
    
    
    18.18
    %
    
    
    15.20
    %Dividend Payout
    
    
    46.47
    %
    
    
    40.36
    %
    
    
    35.74
    %
    
    
    39.29
    %
    
    
    42.09
    %Average Equity to Average Assets
    
    
    9.43
    %
    
    
    9.49
    %
    
    
    9.43
    %
    
    
    7.91
    %
    
    
    7.21
    %Tier 1 Risk-Based Capital-Bank4
    
    
    9.97
    %
    
    
    11.42
    %
    
    
    12.08
    %
    
    
    10.80
    %
    
    
    10.77
    %Total Risk-Based Capital-Bank
    
    
    11.22
    %
    
    
    12.54
    %
    
    
    13.11
    %
    
    
    11.88
    %
    
    
    12.02
    %Net Interest Margin5
    
    
    3.98
    %
    
    
    4.26
    %
    
    
    4.59
    %
    
    
    4.45
    %
    
    
    4.22
    %Average Earning Assets to Total Average Assets
    
    
    93.74
    %
    
    
    94.20
    %
    
    
    94.04
    %
    
    
    92.62
    %
    
    
    91.26
    %Nonperforming Assets to Total Assets6
    
    
    2.01
    %
    
    
    0.00
    %
    
    
    0.08
    %
    
    
    0.54
    %
    
    
    1.16
    %Net Charge-offs to Average Loans
    
    
    .00
    %
    
    
    -.09
    %
    
    
    0.00
    %
    
    
    0.12
    %
    
    
    0.13
    %Allowance for Loan Losses to Total Loans
    
    
    1.66
    %
    
    
    1.18
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %Nonperforming Loans to Allowance for Loan Losses
    
    
    150.72
    %
    
    
    0.00
    %
    
    
    9.15
    %
    
    
    61.64
    %
    
    
    126.34
    %Efficiency Ratio7
    
    
    59.31
    %
    
    
    55.64
    %
    
    
    52.54
    %
    
    
    55.65
    %
    
    
    59.15
    %Share DataAverage Common Shares Outstanding  basic
    
    
    8,858
    
    
    
    8,760
    
    
    
    8,600
    
    
    
    8,283
    
    
    
    8,033Average Common Shares Outstanding  diluted
    
    
    8,938
    
    
    
    8,932
    
    
    
    8,845
    
    
    
    8,703
    
    
    
    8,327Book Value Per Common Share
    
    $
    5.27
    
    
    $
    4.96
    
    
    $
    4.52
    
    
    $
    4.27
    
    
    $
    3.80Basic Earnings Per Common Share
    
    $
    0.69
    
    
    $
    0.75
    
    
    $
    0.73
    
    
    $
    0.60
    
    
    $
    0.52Diluted Earnings Per Common Share
    
    $
    0.68
    
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.57
    
    
    $
    0.50Cash Dividends Per Common Share8
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
 
 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 stockholders equity.4
    
    Regulatory capital ratios are defined in detail in the
table on pages 39-40.5
    
    Net interest margin equals net interest income as a
percent of average interest-earning assets.6
    
    Non-performing assets includes all nonperforming loans
(nonaccrual loans, loans 90 days past due and still accruing interest and
restructured loans) 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.8
    
    Cash dividends declared during the current fiscal year 22




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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 The following discussion should be read in conjunction with the Consolidated Financial Statements
of the Company and related notes thereto appearing elsewhere in this report. This report includes
forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the Exchange
Act) and the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and involve certain risks. 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. The Companys actual future
results and stockholder 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,
including those discussed under the heading Risk Factors That May Affect Results, 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 to 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 referenced to the Company refer to Bank of
Commerce Holdings, a California corporation, and its consolidated subsidiaries.
 
 Executive Overview
      23




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Risk Management
 Overview
  Board Committees
  
    
    Loan Committee reviews credit risks and the adequacy of the allowance for loan losses.
    
    Asset/Liability Management Committee (ALCO) reviews liquidity and market risks.
    
    Audit Committee reviews the scope and coverage of internal and external audit activities.
    
    Nominating and Corporate Governance Committee evaluates corporate governance structure,
charters, committee performance and acts in best interests of the corporation and its
stockholders with regard to the appointment of director nominees.
  Senior Leadership Committees
  
    
    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 practices and limits,
including industry concentration limits and 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.
 
    
    The SOX 404 Compliance Team has established the master plan for full documentation of the
Companies internal controls and compliance with the Sarbanes-Oxley Act, Section 404.
 Risk Management Controls
  24




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Liquidity Risk Management
 Liquidity Risk
       Federal Home Loan Bank borrowings
  2007
    
    
    2006
    
    
    2005Securities sold under agreements to repurchase
with weighted average interest rates of 2.84%,
4.00% and 3.19% at December 31, 2007, 2006
and 2005, respectively
    
    $
    15,513,211
    
    
    $
    37,116,610
    
    
    $
    22,885,658Federal Home Loan Bank borrowings with
weighted average interest rates of 4.30%,
5.64% and 4.17% at December 31, 2007, 2006
and 2005, respectively
    
    
    60,000,000
    
    
    
    40,000,000
    
    
    
    55,000,000Total short-term borrowings
    
    $
    75,513,211
    
    
    $
    77,116,610
    
    
    $
    77,885,658Securities sold under agreements to repurchase:Maximum outstanding at any month end
    
    $
    46,417,358
    
    
    $
    37,116,610
    
    
    $
    24,308,869Average balance during the year
    
    
    32,237,000
    
    
    
    29,708,000
    
    
    
    17,892,000Weighted average interest rate during year
    
    
    3.65
    %
    
    
    3.84
    %
    
    
    2.42
    %Federal Home Loan Bank borrowings:Maximum outstanding at any month end
    
    $
    60,000,000
    
    
    $
    80,000,000
    
    
    $
    55,000,000Average Balance during the year
    
    
    46,630,462
    
    
    
    59,059,300
    
    
    
    34,032,738Weighted average interest rate during year
    
    
    5.20
    %
    
    
    5.21
    %
    
    
    3.37
    %
 25




---



##### Table of Contents



Credit Risk Management
  Commercial portfolio credit risk management
   Real estate portfolio credit risk management
    26




---



##### Table of Contents



Concentrations of credit risk
  Nonperforming assets
  Allowance for loan and lease losses (ALLL)
   Accounting for Contingencies Accounting by Creditors for
Impairment of a Loan
   27




---



##### Table of Contents



Years Ended December 31,(Dollars in thousands)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Beginning Balance:
    
    $
    4,904
    
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529Provision for loan losses
    
    
    3,291
    
    
    
    226
    
    
    
    448
    
    
    
    554
    
    
    
    515Charge-offs:Commercial & Financial
    
    
    (0
    )
    
    
    (274
    )
    
    
    (83
    )
    
    
    (367
    )
    
    
    (379
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )Other
    
    
    (0
    )
    
    
    (25
    )
    
    
    (10
    )
    
    
    (1
    )
    
    
    (1
    )Total Charge-offs
    
    
    (0
    )
    
    
    ( 299
    )
    
    
    (93
    )
    
    
    (368
    )
    
    
    (380
    )Recoveries:Commercial & Financial
    
    
    26
    
    
    
    655
    
    
    
    93
    
    
    
    2
    
    
    
    11Real Estate
    
    
    12
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    0
    
    
    
    6
    
    
    
    2
    
    
    
    3
    
    
    
    0Total Recoveries
    
    
    38
    
    
    
    661
    
    
    
    95
    
    
    
    5
    
    
    
    11Net Charge-offs
    
    
    38
    
    
    
    362
    
    
    
    2
    
    
    
    (363
    )
    
    
    (369
    )Ending Balance
    
    $
    8,233
    
    
    $
    4,904
    
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675Allowance for loan losses to
total loans
    
    
    1.66
    %
    
    
    1.18
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %Net Charge-offs to average loans
    
    
    .00
    %
    
    
    -.09
    %
    
    
    .00
    %
    
    
    .12
    %
    
    
    .13
    %
   Dec. 31, 2007
    
    
    Dec. 31, 2006
    
    
    Dec. 31, 2005
    
    
    Dec. 31, 2004
    
    
    Dec. 31, 2003Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofcategory to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category to
    
    
    
    
    
    
    category to(Dollars in thousands)
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loans
    
    
    Amount
    
    
    total loansBalance at end of
period applicable to:Commercial and Financial
    
    $
    1,722
    
    
    
    35.11
    %
    
    $
    2,033
    
    
    
    30.36
    %
    
    $
    1,900
    
    
    
    30.76
    %
    
    $
    2,087
    
    
    
    32.64
    %
    
    $
    2,315
    
    
    
    37.01
    %Commercial Real Estate
    
    $
    1,512
    
    
    
    35.37
    %
    
    $
    1,364
    
    
    
    41.62
    %
    
    $
    1,375
    
    
    
    41.11
    %
    
    $
    1,149
    
    
    
    41.83
    %
    
    $
    878
    
    
    
    36.46
    %Construction and Development
    
    $
    4,594
    
    
    
    21.62
    %
    
    $
    1,244
    
    
    
    26.73
    %
    
    $
    936
    
    
    
    27.57
    %
    
    $
    588
    
    
    
    23.95
    %
    
    $
    456
    
    
    
    23.64
    %Installment Loans
    
    $
    44
    
    
    
    0.05
    %
    
    $
    28
    
    
    
    0.23
    %
    
    $
    28
    
    
    
    0.53
    %
    
    $
    23
    
    
    
    0.21
    %
    
    $
    20
    
    
    
    0.16
    %Other Loans
    
    $
    56
    
    
    
    0.25
    %
    
    $
    41
    
    
    
    0.05
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    0
    
    
    
    0.22
    %Unallocated
    
    $
    305
    
    
    
    7.60
    %
    
    $
    194
    
    
    
    1.01
    %
    
    $
    77
    
    
    
    0.03
    %
    
    $
    19
    
    
    
    1.37
    %
    
    $
    6
    
    
    
    2.51
    %Total Allowance for
loan and lease losses
    
    $
    8,233
    
    
    
    100.00
    %
    
    $
    4,904
    
    
    
    100.00
    %
    
    $
    4,316
    
    
    
    100.00
    %
    
    $
    3,866
    
    
    
    100.00
    %
    
    $
    3,675
    
    
    
    100.00
    %
 28




---



##### Table of Contents



Market Risk Management
   Securities Portfolio
 available-for-sale held-to-maturity held-to-maturity available-for-sale held-to-maturity
 
 Operational Risk Management
  
 Critical Accounting Policies
 
 General
  29




---



##### Table of Contents



Allowance for Loan and Lease Losses (ALLL)
   
 Stock-Based Compensation
 Accounting for Stock Based
Compensation
 Accounting for Stock Issued to Employees
 
 Revenue recognition
  30




---



##### Table of Contents



Fixed Assets
  
 Income Taxes
  
 Financial Highlights  Results of Operations
  
 Key Financial Ratios
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003ProfitabilityReturn on average assets
    
    
    1.04
    %
    
    
    1.20
    %
    
    
    1.34
    %
    
    
    1.22
    %
    
    
    1.10
    %Return on average equity
    
    
    13.39
    %
    
    
    15.59
    %
    
    
    18.35
    %
    
    
    18.18
    %
    
    
    15.20
    %Average earning assets to total average assets
    
    
    93.74
    %
    
    
    94.20
    %
    
    
    94.04
    %
    
    
    92.62
    %
    
    
    91.26
    %Interest MarginNet interest margin
    
    
    3.98
    %
    
    
    4.26
    %
    
    
    4.59
    %
    
    
    4.45
    %
    
    
    4.22
    %Asset QualityAllowance for loan losses to total loans
    
    
    1.66
    %
    
    
    1.18
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %Nonperforming assets to total assets
    
    
    2.01
    %
    
    
    0.00
    %
    
    
    0.08
    %
    
    
    0.54
    %
    
    
    1.16
    %Net charge-offs to average loans
    
    
    0.00
    %
    
    
    -0.09
    %
    
    
    0.00
    %
    
    
    0.12
    %
    
    
    0.13
    %LiquidityLoans to deposits
    
    
    102.67
    %
    
    
    93.08
    %
    
    
    97.63
    %
    
    
    90.34
    %
    
    
    84.94
    %Liquidity ratio
    
    
    18.49
    %
    
    
    27.96
    %
    
    
    23.57
    %
    
    
    23.23
    %
    
    
    25.49
    %CapitalTier 1 risk-based capital  Bank
    
    
    9.97
    %
    
    
    11.42
    %
    
    
    12.08
    %
    
    
    10.80
    %
    
    
    10.77
    %Total risk-based capital  Bank
    
    
    11.22
    %
    
    
    12.54
    %
    
    
    13.11
    %
    
    
    11.88
    %
    
    
    12.02
    %EfficiencyEfficiency ratio
    
    
    59.31
    %
    
    
    55.64
    %
    
    
    52.54
    %
    
    
    55.65
    %
    
    
    59.15
    %
 www.fdic.gov
 31




---



##### Table of Contents



Sources of Income
       
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
   32




---



##### Table of Contents



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
     
 Net Interest Income and Net Interest Margin
    33




---



##### Table of Contents



Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
 (Dollars in thousands)
    
    2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest Earning AssetsPortfolio loans
    
    $
    437,217
    
    
    $
    36,134
    
    
    
    8.26
    %
    
    $
    394,152
    
    
    $
    32,394
    
    
    
    8.22
    %
    
    $
    337,284
    
    
    $
    24,070
    
    
    
    7.14
    %Tax-exempt securities
    
    
    30,727
    
    
    
    1,229
    
    
    
    4.00
    %
    
    
    21,112
    
    
    
    787
    
    
    
    3.73
    %
    
    
    9,966
    
    
    
    332
    
    
    
    3.33
    %US government securities
    
    
    26,782
    
    
    
    1,112
    
    
    
    4.15
    %
    
    
    39,576
    
    
    
    1,593
    
    
    
    4.03
    %
    
    
    35,779
    
    
    
    1,272
    
    
    
    3.56
    %Mortgage backed securities
    
    
    43,122
    
    
    
    1,973
    
    
    
    4.58
    %
    
    
    42,476
    
    
    
    1,828
    
    
    
    4.30
    %
    
    
    41,181
    
    
    
    1,639
    
    
    
    3.98
    %Federal funds sold
    
    
    13,099
    
    
    
    681
    
    
    
    5.20
    %
    
    
    17,124
    
    
    
    872
    
    
    
    5.09
    %
    
    
    15,225
    
    
    
    491
    
    
    
    3.22
    %Other securities
    
    
    2,000
    
    
    
    90
    
    
    
    4.50
    %
    
    
    3,075
    
    
    
    136
    
    
    
    4.42
    %
    
    
    1,384
    
    
    
    60
    
    
    
    4.34
    %Average Earning Assets
    
    $
    552,947
    
    
    $
    41,219
    
    
    
    7.45
    %
    
    $
    517,515
    
    
    $
    37,610
    
    
    
