##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For
the transition period from
to
 Commission file number 0-25135
 Bank of Commerce Holdings
  California
    
    94-2823865(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)1901 Churn Creek Road Redding, California
    
    96002(Address of principal executive offices)
    
    (Zip code)
   
 þ o
  o o þ
 o þ




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Index to Form 10-Q
  
 PART I. FINANCIAL INFORMATION
    
    Page:Item 1. Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2007, December 31, 2006 and September 30, 2007
    
    
    4Condensed Consolidated Statements of Income
Three and nine months ended September 30, 2007 and 2006
    
    
    5Condensed Consolidated Statements of Cash Flows
Three and nine months ended September 30, 2007 and 2006
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    14Corporate Overview
    
    
    14Lending Risks Associated with Commercial Banking and Construction Activities
    
    
    18Potential Volatility of Deposits
    
    
    18Dividends
    
    
    19Government Regulation and Legislation
    
    
    19Certain Ownership Restrictions under California and Federal Law
    
    
    20Environmental Risks
    
    
    20Unresolved Staff Comments
    
    
    21Executive Overview
    
    
    22Sources of Income
    
    
    22Financial Highlights  Results of Operations
    
    
    23Net Interest Income and Net Interest Margin
    
    
    23Liquidity
    
    
    24Capital Management
    
    
    24Short and long term borrowings
    
    
    25Factors that may affect future results
    
    
    26Critical accounting policies
    
    
    27Average balances, Interest Income/Expense and yields/rates paid
    
    
    30Analysis of changes in net interest income and interest expense
    
    
    31Noninterest Income
    
    
    32Noninterest Expense
    
    
    32Income taxes
    
    
    33Asset quality
    
    
    34Allowance for loan and lease losses (ALLL)
    
    
    35Securities portfolio
    
    
    36Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    38Item 4.
Controls and Procedures
    
    
    40
 2




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##### Table of Contents



PART II. OTHER INFORMATION
    

    Page:Item 1. Legal proceedings
    
    
    41Item 1a. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EXHIBITS
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Condensed Consolidated Balance Sheets

(Unaudited)
 September 30,
    
    
    December 31,
    
    

September 30,Amounts in thousands, except per share data
    
    2007
    
    
    2006
    
    
    2006ASSETSCash and due from banks
    
    $
    12,366
    
    
    $
    14,661
    
    
    $
    17,535Federal funds sold and securities purchased under agreements to resell
    
    
    7,980
    
    
    
    24,605
    
    
    
    28,010Cash and cash equivalents
    
    
    20,346
    
    
    
    39,266
    
    
    
    45,545Securities available-for-sale (including pledged collateral of $85,574
at September 30, 2007; $71,686 at December 31, 2006 and
$74,022 at September 30, 2006)
    
    
    93,423
    
    
    
    95,601
    
    
    
    97,614Securities held-to-maturity, at cost (estimated fair value of $10,538
at September 30, 2007, $10,892 at December 31, 2006
and $10,788 at September 30, 2006)
    
    
    10,592
    
    
    
    10,810
    
    
    
    10,841Loans, net of the allowance for loan losses of $5,061 at September
30, 2007, $4,904 at December 31, 2006 and
$4,753 at September 30, 2006
    
    
    461,171
    
    
    
    408,990
    
    
    
    403,657Bank premises and equipment, net
    
    
    10,464
    
    
    
    8,595
    
    
    
    7,350Other assets
    
    
    19,979
    
    
    
    20,180
    
    
    
    20,211TOTAL ASSETS
    
    $
    615,975
    
    
    $
    583,442
    
    
    $
    585,218LIABILITIES AND STOCKHOLDERS EQUITYDemand  noninterest bearing
    
    $
    70,809
    
    
    $
    84,779
    
    
    $
    81,125Demand  interest bearing
    
    
    136,219
    
    
    
    119,437
    
    
    
    111,439Savings
    
    
    44,406
    
    
    
    22,749
    
    
    
    22,610Certificates of deposits
    
    
    220,803
    
    
    
    212,442
    
    
    
    214,019Total deposits
    
    
    472,237
    
    
    
    439,407
    
    
    
    429,193Securities sold under agreements to repurchase
    
    
    26,755
    
    
    
    37,117
    
    
    
    35,260Federal Home Loan Bank borrowings
    
    
    50,000
    
    
    
    40,000
    
    
    
    55,000Other liabilities
    
    
    6,734
    
    
    
    7,537
    
    
    
    6,352Guaranteed Preferred Beneficial Interests in Companys
Junior Subordinated Debt payable to unconsolidated subsidiary
grantor trust
    
    
    15,465
    
    
    
    15,465
    
    
    
    15,465Total Liabilities
    
    
    571,191
    
    
    
    539,526
    
    
    
    541,270Commitments and contingenciesStockholders Equity:Preferred stock, no par value, 2,000,000 authorized
no shares issued and outstanding in 2007 and 2006
    
    
    
    
    
    
    
    
    
    
    Common stock , no par value, 50,000,000 shares
authorized; 8,784,359 shares issued and outstanding
at September 30, 2007, 8,847,042 at December 31, 2006
and 8,926,842 at September 30, 2006
    
    
    10,252
    
    
    
    11,517
    
    
    
    12,416Retained earnings
    
    
    35,617
    
    
    
    33,336
    
    
    
    32,526Accumulated other comprehensive (loss), net of tax
    
    
    (1,085
    )
    
    
    (937
    )
    
    
    (994
    )Total Stockholders equity
    
    
    44,784
    
    
    
    43,916
    
    
    