    7.27
    %
    
    $
    440,819
    
    
    $
    27,864
    
    
    
    6.32
    %Cash & due from banks
    
    
    14,273
    
    
    
    
    
    
    
    
    
    
    
    14,113
    
    
    
    
    
    
    
    
    
    
    
    15,208Bank premises and fixed assets
    
    
    10,155
    
    
    
    
    
    
    
    
    
    
    
    6,878
    
    
    
    
    
    
    
    
    
    
    
    5,563Other assets
    
    
    17,986
    
    
    
    
    
    
    
    
    
    
    
    11,022
    
    
    
    
    
    
    
    
    
    
    
    7,172Average Total Assets
    
    $
    595,361
    
    
    
    
    
    
    
    
    
    
    $
    549,528
    
    
    
    
    
    
    
    
    
    
    $
    468,762Interest Bearing LiabilitiesInterest bearing demand
    
    $
    121,281
    
    
    $
    2,735
    
    
    
    2.26
    %
    
    $
    108,066
    
    
    $
    1,504
    
    
    
    1.39
    %
    
    $
    112,236
    
    
    $
    939
    
    
    
    0.84
    %Savings deposits
    
    
    39,565
    
    
    
    1,216
    
    
    
    3.07
    %
    
    
    24,633
    
    
    
    289
    
    
    
    1.17
    %
    
    
    26,542
    
    
    
    183
    
    
    
    0.69
    %Certificates of deposit
    
    
    215,511
    
    
    
    10,571
    
    
    
    4.91
    %
    
    
    190,568
    
    
    
    8,486
    
    
    
    4.45
    %
    
    
    149,204
    
    
    
    4,331
    
    
    
    2.90
    %Repurchase Agreements
    
    
    32,237
    
    
    
    1,177
    
    
    
    3.65
    %
    
    
    29,708
    
    
    
    1,138
    
    
    
    3.83
    %
    
    
    17,892
    
    
    
    431
    
    
    
    0.36
    %Other borrowings
    
    
    62,095
    
    
    
    3,507
    
    
    
    5.65
    %
    
    
    69,014
    
    
    
    4,158
    
    
    
    6.02
    %
    
    
    34,042
    
    
    
    1,742
    
    
    
    6.20
    %Average Interest Liabilities
    
    $
    470,689
    
    
    $
    19,206
    
    
    
    4.08
    %
    
    $
    421,989
    
    
    
    15,575
    
    
    
    3.69
    %
    
    $
    339,916
    
    
    
    7,626
    
    
    
    2.24
    %Noninterest bearing Demand
    
    
    72,545
    
    
    
    
    
    
    
    
    
    
    
    79,245
    
    
    
    
    
    
    
    
    
    
    
    80,219Other liabilities
    
    
    6,502
    
    
    
    
    
    
    
    
    
    
    
    6,154
    
    
    
    
    
    
    
    
    
    
    
    4,417Stockholders equity
    
    
    45,625
    
    
    
    
    
    
    
    
    
    
    
    42,140
    
    
    
    
    
    
    
    
    
    
    
    44,210Average Liabilities and
Stockholders equity
    
    $
    595,361
    
    
    
    
    
    
    
    
    
    
    $
    549,528
    
    
    
    
    
    
    
    
    
    
    $
    468,762Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    22,013
    
    
    
    3.98
    %
    
    
    
    
    
    $
    22,035
    
    
    
    4.26
    %
    
    
    
    
    
    $
    20,238
    
    
    
    4.59
    %
  34




---



##### Table of Contents



Analysis of Changes in Net Interest Income
Years ended December 31,
 (Dollars in thousands)
    
    2007 over 2006
    
    
    
    
    
    
    2006 over 2005Variance
    
    
    Variance
    
    
    
    
    
    
    Variance
    
    
    Variancedue to
    
    
    due to
    
    
    
    
    
    
    due to
    
    
    due toAverage
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalIncrease (Decrease)In Interest Income:Portfolio loans
    
    $
    3,559
    
    
    
    180
    
    
    $
    3,739
    
    
    $
    4,674
    
    
    $
    3,651
    
    
    $
    8,325Tax-exempt securities
    
    
    385
    
    
    
    57
    
    
    
    442
    
    
    
    415
    
    
    
    40
    
    
    
    455US government securities
    
    
    (531
    )
    
    
    50
    
    
    
    (481
    )
    
    
    153
    
    
    
    168
    
    
    
    321Mortgage backed securities
    
    
    30
    
    
    
    115
    
    
    
    145
    
    
    
    56
    
    
    
    133
    
    
    
    189Federal funds sold
    
    
    (209
    )
    
    
    18
    
    
    
    (191
    )
    
    
    97
    
    
    
    284
    
    
    
    381Other securities
    
    
    (48
    )
    
    
    2
    
    
    
    (46
    )
    
    
    75
    
    
    
    1
    
    
    
    76Total Increase (Decrease)
    
    
    3,186
    
    
    
    422
    
    
    
    3,608
    
    
    
    5,470
    
    
    
    4,277
    
    
    
    9,747(Decrease) IncreaseIn Interest Expense:Interest bearing demand
    
    
    298
    
    
    
    933
    
    
    
    1,231
    
    
    
    (58
    )
    
    
    624
    
    
    
    566Savings accounts
    
    
    459
    
    
    
    468
    
    
    
    927
    
    
    
    (22
    )
    
    
    128
    
    
    
    106Certificates of deposit
    
    
    1,223
    
    
    
    862
    
    
    
    2,085
    
    
    
    1,842
    
    
    
    2,313
    
    
    
    4,155Other borrowings
    
    
    (1,591
    )
    
    
    979
    
    
    
    (612
    )
    
    
    2,560
    
    
    
    562
    
    
    
    3,122Total Increase (Decrease)
    
    
    389
    
    
    
    3,242
    
    
    
    3,631
    
    
    
    4,322
    
    
    
    3,627
    
    
    
    7,949Net Increase (Decrease)
    
    $
    2,797
    
    
    $
    (2,820
    )
    
    $
    (23
    )
    
    $
    1,148
    
    
    $
    650
    
    
    $
    1,798
 35




---



##### Table of Contents



Noninterest Income
  (Dollars in thousands)
    
    Years Ended December 31,2007
    
    2006
    
    2005Noninterest income:Service charges on deposit accounts
    
    $
    278
    
    
    $
    346
    
    
    $
    394Payroll and benefit processing fees
    
    
    383
    
    
    
    386
    
    
    
    357Earnings on cash surrender-
Bank owned life insurance
    
    
    331
    
    
    
    329
    
    
    
    209Life Insurance policy benefits
    
    
    2,400
    
    
    
    0
    
    
    
    0Net realized gain (loss) on sale of
securities available-for-sale
    
    
    46
    
    
    
    (171
    )
    
    
    (2
    )Net gain on sale of loans
    
    
    0
    
    
    
    90
    
    
    
    146Merchant credit card service income, net
    
    
    388
    
    
    
    380
    
    
    
    346Mortgage brokerage fee income
    
    
    50
    
    
    
    71
    
    
    
    249Other income
    
    
    659
    
    
    
    497
    
    
    
    425Total Noninterest income
    
    $
    4.535
    
    
    $
    1,928
    
    
    $
    2,124
    
 Noninterest Expense
  (Dollars in thousands)
    
    Years Ended December 31,2007
    
    2006
    
    2005Salaries & related benefits
    
    $
    8,666
    
    
    $
    8,020
    
    
    $
    6,884Occupancy & equipment expense
    
    
    2,373
    
    
    
    1,846
    
    
    
    1,572FDIC insurance premium
    
    
    51
    
    
    
    48
    
    
    
    49Data processing fees
    
    
    395
    
    
    
    216
    
    
    
    303Professional service fees
    
    
    1,027
    
    
    
    684
    
    
    
    649Payroll processing fees
    
    
    108
    
    
    
    104
    
    
    
    111Deferred compensation expense
    
    
    411
    
    
    
    369
    
    
    
    321Stationery & supplies
    
    
    257
    
    
    
    231
    
    
    
    241Postage
    
    
    138
    
    
    
    113
    
    
    
    104Directors expenses
    
    
    312
    
    
    
    243
    
    
    
    220Other expenses
    
    
    2,006
    
    
    
    1,459
    
    
    
    1,295Total Noninterest expense
    
    $
    15,744
    
    
    $
    13,333
    
    
    $
    11,749
  36




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##### Table of Contents



Income Taxes
    (Dollars in thousands)
    
    Years Ended December 31,2007
    
    
    2006
    
    
    2005Income tax provision
    
    $
    1,405
    
    
    $
    3,837
    
    
    $
    3,887Effective tax rate
    
    
    18.7
    %
    
    
    36.9
    %
    
    
    38.2
    %
 
 Asset Quality
  (Dollars in thousands)
    
    As of December 31,2007
    
    
    %
    
    
    2006
    
    
    %
    
    
    2005
    
    
    %
    
    
    2004
    
    
    %
    
    
    2003
    
    
    %Commercial & industrial
    
    $
    173,704
    
    
    
    35.11
    %
    
    $
    125,725
    
    
    
    30.36
    %
    
    $
    115,401
    
    
    
    31.36
    %
    
    $
    105,545
    
    
    
    32.64
    %
    
    $
    104,509
    
    
    
    37.01
    %Real Estate-construction
    
    
    106,977
    
    
    
    21.62
    %
    
    
    110,693
    
    
    
    26.73
    %
    
    
    105,094
    
    
    
    28.56
    %
    
    
    77,439
    
    
    
    23.95
    %
    
    
    66,741
    
    
    
    23.64
    %Real Estate-commercial
    
    
    175,013
    
    
    
    35.37
    %
    
    
    159,370
    
    
    
    38.48
    %
    
    
    129,202
    
    
    
    35.11
    %
    
    
    128,317
    
    
    
    39.69
    %
    
    
    95,903
    
    
    
    33.97
    %Real Estate- mortgage
    
    
    10,787
    
    
    
    2.18
    %
    
    
    4,278
    
    
    
    1.04
    %
    
    
    3,669
    
    
    
    1.00
    %
    
    
    4,423
    
    
    
    1.37
    %
    
    
    7,086
    
    
    
    2.51
    %Real Estate  other
    
    
    26,818
    
    
    
    5.42
    %
    
    
    12,986
    
    
    
    3.14
    %
    
    
    13,790
    
    
    
    3.75
    %
    
    
    6,943
    
    
    
    2.14
    %
    
    
    7,050
    
    
    
    2.49
    %Installment
    
    
    226
    
    
    
    0.05
    %
    
    
    202
    
    
    
    0.05
    %
    
    
    439
    
    
    
    0.12
    %
    
    
    300
    
    
    
    0.10
    %
    
    
    451
    
    
    
    0.16
    %Other loans
    
    
    1,223
    
    
    
    0.25
    %
    
    
    937
    
    
    
    0.20
    %
    
    
    446
    
    
    
    0.10
    %
    
    
    353
    
    
    
    0.11
    %
    
    
    632
    
    
    
    0.22
    %Gross Loans
    
    
    494,748
    
    
    
    100.00
    %
    
    $
    414,191
    
    
    
    100.00
    %
    
    $
    368,041
    
    
    
    100.00
    %
    
    $
    323,320
    
    
    
    100.00
    %
    
    $
    282,372
    
    
    
    100.00
    %Less:Deferred loan fees and
costs
    
    
    232
    
    
    
    
    
    
    
    298
    
    
    
    
    
    
    
    420
    
    
    
    
    
    
    
    653
    
    
    
    
    
    
    
    494Allowance for Loan losses
    
    
    8,233
    
    
    
    
    
    
    
    4,904
    
    
    
    
    
    
    
    4,316
    
    
    
    
    
    
    
    3,866
    
    
    
    
    
    
    
    3,675Net Loans
    
    $
    486,283
    
    
    
    
    
    
    $
    408,989
    
    
    
    
    
    
    $
    363,305
    
    
    
    
    
    
    $
    318,801
    
    
    
    
    
    
    $
    278,203
  37




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##### Table of Contents



Nonperforming Assets
  (Dollars in thousands)
    
    As of December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Nonaccrual loans
    
    $
    12,409
    
    
    $
    0
    
    
    $
    372
    
    
    $
    2,383
    
    
    $
    3,93190 days past due and
still accruing interest
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    712Total nonperforming loans
    
    
    12,409
    
    
    
    0
    
    
    
    372
    
    
    
    2,383
    
    
    
    4,643Other real estate owned
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total nonperforming assets
    
    $
    12,409
    
    
    $
    0
    
    
    $
    372
    
    
    $
    2,383
    
    
    $
    4,643
  Loan Maturity Schedule
  After One(Dollars in thousands)
    
    Within One Year
    
    
    through Five Years
    
    
    After Five Years
    
    
    TotalCommercial & industrial
    
    $
    149,716
    
    
    $
    22,783
    
    
    $
    1,205
    
    
    $
    173,704Real Estate   construction
    
    
    104,061
    
    
    
    2,916
    
    
    
    0
    
    
    
    106,977Real Estate  commercial
    
    
    150,818
    
    
    
    7,992
    
    
    
    16,203
    
    
    
    175,013Real Estate  mortgage
    
    
    9,994
    
    
    
    281
    
    
    
    512
    
    
    
    10,787Real Estate  other
    
    
    21,708
    
    
    
    3,160
    
    
    
    1,950
    
    
    
    26,818Installment loans
    
    
    226
    
    
    
    0
    
    
    
    0
    
    
    
    226Other loans
    
    
    1,223
    
    
    
    0
    
    
    
    0
    
    
    
    1,223Total gross loans
    
    $
    437,746
    
    
    $
    37,132
    
    
    $
    19,870
    
    
    $
    494,748Loans due after one year
with:Fixed Rates
    
    
    
    
    
    $
    35,040
    
    
    $
    19,870
    
    
    $
    54,910Variable Rates
    
    
    
    
    
    
    2,092
    
    
    
    0
    
    
    
    2,092Total
    
    
    
    
    
    $
    37,132
    
    
    $
    19,870
    
    
    $
    57,002
 
 Available-for-sale securities
  Over One through
    
    
    Over Five through
    
    
    OverWithin One
    
    
    Five
    
    
    Ten
    
    
    Ten(Dollars in thousands)
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. government & agencies
    
    $
    5,000
    
    
    
    4.05
    %
    
    $
    7,991
    
    
    
    3.79
    %
    
    $
    2,998
    
    
    
    4.01
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    15,989
    
    
    
    3.79
    %Obligations of state and
political subdivisions
    
    
    86
    
    
    
    2.16
    %
    
    
    510
    
    
    
    3.43
    %
    
    
    2,410
    
    
    
    3.48
    %
    
    
    16,011
    
    
    
    4.07
    %
    
    
    19,017
    
    
    
    3.97
    %Mortgage backed securities
    
    
    0
    
    
    
    0.00
    %
    
    
    5,469
    
    
    
    4.05
    %
    
    
    4,156
    
    
    
    3.92
    %
    
    
    22,012
    
    
    
    4.59
    %
    
    
    31,637
    
    
    
    4.60
    %Corporate and other bonds
    
    
    2,000
    
    
    
    4.48
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    2,000
    
    
    
    4.48
    %Bankers Acceptances
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Total
    
    $
    7,086
    
    
    
    4.14
    %
    
    $
    13,970
    
    
    
    3.76
    %
    
    $
    9,564
    
    
    
    3.84
    %
    
    $
    38,023
    
    
    
    4.54
    %
    
    $
    68,643
    
    
    
    4.24
    %
 38




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##### Table of Contents



Deposit Structure
  (Dollars in thousands)
    
    Years Ended December 31,2007
    
    
    2006
    
    
    2005Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldNOW accounts
    
    $
    61,391
    
    
    
    1.58
    %
    
    $
    79,885
    
    
    
    1.22
    %
    
    $
    84,070
    
    
    
    0.67
    %Savings
    
    
    39,518
    
    
    
    3.08
    %
    
    
    24,633
    
    
    
    1.17
    %
    
    
    26,542
    
    
    
    0.69
    %Money market accounts
    
    
    59,814
    
    
    
    2.95
    %
    
    
    28,181
    
    
    
    1.90
    %
    
    
    28,166
    
    
    
    1.32
    %Certificates of deposit
    
    
    215,498
    
    
    
    4.94
    %
    
    
    190,568
    
    
    
    4.45
    %
    
    
    149,204
    
    
    
    2.96
    %Interest bearing deposits
    
    
    376,221
    
    
    
    4.00
    %
    
    
    323,267
    
    
    
    3.69
    %
    
    
    287,982
    
    
    
    2.24
    %Noninterest bearing deposits
    
    
    72,545
    
    
    
    
    
    
    
    79,245
    
    
    
    
    
    
    
    80,219Average Total Deposits
    
    $
    448,766
    
    
    
    
    
    
    $
    402,512
    
    
    
    
    
    
    $
    368,201Average Other borrowings
    
    
    78,852
    
    
    
    4.57
    %
    
    
    98,722
    
    
    
    5.37
    %
    
    
    51,934
    
    
    
    3.04
    %
  Deposit Maturity Schedule
 (Dollars in thousands)2007Three months or less
    
    $
    78,719Three through six months
    
    
    27,920Six through twelve months
    
    
    27,919Over twelve months
    
    
    19,029Total
    
    $
    153,584
 
 Capital Management and Adequacy
    39




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##### Table of Contents



Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalDecember 31, 2007
    
    Capital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    56,857,387
    
    
    
    9.26
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    56,857,387
    
    
    
    10.12
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    63,881,556
    
    
    
    11.37
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of
CommerceLeverage
    
    $
    56,025,174
    
    
    
    9.20
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    56,025,174
    
    
    
    9.97
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    63,049,343
    
    
    
    11.22
    %
    
    
    10.00
    %
    
    
    8.0
    %
  
 Lending Transactions with Related Parties
    December 31,2007
    
    
    2006Balance at beginning of year
    
    $
    2,849,533
    
    
    $
    1,854,751New loan additions
    
    
    25,312
    
    
    
    1,507,115Advances on existing lines of credit
    
    
    2,184,045
    
    
    
    0Principal repayments
    
    
    (1,458,548
    )
    
    
    (512,333
    )Balance at end of year
    
    $
    3,600,342
    
    
    $
    2,849,533
 40




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##### Table of Contents



Impact of Inflation
  
 Commitments
 Off-Balance Sheet Financial Instruments
  2007
    
    
    2006Off-balance sheet commitments:Commitments to extend credit
    
    $
    192,815,902
    
    
    $
    158,296,132Standby letters of credit
    
    
    6,627,409
    
    
    
    13,511,196Guaranteed commitments outstanding
    
    
    1,375,999
    
    
    
    1,248,000$
    200,819,310
    
    
    $
    173,055,328
    Commitments and Contingent Liabilities
   Less than
    
    
    
    
    
    
    
    
    
    
    More than 5
    
    
    IndeterminateContractual Obligations
    
    Total
    
    
    One Year
    
    
    1  3 Years
    
    
    3  5 Years
    
    
    years
    
    
    Maturity (1)Junior Subordinated
    
    $
    15,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,465
    
    
    
    Debentures
FHLB Borrowings
    
    $
    60,000
    
    
    $
    25,000
    
    
    $
    35,000
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    $
    3,168
    
    
    $
    591
    
    
    $
    1,082
    
    
    $
    733
    
    
    $
    762
    
    
    
    Repurchase Agreements
    
    $
    15,513
    
    
    $
    15,513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deposits (1)
    
    $
    473,631
    
    
    $
    186,536
    
    
    $
    27,108
    
    
    $
    73
    
    
    
    0
    
    
    
    259,914Total
    
    $
    567,777
    
    
    $
    227,640
    
    
    $
    63,190
    
    
    $
    806
    
    
    $
    16,227
    
    
    $
    259,914
 
 (1)
    
    Represents interest-bearing and non-interest bearing checking, money market and savings
accounts. 41




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##### Table of Contents



ITEM 7-A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      42




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##### Table of Contents



43




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##### Table of Contents



(Dollars in thousands)
    
    At December 31, 2007Within 3
    
    
    3 Months to
    
    
    One Year toMonths
    
    
    One Year
    
    
    Five Years
    
    
    Over Five Years
    
    
    TotalInterest-Earning AssetsHeld-to-maturity securities
    
    $
    110
    
    
    $
    
    
    
    $
    4,778
    
    
    $
    5,671
    
    
    $
    10,559Available-for-sale securities
    
    
    0
    
    
    
    7,087
    
    
    
    13,970
    
    
    
    47,587
    
    
    
    68,644Federal funds sold
    
    
    8,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,395Loans, net
    
    
    219,776
    
    
    
    211,005
    
    
    
    37,132
    
    
    
    19,870
    
    
    
    487,783Total Interest-earning Assets
    
    $
    228,281
    
    
    $
    218,092
    
    
    $
    55,880
    
    
    $
    73,128
    
    
    $
    575,381Interest-Bearing LiabilitiesDemand  Interest bearing
    
    $
    71,411
    
    
    
    42,846
    
    
    $
    28,564
    
    
    $
    0
    
    
    $
    142,821Savings Accounts
    
    
    24,826
    
    
    
    8,275
    
    
    
    8,275
    
    
    
    
    
    
    
    41,376Certificates of deposit
    
    
    68,360
    
    
    
    118,176
    
    
    
    27,181
    
    
    
    
    
    
    
    213,717Repurchase Agreements
    
    
    15,513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,513Other borrowings
    
    
    20,000
    
    
    
    5,000
    
    
    
    35,000
    
    
    
    
    
    
    
    60,000Total Interest-bearing Liabilities
    
    $
    200,110
    
    
    $
    174,297
    
    
    $
    99,020
    
    
    $
    0
    
    
    $
    473,427GAP in dollars
    
    $
    28,172
    
    
    $
    43,795
    
    
    
    ($43,140
    )
    
    $
    73,128
    
    
    $
    101,954Cumulative GAP in dollars
    
    
    
    
    
    $
    71,966
    
    
    
    28,826
    
    
    $
    101,954As a percentage of earning assets:GAP Ratio
    
    
    1.14
    
    
    
    1.25
    
    
    
    0.56
    
    
    
    0.97
    
    
    
    1.22Cumulative GAP Ratio
    
    
    1.14
    
    
    
    0.20
    
    
    
    (0.77
    )
    
    
    1.00Gap as % of Earning Assets
    
    
    4.90
    %
    
    
    7.61
    %
    
    
    -7.50
    %
    
    
    12.71
    %
    
    
    17.72
    %Cumulative Gap as % of Earning
Assets
    
    
    4.90
    %
    
    
    12.51
    %
    
    
    5.01
    %
    
    
    17.72
    %
  44




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    46Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    47Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
    
    
    48Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
    
    
    49Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    
    51Notes to Consolidated Financial Statements for the years ended December 31, 2007, 2006 and 2005
    
    
    53
 45




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 46




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 2007
    
    
    2006ASSETSCash and due from banks
    
    $
    13,839,123
    
    
    $
    14,661,386Federal funds sold and securities purchased under agreements to resell
    
    
    8,395,000
    
    
    
    24,605,000Cash and cash equivalents
    
    
    22,234,123
    
    
    
    39,266,386Securities available-for-sale (including pledged collateral of
$61,329,000 at December 31, 2007 and $71,686,000 at December 31, 2006)
    
    
    67,906,386
    
    
    
    95,601,107Securities held-to-maturity, at cost
(estimated fair value of $10,632,208 at December 31, 2007
and $10,792,938 at December
31, 2006)
    
    
    10,558,765
    
    
    
    10,810,113Loans, net of the allowance for loan and lease losses of $8,232,970
at December 31, 2007 and $4,904,266 at December 31, 2006
    
    
    486,282,571
    
    
    
    408,989,228Bank premises and equipment, net
    
    
    10,963,975
    
    
    
    8,595,044Other assets
    
    
    20,381,095
    
    
    
    20,180,149TOTAL ASSETS
    
    $
    618,326,915
    
    
    $
    583,442,027LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Demand  noninterest bearing
    
    $
    75,717,742
    
    
    $
    84,778,916Demand  interest bearing
    
    
    142,820,773
    
    
    
    119,437,370Savings accounts
    
    
    41,376,296
    
    
    
    22,748,885Certificates of deposit
    
    
    213,716,486
    
    
    
    212,442,258Total Deposits
    
    
    473,631,297
    
    
    
    439,407,429Securities sold under agreements to repurchase
    
    
    15,513,211
    
    
    
    37,116,610Federal Home Loan Bank borrowings
    
    
    60,000,000
    
    
    
    40,000,000Other liabilities
    
    
    7,553,559
    
    
    
    7,536,738Junior subordinated debt payable to
unconsolidated
subsidiary grantor
trust
    
    
    15,465,000
    
    
    
    15,465,000Total liabilities
    
    
    572,163,067
    
    
    
    539,525,777Commitments and contingencies (Note 17)Stockholders equity:Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued and
outstanding in 2007 and 2006
    
    
    
    
    
    
    Common stock, no par value; 50,000,000
shares
authorized; 8,757,445 shares issued and outstanding in 2007
and 8,847,042 shares issued and outstanding
in 2006
    
    
    9,995,517
    
    
    
    11,517,368Retained earnings
    
    
    36,604,902
    
    
    
    33,336,032Accumulated other comprehensive loss, net of
tax
    
    
    (436,571
    )
    
    
    (937,150
    )Total stockholders equity
    
    
    46,163,848
    
    
    
    43,916,250TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    618,326,915
    
    
    $
    583,442,027
 See
accompanying notes to consolidated financial statements.
 47




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 2007
    
    
    2006
    
    
    2005Interest income:Interest and fees on loans
    
    $
    36,134,170
    
    
    $
    32,394,766
    
    
    $
    24,069,980Interest on tax-exempt securities
    
    
    1,228,944
    
    
    
    786,972
    
    
    
    332,385Interest on U.S. government securities
    
    
    3,084,672
    
    
    
    3,421,191
    
    
    
    2,910,695Interest on federal funds sold and securities purchased
under agreement to resell
    
    
    680,578
    
    
    
    871,879
    
    
    
    491,019Interest on other securities
    
    
    89,686
    
    
    
    135,651
    
    
    
    59,909Total interest income
    
    
    41,218,050
    
    
    
    37,610,459
    
    
    
    27,863,988Interest expense:Interest on demand deposits
    
    
    2,735,170
    
    
    
    1,504,180
    
    
    
    938,532Interest on savings deposits
    
    
    1,215,920
    
    
    
    288,883
    
    
    
    182,994Interest on certificates of deposit
    
    
    10,570,776
    
    
    
    8,485,799
    
    
    
    4,331,468Interest on securities sold under repurchase agreements
    
    
    1,177,417
    
    
    
    1,138,242
    
    
    
    430,754Interest on FHLB borrowings
    
    
    2,421,636
    
    
    
    3,079,432
    
    
    
    1,161,762Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trusts
    
    
    1,084,990
    
    
    
    1,078,884
    
    
    
    580,935Total interest expense
    
    
    19,205,909
    
    
    
    15,575,420
    
    
    
    7,626,445Net interest income
    
    
    22,012,141
    
    
    
    22,035,039
    
    
    
    20,237,543Provision for loan and lease losses
    
    
    3,291,250
    
    
    
    225,900
    
    
    
    447,700Net interest income after provision for loan and lease losses
    
    
    18,720,891
    
    
    
    21,809,139
    
    
    
    19,789,843Noninterest income:Service charges on deposit accounts
    
    
    277,769
    
    
    
    345,737
    
    
    
    393,661Payroll and benefit processing fees
    
    
    382,738
    
    
    
    385,867
    
    
    
    356,957Earnings on cash surrender value  Bank owned life insurance
    
    
    331,251
    
    
    
    328,743
    
    
    
    209,322Life Insurance policy benefits
    
    
    2,400,000
    
    
    
    0
    
    
    
    0Net gain (loss) on sale of securities available-for-sale
    
    
    45,670
    
    
    
    (170,524
    )
    
    
    (1,537
    )Net gain on sale of loans
    
    
    0
    
    
    
    89,851
    
    
    
    145,594Merchant credit card service income, net
    
    
    388,438
    
    
    
    380,066
    
    
    
    345,721Mortgage brokerage fee income
    
    
    49,995
    
    
    
    71,350
    
    
    
    249,049Other income
    
    
    658,893
    
    
    
    497,141
    
    
    
    424,973Total noninterest income
    
    
    4,534,754
    
    
    
    1,928,231
    
    
    
    2,123,740Noninterest expense:Salaries and related benefits
    
    
    8,665,679
    
    
    
    8,020,136
    
    
    
    6,883,754Occupancy and equipment expense
    
    
    2,372,617
    
    
    
    1,845,664
    
    
    
    1,572,458FDIC insurance premium
    
    
    51,077
    
    
    
    47,670
    
    
    
    48,659Data processing fees
    
    
    395,558
    
    
    
    216,313
    
    
    
    303,316Professional service fees
    
    
    1,027,671
    
    
    
    683,602
    
    
    
    648,871Payroll processing fees
    
    
    107,856
    
    
    
    103,518
    
    
    
    110,376Deferred compensation expense
    
    
    411,191
    
    
    
    368,809
    
    
    
    321,321Stationery and supplies
    
    
    256,799
    
    
    
    230,843
    
    
    
    241,144Postage
    
    
    137,740
    
    
    
    112,740
    
    
    
    104,439Directors expenses
    
    
    311,777
    
    
    
    243,428
    
    
    
    219,687Other expenses
    
    
    2,005,729
    
    
    
    1,460,008
    
    
    
    1,294,684Total noninterest expense
    
    
    15,743,694
    
    
    
    13,332,731
    
    
    
    11,748,709Income before provision for income taxes
    
    
    7,511,951
    
    
    
    10,404,639
    
    
    
    10,164,874Provision for income taxes
    
    
    1,405,053
    
    
    
    3,836,930
    
    
    
    3,886,504Net Income
    
    $
    6,106,898
    
    
    $
    6,567,709
    
    
    $
    6,278,370Basic earnings per share
    
    $
    0.69
    
    
    $
    0.75
    
    
    $
    0.73Weighted average shares  basic
    
    
    8,857,627
    
    
    
    8,759,568
    
    
    
    8,600,270Diluted earnings per share
    
    $
    0.68
    
    
    $
    0.74
    
    
    $
    0.71Weighted average shares  diluted
    
    
    8,937,736
    
    
    
    8,931,584
    
    
    
    8,844,626
 See accompanying notes to consolidated financial statements.
 48




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedOtherComprehensiveComprehensive
    
    
    Common
    
    
    Stock
    
    
    Retained
    
    
    (Loss), netIncome
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    of tax
    
    
    TotalBalance at January 1, 2005
    
    
    
    
    
    
    8,502,831
    
    
    $
    10,536,562
    
    
    $
    25,079,522
    
    
    
    ($332,747
    )
    
    $
    35,283,337Comprehensive Income:Net Income
    
    
    6,278,370
    
    
    
    
    
    
    
    
    
    
    
    6,278,370
    
    
    
    
    
    
    
    6,278,370Other Comprehensive
Income:Other Comprehensive
Income, net of taxUnrealized losses on
securities, net
of reclassification
adjustment
    
    
    (956,436
    )Less: reclassification
adjustment
for gains included in net
income, net of tax
    
    
    (903
    )Other Comprehensive Income
    
    
    (957,339
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (957,339
    )
    
    
    (957,339
    )Total Comprehensive Income
    
    $
    5,321,031Cash dividends ($0.26 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,243,347
    )
    
    
    
    
    
    
    (2,243,347
    )Compensation expense
associated with stock options
    
    
    
    
    
    
    
    
    
    
    5,784
    
    
    
    
    
    
    
    
    
    
    
    5,784Stock options exercised
    
    
    
    
    
    
    155,065
    
    
    
    467,000
    
    
    
    
    
    
    
    
    
    
    
    467,000Tax benefit on exercise of
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304,098
    
    
    
    
    
    
    
    304,098Balance at December 31, 2005
    
    
    
    
    
    
    8,657,896
    
    
    $
    11,009,346
    
    
    $
    29,418,643
    
    
    
    ($1,290,086
    )
    
    $
    39,137,903Balance at December 31, 2005
    
    
    
    
    
    
    8,657,896
    
    
    $
    11,009,346
    
    
    $
    29,418,643
    
    
    
    ($1,290,086
    )
    
    $
    39,137,903Comprehensive Income:Net Income
    
    
    6,567,709
    
    
    
    
    
    
    
    
    
    
    
    6,567,709
    
    
    
    
    
    
    
    6,567,709Other Comprehensive
Income:Components of Other
ComprehensiveIncome, net of taxUnrealized (loss) gain
arising during
the period on derivative
transactions, net
    
    
    (27,280
    )Net holding loss on
derivatives
    
    
    (27,280
    )Unrealized gains on
securities, net
of reclassification
adjustment
    
    
    279,692Less: reclassification
adjustment
for gains included in net
income, net of tax
    
    
    100,524Other Comprehensive Income
    
    
    352,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,936
    
    
    
    352,936Total Comprehensive Income
    
    $
    6,920,645Cash dividends ($0.29 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,650,320
    )
    
    
    
    
    
    
    (2,650,320
    )Compensation expense
associated with stock options
    
    
    
    
    
    
    
    
    
    
    64,493
    
    
    
    
    
    
    
    
    
    
    
    64,493Share Repurchase
    
    
    
    
    
    
    (92,000
    )
    
    
    (1,089,868
    )
    
    
    
    
    
    
    
    
    
    
    (1,089,868
    )Stock options exercised
    
    
    
    
    
    
    281,146
    
    
    
    879,279
    
    
    
    
    
    
    
    
    
    
    
    879,279Tax benefit on exercise of
options
    
    
    
    
    
    
    
    
    
    
    654,118
    
    
    
    
    
    
    
    
    
    
    
    654,118Balance at December 31, 2006
    
    
    
    
    
    
    8,847,042
    
    
    $
    11,517,368
    
    
    $
    33,336,032
    
    
    
    ($937,150
    )
    
    $
    43,916,250
  See accompanying notes to the consolidated financial statements
 49




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedOtherComprehensiveComprehensive
    
    
    Common
    
    
    Stock
    
    
    Retained
    
    
    Income (Loss),Income
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    net of tax
    
    
    TotalBalance at December 31, 2006
    
    
    
    
    
    
    8,847,042
    
    
    $
    11,517,368
    
    
    $
    33,336,032
    
    
    
    ($937,150
    )
    
    $
    43,916,250Comprehensive Income:Net Income
    
    
    6,106,898
    
    
    
    
    
    
    
    
    
    
    
    6,106,898
    
    
    
    
    
    
    
    6,106,898Other Comprehensive
Income:Other Comprehensive
Income,
net of taxUnrealized gains arising
during the
period on derivative
transactions,
net
    
    
    49,425Less: reclassification
adjustment for gains
included in net income,
net of tax
    
    
    (25,000
    )Net holding gain on
derivatives
    
    
    24,425Unrealized gains on
securities
    
    
    503,026Net of reclassification
adjustment
for gains included in net
income, net of tax
    
    
    (26,872
    )Other Comprehensive Income
    
    
    500,579
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,579
    
    
    
    500,579Total Comprehensive Income
    
    $
    6,607,477Cash dividends ($0.33 per
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,838,028
    )
    
    
    
    
    
    
    (2,838,028
    )Compensation expense
associated with stock options
    
    
    
    
    
    
    
    
    
    
    116,880
    
    
    
    
    
    
    
    
    
    
    
    116,880Share Repurchase
    
    
    
    
    
    
    (200,000
    )
    
    
    (2,270,242
    )
    
    
    
    
    
    
    
    
    
    
    (2,270,242
    )Stock options exercised
    
    
    
    
    
    
    110,403
    
    
    
    486,881
    
    
    
    
    
    
    
    
    
    
    
    486,881Tax benefit on exercise of
options
    
    
    
    
    
    
    
    
    
    
    144,630
    
    
    
    
    
    
    
    
    
    
    
    144,630Balance at December 31, 2007
    
    
    
    
    
    
    8,757,445
    
    
    $
    9,995,517
    
    
    $
    36,604,902
    
    
    
    ($436,571
    )
    
    $
    46,163,848
 50




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS
 2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    6,106,898
    
    
    $
    6,567,709
    
    
    $
    6,278,370Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan and lease losses
    
    
    3,291,250
    
    
    
    225,900
    
    
    
    447,700Provision for depreciation and amortization
    
    
    1,035,660
    
    
    
    732,906
    
    
    
    564,779Compensation expense associated with stock options
    
    
    116,880
    
    
    
    64,494
    
    
    
    5,784Tax benefits from the exercise of stock options
    
    
    (144,630
    )
    
    
    (654,118
    )
    
    
    (304,098
    )(Gain) Loss on sale of securities available-for-sale
    
    
    (45,670
    )
    
    
    170,524
    
    
    
    1,537Amortization of securities premiums and accretion
of discounts, net
    
    
    (3,687
    )
    
    
    15,402
    
    
    
    96,188Gain on sale of derivative
    
    
    (41,000
    )
    
    
    
    
    
    
    Gain on sale of loans
    
    
    
    
    
    
    (89,851
    )
    
    
    (145,594
    )(Gain) loss on sale of fixed assets
    
    
    (48,398
    )
    
    
    8,158
    
    
    
    (50
    )Proceeds from sale of loans
    
    
    
    
    
    
    2,089,851
    
    
    
    3,645,594Loans originated for sale
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (3,500,000
    )Deferred income taxes
    
    
    (1,646,563
    )
    
    
    (408,197
    )
    
    
    (398,727
    )(Increase) in cash surrender value of
bank owned life policies
    
    
    (1,256,708
    )
    
    
    (3,295,772
    )
    
    
    (166,296
    )Effect of changes in:Other assets
    
    
    (514,427
    )
    
    
    (616,829
    )
    
    
    (918,005
    )Deferred loan fees
    
    
    (65,385
    )
    
    
    (122,449
    )
    
    
    (232,565
    )Other liabilities
    
    
    367,188
    
    
    
    (342,423
    )
    
    
    (1,573,694
    )Net cash provided by operating activities
    
    
    7,151,408
    
    
    
    3,030,151
    
    
    
    3,800,923Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    6,313,987
    
    
    
    10,049,495
    
    
    
    23,560,650Proceeds from sale of available-for-sale securities
    
    
    47,072,143
    
    
    
    10,258,020
    
    
    
    141,270Purchases of available-for-sale securities
    
    
    (24,486,679
    )
    
    
    (21,736,709
    )
    
    
    (37,224,733
    )Purchases of held-to-maturity securities
    
    
    
    
    
    
    (4,418,146
    )
    
    
    (6,540,000
    )Maturities of held-to-maturity securities
    
    
    248,569
    
    
    
    549,809
    
    
    
    50,569Key life benefit proceeds
    
    
    2,400,000
    
    
    
    
    
    
    
    Loan originations, net of principal repayments
    
    
    (80,519,208
    )
    
    
    (45,787,518
    )
    
    
    (44,719,709
    )Purchase of Bank premises and equipment, net
    
    
    (3,439,403
    )
    
    
    (4,036,100
    )
    
    
    (714,719
    )Proceeds on sale of fixed assets
    
    
    83,210
    
    
    
    330,676
    
    
    
    3,502Net cash used in investing activities
    
    
    (52,327,381
    )
    
    
    (54,790,473
    )
    
    
    (65,443,170
    )Cash flows from financing activities:Net increase in demand deposits and savings accounts
    
    
    32,949,640
    
    
    
    4,105,641
    
    
    
    8,481,086Net increase (decrease) in certificates of deposit
    
    
    1,274,228
    
    
    
    63,186,019
    
    
    
    10,756,400Net(decrease) increase in securities sold under
agreements to repurchase
    
    
    (21,603,399
    )
    
    
    14,230,952
    
    
    
    20,881,946Proceeds from Federal Home Loan Bank advances
    
    
    75,000,000
    
    
    
    70,000,000
    
    
    
    88,000,000Repayments of Federal Home Loan Bank advances
    
    
    (55,000,000
    )
    
    
    (85,000,000
    )
    
    
    (68,000,000
    )Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    155,000
    
    
    
    10,310,000Cash dividends paid on common stock
    
    
    (2,838,028
    )
    
    
    (2,650,320
    )
    
    
    (2,243,347
    )Proceeds from stock options exercised
    
    
    486,881
    
    
    
    879,279
    
    
    
    467,000Common Stock Repurchase
    
    
    (2,270,242
    )
    
    
    (1,089,868
    )
    
    
    0Tax benefits from the exercise of stock options
    
    
    144,630
    
    
    
    651,118
    
    
    
    304,098Net cash provided by financing activities
    
    
    28,143,710
    
    
    
    64,470,821
    
    
    
    68,957,183Net (decrease) increase in cash and cash equivalents
    
    
    (17,032,263
    )
    
    
    12,710,499
    
    
    
    7,314,936Cash and cash equivalents at beginning of year
    
    
    39,266,386
    
    
    
    26,555,887
    
    
    
    19,240,951Cash and cash equivalents at end of year
    
    $
    22,234,123
    
    
    $
    39,266,386
    
    
    $
    26,555,887
 51




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS
 2007
    
    
    2006
    
    
    2005Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    2,752,860
    
    
    $
    3,507,000
    
    
    $
    3,755,000Interest
    
    $
    19,279,879
    
    
    $
    15,164,624
    
    
    $
    7,467,150
 See accompanying notes to consolidated financial statements.
 52




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    THE BUSINESS OF THE COMPANYBank of Commerce Holdings (the Holding Company), is a financial holding company
(FHC) with its principal offices in Redding, California. A financial holding company may
engage in commercial banking, insurance, securities business and offer other financial
products to customers. The Company received notification from the Federal Reserve Board
approving the election to change to a financial holding company on April 22, 2001. The
election to change to a financial holding company has had no impact to date on the
operations of the Company. As a financial holding company, Bank of Commerce Holdings is
subject to the Financial Holding Company Act and to supervision by the Board of Governors
of the Federal Reserve System (the FRB). The Holding Companys wholly-owned subsidiaries
are Redding Bank of Commerce (the Bank) and Bank of Commerce Mortgage, (collectively the
Company). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings
Trust and Bank of Commerce Holdings Trust II. Bank of Commerce Mortgage offers mortgage
brokerage services through an affiliate agreement with BWC Mortgage Services. 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. The Bank was incorporated as a
California banking corporation on November 25, 1981. The Bank operates five full service
branches in Redding, Roseville, and Yuba City, California.The Bank conducts a general commercial banking business in the counties of El Dorado,
Placer, Shasta, Sacramento, Tehama, Sutter and Yuba, California. The Company considers
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) and savings accounts, 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.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe accounting and reporting policies of the Company conform with accounting principles
generally accepted in the United States of America and general practices within the banking
industry. 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. Actual results could differ from those estimates. Certain amounts for prior
periods have been reclassified to conform to the current financial statement presentation.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.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents
include amounts due from 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.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. In general, these
agreements mature within 90 days and no material amount of agreements to resell securities
purchased is outstanding with any individual dealer.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 stockholders
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. If negative evidence outweighs positive evidence that
the carrying amount is recoverable within a reasonable period of time, the impairment is
deemed other-than-temporary and the security is written down in the period in which such
determination is made.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.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Companys practice is to place an asset on nonaccrual status when one of the following
events occurs: (i) 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),
(ii) management determines the ultimate collection of principal or interest to be unlikely
or (iii) 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, are 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.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 losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be adequate to absorb
losses inherent in existing loans and overdrafts based on evaluations of collectibility 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
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.Bank Premises and Equipment Bank 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, 2007 and 2006, 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 Municipal 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. The Company has pledged
collateral of commercial real estate loans and specific securities to support the
borrowings.Goodwill and Other Intangibles Net assets of companies acquired in purchase transactions
are recorded at fair value at the date of acquisition, as such, the historical cost basis of
individual assets and liabilities are adjusted to reflect their fair value. Identified
intangibles are amortized on a straight-line basis over the period benefited. In June 2001,
the Company purchased a bank branch office. The Company recorded core deposit intangibles,
which are being amortized over seven years by the straight-line method. Amortization
expense for the year ended December 31, 2007, 2006 and 2005 was $154,209, $106,800 and
$106,800, respectively. Deposit retention, growth and activities are evaluated for
impairment on an annual basis.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 Earnings Per Share Basic earnings per share (EPS) excludes dilution and is computed by
dividing net income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the dilutive effect
that could occur if the Companys outstanding stock options were exercised and converted
into common stock, net of estimated shares that could be reacquired with proceeds from the
exercise of such options. Stock options are considered to be common stock equivalents. 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.
 2007
    
    
    2006
    
    
    2005Basic EPS CalculationNumerator (net income)
    
    $
    6,106,898
    
    
    $
    6,567,709
    
    
    $
    6,278,370Denominator (weighted average common shares
outstanding)
    
    
    8,857,627
    
    
    
    8,759,568
    
    
    
    8,600,270Basic EPS
    
    $
    0.69
    
    
    $
    0.75
    
    
    $
    0.73Diluted EPS CalculationNumerator (net income)
    
    $
    6,106,898
    
    
    $
    6,567,709
    
    
    $
    6,278,370Denominator:Weighted average common shares outstanding
    
    
    8,857,627
    
    
    
    8,759,568
    
    
    
    8,600,270Diluted effect of stock options
    
    
    80,109
    
    
    
    172,016
    
    
    
    244,356Adjusted weighted average common shares
outstanding
    
    
    8,937,736
    
    
    
    8,931,584
    
    
    
    8,844,626Diluted EPS
    
    $
    0.68
    
    
    $
    0.74
    
    
    $
    0.71
 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.Income Taxes The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using currently enacted tax rates applied
to such taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Stock Option Plan The Company adopted Statement of Financial Accounting Standards No.
123R (FAS 123R), Share-Based Payment,on January 1, 2006. The scope of FAS 123R includes a
wide range of stock-based compensation arrangements including stock options, restricted
stock plans, performance-based awards, stock appreciation rights, and employee stock
purchase plans. FAS 123R requires the Company to 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. That cost must be recognized in the income
statement over the service period of the award. Under the modified prospective transition
method, awards that are granted, modified or settled beginning at the date of adoption will
be measured and accounted for in accordance with FAS 123R. In addition, expense must be
recognized in the income statement for unvested awards that were granted prior to the date
of adoption. Prior to the adoption of FAS 123R and as permitted by FAS 123 and FAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure,the Company elected to
follow APB 25 and related interpretations in accounting for our employee stock options. The
Company adopted FAS 123R using the modified prospective method. Under this transition
method, stock option expense for 2006 includes the cost for all share-based payments granted
prior to, but not yet vested, as of January 1, 2006, as well as any share-based payments
granted subsequent to December 31, 2005. This compensation expense is measured on the date
of grant using an option-pricing model. The option-pricing model is based on certain
assumptions, and changes to those assumptions may result in different fair value estimates.Prior to adopting FAS 123R, the Company accounted for its stock option plan under the
intrinsic value method in accordance with the provisions of Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. As required by the
Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for Stock-Based
Compensation,as amended, by SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosurethe Company provides pro forma net income and pro forma earnings
per share disclosures for employee stock option grants. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS Statement No. 123, to stock-based employee compensation.In accordance with SFAS 123R, the Company provides disclosures as if it had adopted the fair
value-based method of measuring all outstanding employee stock options during 2005.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Net income before option expense less compensation expense associated with stock options
 Year Ended December 312005Net income before option expense
    
    $
    6,284,154Less compensation expense associated with stock options
    
    
    (5,784
    )Net income as reported
    
    $
    6,278,370Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of tax
    
    
    (306,870
    )Pro forma net income
    
    $
    5,971,500Earnings per share:Basic  as reported
    
    $
    0.73Basic  pro forma
    
    $
    0.69Diluted  as reported
    
    $
    0.71Diluted  pro forma
    
    $
    0.68
 During 2007, the fair value of options granted was determined on the date of the grant using
a binomial option-pricing model with the following assumptions: a current volatility rate of
29.98%, a risk-free interest rate of 3.40% (based upon the five year treasury coupon rate at
the time the options were issued), expected dividends of $0.33 per share per year, an annual
dividend rate of 2.89%, an assumed forfeiture rate of zero and an expected life of seven
years.
 December 31, 2005Risk-free interest rate
    
    
    3.92
    %Dividend Yield
    
    
    2.49
    %Volatility
    
    
    32.36
    %Expected lives (years)
    
    
    7Weighted average grant-date fair value per share of
options granted
    
    $
    3.34
 Description of stock-based compensation planOn February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the Plan)
which was approved by the Companys stockholders on April 21, 1998. 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.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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. A total of 1,782,000 shares
of the Companys common stock are reserved for grant under the Plan. At December 31, 2007,
62,077 shares were available for future grants under the Plan. At December 31, 2007, 200,933
shares were available to be exercised. The weighted average grant exercise price for vested
options at December 31, 2007 was $6.40. The total intrinsic value (which is the amount by
which the stock price exceeded the exercise price on the date of exercise) of options
exercised during the twelve months ended December, 2007 was $452,652.Comprehensive Income   Comprehensive income 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 stockholders 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.Operating Segments   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 does not have reportable operating
segments. In the years 2007, 2006 and 2005, the Company accounted for its operations as one
operating segment.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 Corporation, (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, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before
their maturity. The Company services, for others, SBA loans that are sold with a principal
balance of $5,316,219, $3,494,130 and $3,522,609 as of December 31, 2007, 2006 and 2005,
respectively.Derivative Financial Instruments and Hedging Activities   As part of the overall risk
management, the Company pursues various asset and liability management strategies, which may
include obtaining derivative financial instruments to mitigate the impact of interest
fluctuations on the Companys net interest margin. During the fourth quarter of 2007, the
Company entered into an interest rate swap agreement for the purpose of minimizing interest
rate fluctuations on its interest rate margin and equity. Under the interest rate swap
agreement, the company receives a fixed rate and pays a variable rate based on the three
month London Interbank Offering Rate (LIBOR). A portion of the swap qualifies as a cash
flow hedge under SFAS no. 133, Accounting for Derivative Instruments and Hedging
Activities,as amended, and is designated as a hedge of the variability of cash flows the
Company owes on certain variable-rate borrowings tied to LIBOR.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Recent Accounting Pronouncements
 On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48 Accounting for Income Tax Uncertainties (FIN 48). FIN 48 supplements Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109),
 On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements ,
 On September 29, 2006, the FASB issued FAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans 
  On February 15, 2007 the FASB issued FAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement 115.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    RESTRICTIONS ON CASH AND DUE FROM BANKSThe Bank maintains compensating balances with its primary correspondent, which totaled
$2,000,000 at December 31, 2007, $2,000,000 at December 31, 2006 and $2,500,000 at December
31, 2005.
 4.
    
    SECURITIES
 The amortized cost and estimated fair value of securities available-for-sale are summarized as follows:
 December 31, 2007Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    15,988,936
    
    
    $
    26,031
    
    
    $
    (103,535
    )
    
    $
    15,911,432Obligations of state and political
subdivisions
    
    
    19,016,813
    
    
    
    27,424
    
    
    
    (262,596
    )
    
    
    18,781,641Mortgage-backed securities
    
    
    31,637,544
    
    
    
    10,250
    
    
    
    (353,929
    )
    
    
    31,293,865Corporate Bonds
    
    
    2,000,204
    
    
    
    0
    
    
    
    (80,756
    )
    
    
    1,919,448$
    68,643,497
    
    
    $
    63,705
    
    
    $
    (800,816
    )
    
    $
    67,906,386
 December 31, 2006Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    33,959,800
    
    
    $
    29,993
    
    
    $
    (648,631
    )
    
    $
    33,341,162Obligations of state and political
subdivisions
    
    
    21,167,316
    
    
    
    84,206
    
    
    
    (183,681
    )
    
    
    21,067,841Mortgage-backed securities
    
    
    40,019,818
    
    
    
    185,697
    
    
    
    (990,967
    )
    
    
    39,214,548Corporate Bonds
    
    
    2,000,519
    
    
    
    0
    
    
    
    (22,963
    )
    
    
    1,977,556$
    97,147,453
    
    
    $
    299,896
    
    
    $
    (1,846,242
    )
    
    $
    95,601,107
 The amortized cost and estimated fair value of securities held-to-maturity at December 31, 2007 and 2006 consist of the following:
 December 31, 2007Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    1,632,816
    
    
    $
    13,706
    
    
    $
    0
    
    
    $
    1,646,522Obligations of state and political
Subdivisions
    
    
    8,925,949
    
    
    
    62,107
    
    
    
    (2,370
    )
    
    
    8,985,686$
    10,558,765
    
    
    $
    75,813
    
    
    $
    (2,370
    )
    
    $
    10,632,208
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2006Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    1,763,305
    
    
    $
    14,424
    
    
    $
    0
    
    
    $
    1,777,729Obligations of state and political
Subdivisions
    
    
    9,046,808
    
    
    
    18,264
    
    
    
    (49,863
    )
    
    
    9,015,209$
    10,810,113
    
    
    $
    32,688
    
    
    $
    (49,863
    )
    
    $
    10,792,938
 The amortized cost and estimated fair value of securities at December 31, 2007 by
contractual maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or repay obligations with or without
call or prepayment penalties.
 Available-for-Sale
    
    
    Held-to-MaturityEstimated
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    7,086,500
    
    
    $
    7,002,165
    
    
    $
    110,219
    
    
    $
    110,207Due after one year through five years
    
    
    13,970,268
    
    
    
    13,864,296
    
    
    
    4,778,241
    
    
    
    4,813,741Due after five years through ten years
    
    
    9,564,019
    
    
    
    9,483,402
    
    
    
    1,954,544
    
    
    
    1,974,479Due after ten years
    
    
    38,022,710
    
    
    
    37,556,523
    
    
    
    3,715,761
    
    
    
    3,733,781$
    68,643,497
    
    
    $
    67,906,386
    
    
    $
    10,558,765
    
    
    $
    10,632,208
 The following table presents the current fair value and associated unrealized losses on
investments with unrealized losses at December 31, 2007. The table also discloses whether
these securities have had unrealized losses for less than 12 months or for 12 months or
longer.
 Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury
securities and
Obligations of U.
S. Agencies
    
    $
    0
    
    
    $
    0
    
    
    $
    12,894,359
    
    
    
    ($103,535
    )
    
    $
    12,894,359
    
    
    
    ($103,535
    )Obligations of
state and political
subdivisions
    
    $
    11,047,188
    
    
    
    ($228,589
    )
    
    $
    3,360,969
    
    
    
    ($36,378
    )
    
    $
    14,408,156
    
    
    
    ($264,967
    )Mortgage-backed
securities
    
    $
    4,779,905
    
    
    
    ($29,487
    )
    
    $
    21,557,410
    
    
    
    ($324,441
    )
    
    $
    26,337,315
    
    
    
    ($353,928
    )Corporate Bonds
    
    $
    0
    
    
    $
    0
    
    
    $
    1,919,448
    
    
    
    ($80,756
    )
    
    $
    1,919,448
    
    
    
    ($80,756
    )Total temporarily
impaired securities
    
    $
    15,827,093
    
    
    
    ($258,076
    )
    
    $
    39,732,186
    
    
    
    ($545,110
    )
    
    $
    55,559,279
    
    
    
    ($803,186
    )
 62




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Economic factors may affect market pricing over the stated maturity of the security. The
unrealized losses associated with securities are not considered to be other-than-temporary
because their unrealized losses are related to changes in interest rates and do not affect
the expected cash flows of the underlying collateral or issuer. Security income is accrued
when earned and included in interest income. The Company requires a credit rating of A or
higher on its initial acquisition of investments and maintains an average rating of AA on
the overall securities portfolio. Management has evaluated each security in an unrealized
loss position to determine if the impairment is other-than-temporary. Management has
determined that no security is other than temporarily impaired. The unrealized losses are
due to interest rate changes and the Company has the ability and intent to hold all
securities with identified impairments to the earlier of the forecasted recovery or the
maturity of the underlying security.At December 31, 2007, the Company has pledged book values of $1,000,000 in securities for
treasury, tax and loan accounts, $14,596,000 for deposits of public funds, $5,733,000 for
collateralized repurchase agreements, and $40,000,000 for Federal Home Loan borrowings.Gross realized gains and gross realized losses, respectively, on available-for-sale
securities were $268,078 and $222,408 in 2007, $5,062 and $175,596 in 2006, and $0 and
$1,537 in 2005. Gross realized gains and gross realized losses, respectively, on
held-to-maturity securities were $0 and $0 at December 31, 2007.5.
    
    LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSESOutstanding loan balances consist of the following:
 December 31,2007
    
    
    2006Commercial and industrial loans
    
    $
    173,703,638
    
    
    $
    125,724,514Real estate  construction loans
    
    
    106,976,522
    
    
    
    110,693,230Real estate  commercial
    
    
    175,013,372
    
    
    
    159,370,407Real estate  mortgage
    
    
    10,787,433
    
    
    
    4,278,117Real estate  other
    
    
    26,817,909
    
    
    
    12,985,836Installment loans
    
    
    226,102
    
    
    
    202,487Other
    
    
    1,223,036
    
    
    
    936,759494,748,012
    
    
    
    414,191,350Less:Deferred loan fees, net
    
    
    232,471
    
    
    
    297,856Allowance for loan and lease losses
    
    
    8,232,970
    
    
    
    4,904,266$
    486,282,571
    
    
    $
    408,989,228
 Included in total loans are nonaccrual loans of $12,408,613 and $0 at December 31, 2007 and
2006, respectively. A loan is impaired when, based on current information and events,
management believes it is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. If interest on nonaccrual loans at
December 31, 2007 and 2006 had been accrued, such interest income would have approximated
$92,000 and $0, respectively.
 63




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The average outstanding balances of impaired loans were $13,001,847, $0 and $1,748,956, for
the years ended December 31, 2007, 2006 and 2005 respectively. There was interest of $0, $0
and $20,000 recognized on impaired loans during the year ended December 31, 2007, 2006 and
2005, respectively. At December 31, 2007, 2006 and 2005 impairment allowances were
$3,200,000, $0, and $291,723 held towards impaired loans at December 31, 2007, 2006 and 2005
respectively.The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer
Sacramento, Sutter, Yuba and Tehama counties, in California, and the location of the five
full service offices of the Bank. Although the Company has a diversified loan portfolio, a
significant portion of its customers ability to repay the loans is dependent upon the
professional services and investor commercial real estate sectors. Generally, the loans are
secured by real estate or other assets and are expected to be repaid from cash flows of the
borrowers business or cash flows from real estate investments.The Companys exposure to credit loss, if any, is the difference between the fair value of
the collateral, and the outstanding balance of the loan. At December 31, 2007 and 2006, the
Company had pledged $58,343,819 and $52,365,899, respectively, in loans as available
collateral for Federal Home Loan Bank borrowings. In the ordinary course of business, the
Company enters various types of transactions, which involve financial instruments with
off-balance sheet risk. These instruments include commitments to extend credit and 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. Commitments to extend credit
and standby letters of credit bear similar credit risk characteristics as outstanding loans.
An allowance for unfunded loan commitments and letters of credit is determined using
estimates of the probability of funding. This reserve is carried as a liability on the
consolidated balance sheet.Changes in the allowance for loan losses consist of the following:
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Balance at beginning of year
    
    $
    4,904,266
    
    
    $
    4,316,379
    
    
    $
    3,866,498Provision for loan losses
    
    
    3,291,250
    
    
    
    225,900
    
    
    
    447,700Loans charged off
    
    
    0
    
    
    
    (299,421
    )
    
    
    (92,958
    )Recoveries of loans previously charged off
    
    
    37,454
    
    
    
    661,408
    
    
    
    95,139Balance at end of year
    
    $
    8,232,970
    
    
    $
    4,904,266
    
    
    $
    4,316,379
 64




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 6.
    
    BANK PREMISES AND EQUIPMENTBank premises and equipment consist of the following:
 Estimated
    
    
    December 31,Lives
    
    
    2007
    
    
    2006Land
    
    
    
    
    
    $
    1,507,628
    
    
    $
    991,647Land Improvements
    
    
    
    
    
    
    188,845
    
    
    
    515,981Bank buildings
    
    39.0 years
    
    
    8,114,721
    
    
    
    3,779,956Furniture, fixtures and equipment
    
    3  7 years
    
    
    6,163,236
    
    
    
    5,357,36615,974,430
    
    
    
    10,644,950Less accumulated depreciation
    
    
    
    
    
    
    (5,919,593
    )
    
    
    (4,958,685
    )10,054,837
    
    
    
    5,686,265Construction in progress
    
    
    
    
    
    
    909,138
    
    
    
    2,908,779$
    10,963,975
    
    
    $
    8,595,044
 Depreciation expense, included in net occupancy and equipment expense, is $1,035,660,
$732,906, and $564,779 for the years ended December 31, 2007, 2006 and 2005, respectively.7.
    
    OTHER ASSETSOther assets consist of the following:
 December 31,2007
    
    
    2006Cash surrender value of bank owned life insurance
policies
    
    $
    7,129,627
    
    
    $
    8,272,919Deferred tax asset, net
    
    
    5,209,973
    
    
    
    3,913,577Accrued interest on loans
    
    
    2,497,124
    
    
    
    2,404,259Accrued interest on investment securities
    
    
    538,410
    
    
    
    989,754Goldman Sachs Sweep account receivable
    
    
    267,984
    
    
    
    52,518Taxes receivable
    
    
    181,911
    
    
    
    0Federal Home Loan Bank Stock
    
    
    2,852,200
    
    
    
    3,106,400Core Deposit Intangible, net of accumulated
amortization of $769,145 and $614,936
    
    
    0
    
    
    
    154,209Investment in junior subordinated debt payable to
subsidiary grantor trust
    
    
    465,000
    
    
    
    465,000Other
    
    
    1,238,866
    
    
    
    821,513$
    20,381,095
    
    
    $
    20,180,149
 8.
    
    DEPOSITSTime certificates of deposit of $100,000 or more totaled $153,583,629 and $147,174,522 at
December 31, 2007 and 2006, respectively. Interest expense on such deposits was $6,062,259,
$5,025,273 and $2,813,533 during 2007, 2006 and 2005, respectively.
 65




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 At December 31, 2007, the scheduled maturities for all time deposits are as follows:Time Deposit Maturity Schedule
 One year or less
    
    $
    186,535,932One to three years
    
    
    27,107,745Three to five years
    
    
    72,809Over five years
    
    
    0Total
    
    $
    213,716,486
 9.
    
    OTHER LIABILITIESOther liabilities consist of the following:
 December 31,2007
    
    
    2006Deferred Compensation  Retired Officers
    
    $
    1,035,064
    
    
    $
    1,128,911Deferred Compensation  Directors fees
    
    
    2,310,824
    
    
    
    2,035,218Deferred Compensation  Salary Continuation
    
    
    1,030,020
    
    
    
    706,391Employee incentive payable
    
    
    476,843
    
    
    
    716,435FHLB accrued interest payable
    
    
    242,637
    
    
    
    303,709Accrued 401(k) match payable
    
    
    71,981
    
    
    
    74,407Accrued interest payable
    
    
    787,844
    
    
    
    799,025Reserve for off-balance sheet commitments
    
    
    421,877
    
    
    
    421,877Taxes payable
    
    
    0
    
    
    
    117,054Interest payable Junior Subordinated Debentures
    
    
    112,538
    
    
    
    114,255Dividend payable
    
    
    700,460
    
    
    
    804,226Goldman Sachs Sweep account payable
    
    
    0
    
    
    
    54,931Other
    
    
    363,471
    
    
    
    260,299$
    7,553,559
    
    
    $
    7,536,738
 10.
    
    FEDERAL HOME LOAN BANK ADVANCESIncluded in other borrowings are advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $60,000,000 as of December 31, 2007 and $40,000,000 as of December 31,
2006. The FHLB advances bear fixed and floating rates of interest ranging from 3.96% to
5.23%. Interest on borrowing # 087416 is payable monthly, all other interest is payable
quarterly.
 Advance #
    
    Amount
    
    Interest Rate
    
    Maturity#059277
    
    $
    10,000,000
    
    
    
    4.43
    %
    
    
    01/24/2008#087416
    
    $
    5,000,000
    
    
    
    5.23
    %
    
    
    04/28/2008#133019
    
    $
    35,000,000
    
    
    
    3.96
    %
    
    
    11/23/2009#135944
    
    $
    5,000,000
    
    
    
    4.51
    %
    
    
    01/28/2008#135945
    
    $
    5,000,000
    
    
    
    4.58
    %
    
    
    01/28/2008$
    60,000,000
 66




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 These borrowings are secured by an investment in FHLB stock and certain real estate mortgage
loans which have been specifically pledged to the FHLB pursuant to their collateral
requirements. Based upon the level of FHLB advances, the Company was required to hold a
minimum investment in FHLB stock of $2,852,200 at December 31, 2007 and to pledge
$58,343,819, $52,365,899 and $44,251,812 of its real estate mortgage loans to the FHLB as
collateral as of December 31, 2007, 2006 and 2005. At December 31, 2007 the Bank had
available borrowing lines at the FHLB of $40,178,819 and additional federal fund borrowing
lines at two correspondent banks totaling $25,000,000.11.
    
    JUNIOR SUBORDINATED DEBT PAYABLE TO UNCONSOLIDATED SUBSIDIARY GRANTOR TRUSTSDuring the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued
$5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings
junior subordinated debentures (the trust notes) to the public and $155,000 common
securities to the Company. These debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. The proceeds from the issuance of the trust notes were transferred from the
grantor trust to the Holding Company and from the Holding Company to the Bank as surplus
capital. The trust notes accrue and pay distributions on a quarterly basis at three month
London Interbank Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2007 was 8.66%.
The rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final
maturity on the trust notes is March 18, 2033, and the debt allows for prepayment after five
years on the quarterly payment date.On July 29, 2005, Bank of Commerce Holdings (the Company) participated in a private
placement to an institutional investor of $10 million of fixed rate trust preferred
securities (the Trust Preferred Securities); through a newly formed Delaware trust
affiliate, Bank of Commerce Holdings Trust II (the Trust). The Trust Preferred Securities
mature on September 15, 2035, and are redeemable at the Companys option on any March 15,
June 15, September 15 or December 15 on or after September 15, 2010. In addition, the Trust
Preferred Securities require quarterly distributions by the Trust to the holder of the Trust
Preferred Securities at a rate of 6.115%, until September 10, 2010 after which the rate will
reset quarterly to equal three month LIBOR plus 1.58%. The Trust simultaneously issued
$310,000 common securities to the Company.The proceeds from the sale of the Trust Preferred Securities were used by the Trust to
purchase from the Company the aggregate principal amount of $10,310,000 of the Companys
floating rate junior subordinate notes (the Notes). The net proceeds to the Company from
the sale of the Notes to the Trust will be used by the Company for general corporate
purposes, including funding the growth of the Companys various financial services.The Notes were issued pursuant to a Junior Subordinated Indenture (the Indenture), dated
July 29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association,
as trustee. Like the Trust Preferred Securities, the Notes bear interest at a floating
rate, at 6.115% until September 10, 2010, after which the rate will reset on a quarterly
basis to equal three month LIBOR plus 1.58%. The interest payments by the Company will be
used to pay the quarterly distributions payable by the Trust to the holder of the Trust
Preferred Securities. However, so long as no event of default, as described below, has
occurred under the Notes, the Company may, at any time and from time to time, defer interest
payments on the Notes (in which case the Trust will be entitled to defer distributions
otherwise due on the Trust Preferred Securities) for up to twenty (20) consecutive quarters.
 67




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Notes are subordinated to the prior payment of other indebtedness of the Company that,
by its terms, is not similarly subordinated. Although the Notes will be recorded as a long
term liability on the Companys balance sheet, for regulatory purposes, the Notes are
expected to be treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve
Board, the Companys primary federal regulatory agency.The Notes mature on September 15, 2035, but may be redeemed at the Companys option at any
time on or after September 15, 2010 or at any time upon certain events, such as a change in
the regulatory capital treatment of the Notes, the Trust being deemed to be an investment
company or the occurrence of certain adverse tax events. In each case, the Company may
redeem the Notes for their aggregate principal amount, plus accrued interest, if any.12.
    
    INCOME TAXESProvision for income taxes consists of the following:
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    2,448,140
    
    
    $
    3,260,200
    
    
    $
    3,396,316State
    
    
    603,476
    
    
    
    984,927
    
    
    
    888,915Total currently payable
    
    
    3,051,616
    
    
    
    4,245,127
    
    
    
    4,285,231Deferred:Federal
    
    
    (1,167,545
    )
    
    
    (315,359
    )
    
    
    (333,092
    )State
    
    
    (479,018
    )
    
    
    (92,838
    )
    
    
    (65,635
    )Total deferred provision
    
    
    (1,646,563
    )
    
    
    (408,197
    )
    
    
    (398,727
    )Total provision for income taxes
    
    $
    1,405,053
    
    
    $
    3,836,930
    
    
    $
    3,886,504
 Income tax expense attributable to income before income taxes differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to income before income
taxes because of the following:
 % of Pretax Income2007
    
    2006
    
    2005Income tax at the Federal statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State franchise tax, net of Federal tax benefit
    
    
    1.09
    
    
    
    5.66
    
    
    
    5.35Tax-exempt interest
    
    
    (4.48
    )
    
    
    (2.02
    )
    
    
    (1.01
    )Key Life benefit proceeds
    
    
    (11.35
    )
    
    
    (0.00
    )
    
    
    (0.00
    )Other
    
    
    (0.56
    )
    
    
    (0.76
    )
    
    
    (0.11
    )18.70
    %
    
    
    36.88
    %
    
    
    38.23
    %
 68




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 consist of
the following:
 2007
    
    
    2006Deferred tax assets:State franchise taxes
    
    $
    186,193
    
    
    $
    276,048Deferred compensation
    
    
    1,962,157
    
    
    
    1,735,541Loan loss reserves
    
    
    3,585,204
    
    
    
    1,926,296Net unrealized losses on securities available-for-sale
    
    
    305,392
    
    
    
    655,559Other
    
    
    217,417
    
    
    
    208,910Total deferred tax assets
    
    
    6,256,363
    
    
    
    4,802,354Deferred tax liabilities:Depreciation
    
    
    (180,882
    )
    
    
    (229,998
    )Deferred loan origination costs
    
    
    (452,281
    )
    
    
    (413,431
    )Deferred state taxes
    
    
    (413,227
    )
    
    
    (245,348
    )Total deferred tax liabilities
    
    
    (1,046,390
    )
    
    
    (888,777
    )Net deferred tax asset
    
    $
    5,209,973
    
    
    $
    3,913,577
 The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, on January 1, 2007. The Company had no unrecognized tax
benefits which would require an adjustment to the January 1, 2007 beginning balance of
retained earnings. The Company has no unrecognized tax benefits at January 1, 2007 and at
December 31, 2007. The Company recognizes interest accrued and penalties related to
unrecognized tax benefits in tax expense. During the years ended December 31, 2007, 2006
and 2005 the Company recognized no interest and penalties.The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and the State of California. With few exceptions, the Company is no longer
subject to U.S. federal or State and local income tax examinations by tax authorities for
the years before 2001.13.
    
    STOCK OPTION PLANOn February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the Plan)
which was approved by the Companys stockholders on April 21, 1998. 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.
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 purpose of the plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging key personnel to focus on
critical long range objectives, (b) increasing the ability of the Company to attract and
retain key personnel and (c) linking key personnel directly to stockholder interests through
increased stock ownership.
 69




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 A total of 1,782,000 shares of the Companys common stock are reserved for grant under the
Plan.The Plan provides that all options under the Plan shall vest at a rate of at least 20% per
year from the date of the grant. Vesting may be accelerated in case of an optionees death,
disability, and retirement or in case of a change of control.During 2007, stock option compensation expense charged against income was $116,880 ($82,206
net of tax), or less than one cent per diluted share. At December 31, 2007, there was
$331,993 of total unrecognized compensation costs related to non-vested share based payments
which is expected to be recognized over a weighted average period of three years. Three new
options totaling 32,500 shares were granted during 2007.Activity in stock-based compensation planThe following table presents the changes in outstanding stock options for the periods
indicated:
 Number of
    
    
    Weighted Average
    
    
    Aggregate IntrinsicShares
    
    
    Exercise Price
    
    
    ValueOptions outstanding, December 31, 2005
    
    
    608,316
    
    
    $
    5.20
    
    
    $
    3,290,989Granted
    
    
    52,000
    
    
    $
    10.13
    
    
    $
    56,640Exercised
    
    
    (281,146
    )
    
    $
    3.13
    
    
    $
    2,036,775Forfeited
    
    
    (1,425
    )
    
    $
    10.60
    
    
    
    Options outstanding, December 31, 2006
    
    
    377,745
    
    
    $
    6.93
    
    
    $
    1,793,156Granted
    
    
    32,500
    
    
    $
    10.98
    
    
    $
    0Exercised
    
    
    (110,403
    )
    
    $
    4.65
    
    
    $
    452,652Forfeited
    
    
    (20,412
    )
    
    $
    10.20
    
    
    
    Options outstanding December 31, 2007
    
    
    279,430
    
    
    $
    8.65
    
    
    $
    27,943Exercisable at December 31, 2007
    
    
    200,993
    
    
    $
    6.40
    
    
    $
    472,334
 At December 31, 2007, 200,993 shares were available to be exercised. The weighted average
grant price at December 31, 2007 was $6.40. The total intrinsic value (which is the amount
by which the stock price exceeded the exercise price on the date of exercise) of options
exercised during 2007 and 2006 was $452,652 and $2,036,775, respectively. At December 31,
2007, 62,077 shares were available for future grants under the Plan. As of December 31,
2007, 2006 and 2005, respectively, 200,993, 300,631 and 539,314 shares respectively were
available to be exercised. The weighted average exercise price for outstanding options for
December 31, 2007, 2006 and 2005, respectively, was $8.65, $6.93 and $4.11, respectively.The fair value of the options granted during 2007, 2006 and 2005, is estimated as $91,539,
$194,745 and $20,068, respectively, on the date of grant using a binomial option-pricing
model with the following assumptions: volatility of 29.98%, 32.03% and 32.36%, respectively,
risk-free interest rate of 3.40%, 4.65% and 3.92%, respectively, expected dividends of $0.33
per share per year for 2007 and $0.29 per share in 2006, annual dividend rate of 2.89%,
3.07% and 2.49%, assumed forfeiture rate of zero and an expected life of seven years. There
were 32,500 options granted in 2007, 52,000 options granted in 2006 and 6,000 options
granted in 2005. The fair value per share of the 2007, 2006 and 2005 awards was $2.82, $3.75
and $3.34, respectively.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14.
    
    CAPITAL STOCKOn August 28, 2007, the Board of Directors authorized a common stock repurchase of up to
2.4%, or approximately 214,000 shares, of the Companys common stock. There were 200,000
shares repurchased during 2007 at an average price of $11.35 per share. There were 92,000
shares repurchased during 2006 at an average price of $11.85. No shares were repurchased
during 2005. Shares purchased are retired by a charge to common stock for the cost. To date,
the Company has repurchased 1,715,311 shares at an average price of $7.64.The Company paid a quarterly cash dividend of $0.09, $0.08, $0.08 and $0.08 on January 12,
2007, April 13, 2007, July 13, 2007 and October 12, 2007, respectively, to stockholders of
record as of December 31, 2006, March 31, 2007, June 30, 2007 and September 30, 2007,
respectively. The fourth quarter dividend of $0.08 per share is payable to shareholders of
record as of December 31, 2007 to be paid on January 11, 2008. On April 20, 1999, the Board
of Directors authorized 2,000,000 shares of preferred stock. As of December 31, 2007, no
preferred shares had been issued.15.
    
    RETIREMENT BENEFITSProfit Sharing Plan In 1985, the Company adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the earnings of the Company. The employees contributions are
limited to the maximum amount allowable under IRS Section 402(G). The Companys
contributions include a matching contribution of 100% of the first 3% of salary deferred and
50% of the next 2% of salary deferred. Discretionary contributions are also permitted. The
Company made matching contributions aggregating $247,500, $224,000 and $157,000 for the
years ended December 31, 2007, 2006 and 2005, respectively. No discretionary contributions
were made in 2007, 2006 or 2005.Salary Continuation Plan In April 2001, the Board of Directors approved the implementation
of the Executive Salary Continuation Plan (SCP), which is a non-qualified executive benefit
plan in which the Bank agrees to pay the executives covered by the SCP plan additional
benefits in the future in return for continued satisfactory performance by the executives.
Benefits under the salary continuation plan include a benefit generally payable commencing
upon a designated retirement date for a fixed period of ten to twenty years; disability or
termination of employment, and a death benefit for the participants designated
beneficiaries. Key-man life insurance policies were purchased as an investment to provide
for the Banks contractual obligation to pay pre-retirement death benefits and to recover
the Banks cost of providing benefits. The executive is the insured under the policy, while
the Bank is the owner and beneficiary. The assets of the SCP, under Internal Revenue Service
Regulations, are the property of the Company and are available to the Companys general
creditors. The insured executive has no claim on the insurance policy, its cash value or the
proceeds thereof.The retirement benefit is derived from accruals to a benefit account during the
participants employment. At the end of the executives period of service, the aggregate
amount accrued should equal the then present value of the benefits expected to be paid to
the executive. Accrued compensation expense under the salary continuation plan totaled
$240,745, $160,917 and $124,356 for 2007, 2006 and 2005, respectively. As of December 31,
2007, 2006 and 2005, the vested benefit payable was $1,030,020, $706,391, and $488,085
respectively.
 71




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Retired Employees deferred compensation Effective April 1, 1990, the Board of Directors
approved and Employee Deferred Compensation plan, which is a non-qualified plan in which
selected employees may elect to defer all or any part of their compensation to be payable to
the employee upon retirement over a period not to exceed fifteen years. Interest on Retired
Employees deferred compensation is fixed at ten percent (10%) per the plan. Participants in
this plan have since retired and funds are being distributed. As of December 31, 2007, 2006
and 2005, the vested benefit payable was $1,035,064, $1,128,911 and $1,194,867,
respectively.Directors deferred fee compensation Effective January 1, 1993, the Board of Directors
approved the implementation of the Directors Deferred Compensation Plan, which is a
non-qualified plan in which a Director may elect to defer the payment of all or any part of
the fee compensation to which such director would otherwise be entitled to as directors
fees or committee fees to be payable upon retirement of the director in a lump sum
distribution or over a period not to exceed fifteen years. Interest on Directors deferred
compensation is fixed at ten percent (10%) per the plan. Deferred compensation expense
totaled $411,191, $368,809 and $321,320 at December 31, 2007, 2006, and 2005 respectively.
As of December 31, 2007, 2006 and 2005, the vested benefit payable was $2,310,824,
$2,035,218 and $1,818,017, respectively.16.
    
    RELATED PARTY TRANSACTIONSSome of the directors, officers and principal stockholders of the Company and their
associates were customers of and had banking transactions with the Bank in the ordinary
course of the Banks business during 2007 and the Bank expects to have such transactions in
the future. All deposits, 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 the opinion of the Company, did not
involve more than a normal risk of collectibility or present other unfavorable features.
  December 31,2007
    
    
    2006Balance at beginning of year
    
    $
    2,849,533
    
    
    $
    1,854,751New loan additions
    
    
    25,312
    
    
    
    1,507,115Advances on existing lines of credit
    
    
    2,184,045
    
    
    
    0Principal repayments
    
    
    (1,458,548
    )
    
    
    ( 512,333
    )Balance at end of year
    
    $
    3,600,342
    
    
    $
    2,849,533
  72




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    COMMITMENTS AND CONTINGENCIESLease Commitments The Company leases certain facilities where it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as of December
31, 2007 are below:(Dollars in thousands)
 2008
    
    $
    5912009
    
    $
    5582010
    
    $
    5242011
    
    $
    4542012
    
    $
    279Thereafter
    
    $
    762Total
    
    $
    3,168Minimum rental due in the future
  Off-Balance Sheet Financial Instruments
  December 31,2007
    
    
    2006Off-balance sheet commitments:Commitments to extend credit
    
    $
    192,815,902
    
    
    $
    158,296,132Standby letters of credit
    
    
    6,627,409
    
    
    
    13,511,196Guaranteed commitments outstanding
    
    
    1,375,999
    
    
    
    1,248,000$
    200,819,310
    
    
    $
    173,055,328
  73




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Credit risk arises in these transactions from
the possibility that a customer may not be able to repay the Bank upon default of
performance. Collateral held for standby letters of credit is based on an individual
evaluation of each customers creditworthiness, but may include cash and securities.Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans.Litigation 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.18.
    
    REGULATORY MATTERSThe Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that if undertaken, could have a direct material effect on the
Companys and Consolidated Financial Statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices.The capital amounts and the Banks prompt corrective action classifications are also
subject to qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to Bank Holding
Companies. 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
following table) 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, 2007 that the Company and the Bank met all capital adequacy requirements to
which they are subject.As of December 31, 2007, the most recent notification from the FDIC 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 that notification that management believes have changed the
Banks category. The Companys and the Banks actual capital amounts and ratios as of
December 31, 2007 and 2006 are also presented in the table.
 74




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 To BeCategorized asWell CapitalizedFor Capital
    
    Under PromptActual
    
    Adequacy Purposes
    
    Corrective ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt December 31, 2007:CompanyLeverage capital (to average assets)
    
    $
    56,857,387
    
    
    
    9.26
    %
    
    $
    19,800,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    56,857,387
    
    
    
    10.12
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    63,881,556
    
    
    
    11.37
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aBankLeverage capital (to average assets)
    
    $
    56,025,174
    
    
    
    9.20
    %
    
    $
    19,783,694
    
    
    
    4.00
    %
    
    $
    24,729,617
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    56,025,174
    
    
    
    9.97
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    25,101,570
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    63,049,343
    
    
    
    11.22
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    41,835,950
    
    
    
    10.00
    %At December 31, 2006:CompanyLeverage capital (to average assets)
    
    $
    54,583,400
    
    
    
    9.38
    %
    
    $
    19,800,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    54,583,400
    
    
    
    11.52
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    60,154,942
    
    
    
    12.64
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aBankLeverage capital (to average assets)
    
    $
    54,389,449
    
    
    
    9.54
    %
    
    $
    19,783,694
    
    
    
    4.00
    %
    
    $
    24,729,617
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    54,389,449
    
    
    
    11.42
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    25,101,570
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    59,690,992
    
    
    
    12.54
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    41,835,950
    
    
    
    10.00
    %
   75




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 19.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTSThe following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:Cash and cash equivalents The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents are a reasonable estimate of fair value.Securities Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted market prices of
comparable instruments. Securities available-for-sale are carried at their aggregate fair
value, while securities held-to-maturity are carried at amortized cost.Loans receivable For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values for fixed
rate loans are estimated using discounted cash flow analysis, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.Commitments to extend credit and standby letters of credit The fair value of commitments
is the off-balance sheet amount of loan commitments and outstanding letters of credit.Federal Home Loan Bank borrowingsThe fair value of borrowed funds is based on carrying
amounts due to the short term nature of the borrowing.Junior subordinated debt payable to unconsolidated subsidiary grantor trust The fair value
of
variable rate junior subordinated debt payable to subsidiary grantor trust is based on
carrying amounts.Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying amounts). The
fair values for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates its fair value.Securities purchased under agreements to resell The fair value of securities purchased
under agreements to resell is estimated by discounting the contractual cash flows under
outstanding borrowings at rates prevailing in the marketplace today for similar borrowings,
rates and collateral.
 76




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Limitations Fair value estimates are made at a specific point in time, based on relevant
market information and other information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at one time the
Companys entire holdings of a particular financial instrument.Because no market exists for a significant portion of the Companys financial instruments,
fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments, and
other factors.These estimates are subjective in nature, involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.Fair value estimates are based on current on and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or liabilities include
deferred tax assets and liabilities, and property, plant and equipment. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of the
estimates.The estimated fair values of the Companys financial instruments are approximately as
follows:
 December 31, 2007Contract
    
    
    Carrying
    
    
    FairAmount
    
    
    Amount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    22,234,123
    
    
    $
    22,234,123Securities
    
    
    
    
    
    
    78,465,151
    
    
    
    78,538,594Loans, net
    
    
    
    
    
    
    486,282,571
    
    
    
    487,801,021Accrued interest on loans
    
    
    
    
    
    
    2,497,124
    
    
    
    2,497,124Accrued interest on securities
    
    
    
    
    
    
    538,410
    
    
    
    538,410Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    259,914,811
    
    
    $
    259,914,811Fixed rate certificates
    
    
    
    
    
    
    185,517,044
    
    
    
    187,227,845Variable certificates
    
    
    
    
    
    
    28,199,442
    
    
    
    28,199,442Accrued interest payable
    
    
    
    
    
    
    787,844
    
    
    
    787,844Securities sold under agreements to repurchase
    
    
    
    
    
    
    15,513,211
    
    
    
    15,513,211Federal Home Loan Borrowings
    
    
    
    
    
    
    60,000,000
    
    
    
    60,000,000Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    15,465,000
    
    
    
    15,465,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    192,815,902
    
    
    
    
    
    
    $
    192,815,902Standby letters of credit
    
    
    6,627,409
    
    
    
    
    
    
    
    6,627,409Guaranteed commitments outstanding
    
    
    1,375,999
    
    
    
    
    
    
    
    1,375,999
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2006Contract
    
    
    Carrying
    
    
    FairAmount
    
    
    Amount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    39,266,386
    
    
    $
    39,266,386Securities
    
    
    
    
    
    
    106,411,220
    
    
    
    106,394,045Loans, net
    
    
    
    
    
    
    408,989,228
    
    
    
    408,940,966Accrued interest on loans
    
    
    
    
    
    
    2,404,259
    
    
    
    2,404,259Accrued interest on securities
    
    
    
    
    
    
    989,754
    
    
    
    989,754Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    226,965,171
    
    
    $
    222,859,530Fixed rate certificates
    
    
    
    
    
    
    173,661,670
    
    
    
    173,816,680Variable certificates
    
    
    
    
    
    
    38,780,888
    
    
    
    38,780,888Accrued interest payable
    
    
    
    
    
    
    799,025
    
    
    
    799,025Securities sold under agreements to repurchase
    
    
    
    
    
    
    37,116,610
    
    
    
    37,116,610Federal Home Loan Borrowings
    
    
    
    
    
    
    40,000,000
    
    
    
    40,000,000Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    15,465,000
    
    
    
    15,465,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    158,296,132
    
    
    
    
    
    
    $
    158,296,132Standby letters of credit
    
    
    13,511,196
    
    
    
    
    
    
    
    13,511,196Guaranteed commitments outstanding
    
    
    1,248,000
    
    
    
    
    
    
    
    1,248,000
 78




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 20.
    
    BANK OF COMMERCE HOLDINGS (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
 December 31,2007
    
    
    2006Condensed Balance SheetsAssets:Cash
    
    $
    1,196,921
    
    
    $
    1,983,893Time deposit with subsidiary
    
    
    0
    
    
    
    432,885Cash and cash equivalents
    
    
    1,196,921
    
    
    
    2,416,778Participation loans, net of allowance
for loan and lease losses of $38,850 in 2007
and $18,900 in 2006
    
    
    5,174,536
    
    
    
    3,332,883Investment in subsidiaries
    
    
    56,070,932
    
    
    
    54,512,570Other assets
    
    
    7,500
    
    
    
    37,500Total assets
    
    $
    62,449,889
    
    
    $
    60,299,731Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    15,465,000
    
    
    
    15,465,000Other liabilities
    
    
    821,042
    
    
    
    918,481Stockholders equity
    
    
    46,163,848
    
    
    
    43,916,250Total liabilities and stockholders equity
    
    $
    62,449,889
    
    
    $
    60,299,731
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Condensed Statements of IncomeIncome:Interest on time deposit
    
    $
    53,488
    
    
    $
    93,167
    
    
    $
    79,931Dividends from subsidiaries
    
    
    6,738,029
    
    
    
    4,641,352
    
    
    
    514,3076,791,517
    
    
    
    4,734,519
    
    
    
    594,238Expenses:
    
    
    1,809,492
    
    
    
    1,405,409
    
    
    
    825,549Income before income taxes and
equity in undistributed net income
of subsidiaries
    
    
    4,982,025
    
    
    
    3,329,110
    
    
    
    (231,311
    )Provision for income taxes
    
    
    800
    
    
    
    800
    
    
    
    800Income before equity in undistributed
net income of subsidiaries
    
    
    4,981,225
    
    
    
    3,328,310
    
    
    
    (232,111
    )Equity in undistributed net income of
subsidiaries
    
    
    1,125,673
    
    
    
    3,239,399
    
    
    
    6,510,481Net income
    
    $
    6,106,898
    
    
    $
    6,567,709
    
    
    $
    6,278,370
 79




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31,2007
    
    
    2006
    
    
    2005Statements of Cash FlowsCash flows from operating activities:Net income
    
    $
    6,106,898
    
    
    $
    6,567,709
    
    
    
    6,278,370Adjustments to reconcile net income to
net cash provided by operating activities:Provision for loan losses
    
    
    19,950
    
    
    
    18,900
    
    
    
    5,700Compensation associated with stock options
    
    
    32,637
    
    
    
    7,672
    
    
    
    5,784Effect of changes in:Other Assets
    
    
    30,000
    
    
    
    30,000
    
    
    
    30,000Other Liabilities
    
    
    (97,439
    )
    
    
    134,958
    
    
    
    20,399Equity in undistributed net income of
subsidiaries
    
    
    (1,125,673
    )
    
    
    (3,239,399
    )
    
    
    (6,510,481
    )Net cash provided by operating activities
    
    
    4,966,373
    
    
    
    3,519,840
    
    
    
    (170,228
    )Cash flows from investing activities:Investment in subsidiary trust
    
    
    0
    
    
    
    (155,000
    )
    
    
    (310,000
    )Capital contribution to Bank
    
    
    0
    
    
    
    0
    
    
    
    (5,000,000
    )Participation loan payments
    
    
    272,058
    
    
    
    0
    
    
    
    0Participation loan purchased
    
    
    (1,861,603
    )
    
    
    (981,523
    )
    
    
    (2,014,736
    )Net cash used by investing activities
    
    
    (1,589,545
    )
    
    
    (1,136,523
    )
    
    
    (7,324,736
    )Cash flows from financing activities:Equity transactions, net
    
    
    (1,758,656
    )
    
    
    (210,589
    )
    
    
    467,000Proceeds from unconsolidated subsidiary
Grantor trust
    
    
    0
    
    
    
    0
    
    
    
    10,310,000Cash dividends
    
    
    (2,838,029
    )
    
    
    (2,650,320
    )
    
    
    (1,550,715
    )Net cash used by financing activities
    
    
    (4,596,685
    )
    
    
    (2,860,909
    )
    
    
    9,226,285(Decrease) Increase in cash and cash equivalents
    
    
    (1,219,857
    )
    
    
    (477,592
    )
    
    
    1,731,321Cash and cash equivalents at beginning of year
    
    
    2,416,778
    
    
    
    2,894,370
    
    
    
    1,163,049Cash and cash equivalents at end of year
    
    $
    1,196,921
    
    
    $
    2,416,778
    
    
    $
    2,894,370
 80




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 22.
    
    UNAUDITED QUARTERLY RESULTS
 UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
 For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except per share data)
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007Net interest income
    
    $
    5,327
    
    
    $
    5,461
    
    
    $
    5,641
    
    
    $
    5,584Provision for loan losses
    
    
    (6
    )
    
    
    0
    
    
    
    (115
    )
    
    
    (3,170
    )Noninterest income
    
    
    498
    
    
    
    618
    
    
    
    526
    
    
    
    2,893Noninterest expense
    
    
    (3,488
    )
    
    
    (3,701
    )
    
    
    (4,028
    )
    
    
    (4,528
    )Income before taxes
    
    
    2,331
    
    
    
    2,378
    
    
    
    2,024
    
    
    
    779Provision for income tax
    
    
    (844
    )
    
    
    (778
    )
    
    
    (693
    )
    
    
    910Net Income
    
    $
    1,487
    
    
    $
    1,600
    
    
    $
    1,331
    
    
    $
    1,689Per common share:Basic earnings per share
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.19Diluted earnings per share
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.18Dividends per share
    
    $
    0.09
    
    
    $
    0.08
    
    
    $
    0.08
    
    
    $
    0.08
 For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except per share data)
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Net interest income
    
    $
    5,413
    
    
    $
    5,674
    
    
    $
    5,530
    
    
    $
    5,418Provision for loan losses
    
    
    (11
    )
    
    
    (143
    )
    
    
    (72
    )
    
    
    (0
    )Noninterest income
    
    
    448
    
    
    
    512
    
    
    
    428
    
    
    
    541Noninterest expense
    
    
    (3,238
    )
    
    
    (3,310
    )
    
    
    (3,299
    )
    
    
    (3,486
    )Income before taxes
    
    
    2,612
    
    
    
    2,733
    
    
    
    2,587
    
    
    
    2,473Provision for income tax
    
    
    (1,020
    )
    
    
    (1,044
    )
    
    
    (915
    )
    
    
    (858
    )Net Income
    
    $
    1,592
    
    
    $
    1,689
    
    
    $
    1,672
    
    
    $
    1,615Per common share:Basic earnings per share
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.18Diluted earnings per share
    
    $
    0.18
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.18Dividends per share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.07
 For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except per share data)
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005Net interest income
    
    $
    4,856
    
    
    $
    4,861
    
    
    $
    5,125
    
    
    $
    5,395Provision for loan losses
    
    
    (177
    )
    
    
    (177
    )
    
    
    (88
    )
    
    
    (6
    )Noninterest income
    
    
    542
    
    
    
    548
    
    
    
    515
    
    
    
    519Noninterest expense
    
    
    (2,920
    )
    
    
    (2,887
    )
    
    
    (3,095
    )
    
    
    (2,846
    )Income before taxes
    
    
    2,301
    
    
    
    2,345
    
    
    
    2,457
    
    
    
    3,062Provision for income tax
    
    
    (925
    )
    
    
    (874
    )
    
    
    (897
    )
    
    
    (1,191
    )Net Income
    
    $
    1,376
    
    
    $
    1,471
    
    
    $
    1,560
    
    
    $
    1,871Per common share:Basic earnings per share
    
    $
    0.16
    
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.18
    
    
    $
    0.21Dividends per share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.08
 81




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  internal control over financial reporting
 
    
    Pertain the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the issuer;
    
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of
management and the Directors of the Company;
    
    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.
 key controls key control
  
    
    Minimum sample size was 5% of the transactions
    
    Sample size drawn from transactions and activities through out 2007
    
    Testing procedures included examination, inquiry, and observation, depending on the
nature of the control being tested
  82




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Effectiveness of Disclosure Controls and Procedures
   Report of Management on Internal Control Over Financial Reporting
   
 ITEM 9B. OTHER INFORMATION
   
 PART III
  83




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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Executive Officers of the Registrant
  Name
    
    Age
    
    Position(s)Patrick J. Moty
    
    
    51
    
    
    President and Chief Executive Officer Redding
Bank of Commerce and Director of Redding Bank of
CommerceLinda J. Miles
    
    
    54
    
    
    Executive Vice President, Chief Financial Officer
and Assistant Secretary
 Patrick J. Moty
 Linda J. Miles
 Audit Committee Information
  Code of Ethics and Business Conduct
 http://www.bankofcommerceholdings.com
 84




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Additional Information
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
   
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  85




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86




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PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
 (a)
    
    The following documents are filed as a part of this Form 10-K:
 (1)
    
    Financial Statements:Reference is made to the Index to Consolidated Financial Statements under Item 8 in
Part II of this Form 10-K.
 (2)
    
    Financial Statement Schedules:All schedules are omitted
because they are not applicable or the required information
is shown in the financial statements or notes thereto.
 (3)
    
    Exhibits:
 ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended filed 12/4/1998.*3.2
    
    Bylaws, as amended filed 05/15/2007.*4.1
    
    Specimen Common Stock Certificate filed 12/4/1998.*10.1
    
    Office Building Lease by and between David and Maria Wong and Redding Bank of Commerce dated June 10, 1998 filed 12/4/1998.*10.2
    
    Office Building Lease between Garian Partnership/First Avenue Square and Redding Bank of Commerce dated July 16, 1998 filed 12/4/1998.*10.3
    
    1998 Stock Option Plan filed 12/4/1998.*10.4
    
    Form of Incentive Stock Option Agreement used in connection with 1998 Stock Option Plan filed 12/4/1998.*10.5
    
    Form of Nonstatutory Stock Option Agreement used in connection with 1998 Stock Option Plan filed 12/4/1998.*10.7
    
    Directors Deferred Compensation Plan filed 12/4/1998.*10.8
    
    Form of Deferred Compensation Agreement Used In Connection With Directors Deferred Compensation Plan filed 12/4/1998.*10.9
    
    Merchant Services Agreement dated as of April 1, 1993, between Cardservice International, Inc. and Redding Bank of Commerce, as amended filed 12/4/1998  Fifth Amendment filed 4/4/2001.*10.10
    
    Employment contracts dated April 2001 filed 9/27/2001.*10.11
    
    Affiliated Business Arrangement Agreement filed 8/20/2004*10.12
    
    Office building lease by and between Wainright #3 Partners and Redding Bank of Commerce dated 9/23/2005 and filed 9/26/2005*10.13
    
    Amendment to Employment contracts dated April 2001, filed 12/20/2005*10.14
    
    Change in Control Agreements filed on 12/21/2005*10.15
    
    Salary Continuation  Blais filed on 12/19/2006*10.16
    
    Salary Continuation  Moty filed on 12/19/2006*10.17
    
    Salary Continuation  Eslick filed on 12/19/2006*10.18
    
    Employment Agreement  Mayer filed on 12/29/06*10.19
    
    Employment Agreement  Miles filed on 12/29/06*10.20
    
    Salary Continuation  Mayer filed on 12/29/06*10.21
    
    Salary Continuation  Miles filed on 12/29/06*10.22
    
    Employment Agreement  Moty filed on 9/28/07*10.23
    
    Salary Continuation  Moty filed on 9/28/07*11.1
    
    Statement re: Computation of Earnings per Share (see page _56_).14.0
    
    RBC Code of Ethics filed on 2/26/2003*16.1
    
    Letter on Change in Certifying Accountants filed 12/4/1998. *21.1
    
    Subsidiaries of the Company filed 12/4/1998. *23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of Moss Adams LLP24.1
    
    Power of Attorney (see page ___88___)31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification of the Companys Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification of the Companys Chief Financial Officer.
 87




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##### Table of Contents



ExhibitNumber
    
    Description of Document32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Previously filed with the Companys Registration Statement on Form 10 and
by the Companys filing of reports on Form 8-K. (b)
    
    Reports on Form 8-K:
 SIGNATURES
  BANK OF COMMERCE HOLDINGSBy
    /s/   Patrick J.  MotyPatrick J. MotyPresident, Chief Executive
Officer and Director of Redding Bank of Commerce POWER OF ATTORNEY
  88




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##### Table of Contents



Name
    
    Title
    
    Date/s/ Patrick J. Moty
Patrick J. Moty
    
    President, Chief Executive Officer 
Redding Bank of Commerce and 
Director of Redding Bank of Commerce
    
    March 14, 2008/s/ Linda J. Miles
Linda J. Miles
    
    Executive Vice President and Chief 
Financial Officer and Assistant 
Secretary (Principal Financial and 
Accounting Officer)
    
    March 14, 2008/s/ Kenneth R. Gifford, Jr.
Kenneth R. Gifford, Jr.
    
    Chairman of the Board
    
    March 14, 2008/s/ Welton L. Carrel
Welton L. Carrel
    
    Director
    
    March 14, 2008/s/ Russell L. Duclos
Russell L. Duclos
    
    Director
    
    March 14, 2008/s/ John C. Fitzpatrick
John C. Fitzpatrick
    
    Director
    
    March 14, 2008/s/ Harry L. Grashoff, Jr.
Harry L. Grashoff, Jr.
    
    Director
    
    March 14, 2008/s/ David H. Scott
David H. Scott
    
    Director
    
    March 14, 2008/s/ Lyle L. Tullis 
Lyle L. Tullis
    
    Director
    
    March 14, 2008/s/ Jon Halfhide 
Jon Halfhide
    
    Director
    
    March 14, 2008/s/ Orin Bennett 
Orin Bennett
    
    Director
    
    March 14, 2008
 89




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended filed 12/4/1998.*3.2
    
    Bylaws, as amended filed 05/15/2007.*4.1
    
    Specimen Common Stock Certificate filed 12/4/1998.*10.1
    
    Office Building Lease by and between David and Maria Wong and Redding Bank of Commerce dated June 10, 1998 filed 12/4/1998.*10.2
    
    Office Building Lease between Garian Partnership/First Avenue Square and Redding Bank of Commerce dated July 16, 1998 filed 12/4/1998.*10.3
    
    1998 Stock Option Plan filed 12/4/1998.*10.4
    
    Form of Incentive Stock Option Agreement used in connection with 1998 Stock Option Plan filed 12/4/1998.*10.5
    
    Form of Nonstatutory Stock Option Agreement used in connection with 1998 Stock Option Plan filed 12/4/1998.*10.7
    
    Directors Deferred Compensation Plan filed 12/4/1998.*10.8
    
    Form of Deferred Compensation Agreement Used In Connection With Directors Deferred Compensation Plan filed 12/4/1998.*10.9
    
    Merchant Services Agreement dated as of April 1, 1993, between Cardservice International, Inc. and Redding Bank of Commerce, as amended filed 12/4/1998  Fifth Amendment filed 4/4/2001.*10.10
    
    Employment contracts dated April 2001 filed 9/27/2001.*10.11
    
    Affiliated Business Arrangement Agreement filed 8/20/2004*10.12
    
    Office building lease by and between Wainright #3 Partners and Redding Bank of Commerce dated 9/23/2005 and filed 9/26/2005*10.13
    
    Amendment to Employment contracts dated April 2001, filed 12/20/2005*10.14
    
    Change in Control Agreements filed on 12/21/2005*10.15
    
    Salary Continuation  Blais filed on 12/19/2006*10.16
    
    Salary Continuation  Moty filed on 12/19/2006*10.17
    
    Salary Continuation  Eslick filed on 12/19/2006*10.18
    
    Employment Agreement  Mayer filed on 12/29/06*10.19
    
    Employment Agreement  Miles filed on 12/29/06*10.20
    
    Salary Continuation  Mayer filed on 12/29/06*10.21
    
    Salary Continuation  Miles filed on 12/29/06*10.22
    
    Employment Agreement  Moty filed on 9/28/07*10.23
    
    Salary Continuation  Moty filed on 9/28/07*11.1
    
    Statement re: Computation of Earnings per Share (see page _56_).14.0
    
    RBC Code of Ethics filed on 2/26/2003*16.1
    
    Letter on Change in Certifying Accountants filed 12/4/1998. *21.1
    
    Subsidiaries of the Company filed 12/4/1998. *23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of Moss Adams LLP24.1
    
    Power of Attorney (see page ___88___)31.1
    
    Rule 13a-14(a)/15d-14(a)
Certification of the Companys Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification of the Companys Chief Financial Officer.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Previously filed with the Companys Registration Statement on Form 10 and by the Companys
filing of reports on Form 8-K.