    43,948TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    615,975
    
    
    $
    583,442
    
    
    $
    585,218
 See accompanying notes to condensed consolidated financial statements.
 4




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
 Three and nine months ended September 30, 2007 and 2006
 Three Months Ended
    
    
    Nine Months EndedAmounts in thousands, except for per share data
    
    Sept. 30, 2007
    
    
    Sept. 30, 2006
    
    
    Sept. 30, 2007
    
    
    Sept. 30, 2006Interest income:Interest and fees on loans
    
    $
    9,350
    
    
    $
    8,501
    
    
    $
    26,779
    
    
    $
    23,881Interest on tax exempt securities
    
    
    324
    
    
    
    231
    
    
    
    936
    
    
    
    494Interest on U.S. government securities
    
    
    798
    
    
    
    849
    
    
    
    2,446
    
    
    
    2,575Interest on federal funds sold and
securities purchased under agreements
to resell
    
    
    190
    
    
    
    383
    
    
    
    580
    
    
    
    658Interest on other securities
    
    
    22
    
    
    
    25
    
    
    
    67
    
    
    
    113Total interest income
    
    
    10,684
    
    
    
    9,989
    
    
    
    30,808
    
    
    
    27,721Interest expense:Interest on demand deposits
    
    
    791
    
    
    
    449
    
    
    
    1,935
    
    
    
    968Interest on savings deposits
    
    
    359
    
    
    
    69
    
    
    
    885
    
    
    
    209Interest on time deposits
    
    
    2,702
    
    
    
    2,423
    
    
    
    7,934
    
    
    
    5,844Securities sold under agreements to repurchase
    
    
    289
    
    
    
    328
    
    
    
    1,012
    
    
    
    794Interest on FHLB and other borrowing expense
    
    
    628
    
    
    
    918
    
    
    
    1,799
    
    
    
    2,492Interest on junior subordinated debt payable
to
unconsolidated subsidiary grantor trust
    
    
    274
    
    
    
    272
    
    
    
    814
    
    
    
    796Total interest expense
    
    
    5,043
    
    
    
    4,459
    
    
    
    14,379
    
    
    
    11,103Net interest income
    
    
    5,641
    
    
    
    5,530
    
    
    
    16,429
    
    
    
    16,618Provision for loan and lease losses
    
    
    115
    
    
    
    72
    
    
    
    121
    
    
    
    226Net interest income after provision for
loan losses
    
    
    5,526
    
    
    
    5,458
    
    
    
    16,308
    
    
    
    16,392Noninterest income:Service charges on deposit accounts
    
    
    70
    
    
    
    81
    
    
    
    215
    
    
    
    255Payroll and benefit processing fees
    
    
    90
    
    
    
    89
    
    
    
    287
    
    
    
    287Earnings on cash surrender value -
Bank owned life insurance
    
    
    100
    
    
    
    80
    
    
    
    294
    
    
    
    231Net gain (loss) on sale of securities
available-for-sale
    
    
    0
    
    
    
    (171
    )
    
    
    46
    
    
    
    (171
    )Net gain on sale of loans
    
    
    0
    
    
    
    90
    
    
    
    0
    
    
    
    90Merchant credit card service income, net
    
    
    109
    
    
    
    110
    
    
    
    297
    
    
    
    280Mortgage brokerage fee income
    
    
    21
    
    
    
    32
    
    
    
    56
    
    
    
    84Other income
    
    
    136
    
    
    
    117
    
    
    
    447
    
    
    
    331Total non-interest income
    
    
    526
    
    
    
    428
    
    
    
    1,642
    
    
    
    1,387Noninterest expense:Salaries and related benefits
    
    
    2,402
    
    
    
    1,996
    
    
    
    6,458
    
    
    
    5,870Occupancy and equipment expense
    
    
    635
    
    
    
    467
    
    
    
    1,636
    
    
    
    1,350FDIC insurance premium
    
    
    13
    
    
    
    12
    
    
    
    39
    
    
    
    36Data processing fees
    
    
    82
    
    
    
    53
    
    
    
    227
    
    
    
    169Professional service fees
    
    
    216
    
    
    
    149
    
    
    
    663
    
    
    
    503Payroll and Benefit fees
    
    
    25
    
    
    
    24
    
    
    
    81
    
    
    
    78Deferred compensation expense
    
    
    105
    
    
    
    94
    
    
    
    303
    
    
    
    272Stationery and Supplies
    
    
    34
    
    
    
    71
    
    
    
    141
    
    
    
    180Postage
    
    
    39
    
    
    
    26
    
    
    
    106
    
    
    
    91Directors expense
    
    
    86
    
    
    
    45
    
    
    
    207
    
    
    
    170Other expenses
    
    
    391
    
    
    
    362
    
    
    
    1,356
    
    
    
    1,128Total non-interest expense
    
    
    4,028
    
    
    
    3,299
    
    
    
    11,217
    
    
    
    9,847Income before provision for income taxes
    
    
    2,024
    
    
    
    2,587
    
    
    
    6,733
    
    
    
    7,932Provision for income taxes
    
    
    693
    
    
    
    915
    
    
    
    2,315
    
    
    
    2,979Net Income
    
    $
    1,331
    
    
    $
    1,672
    
    
    $
    4,418
    
    
    $
    4,953Basic earnings per share
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.50
    
    
    $
    0.57Weighted average shares  basic
    
    
    8,904
    
    
    
    8,764
    
    
    
    8,893
    
    
    
    8,723Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.49
    
    
    $
    0.55Weighted
average shares  diluted
    
    
    8,929
    
    
    
    8,937
    
    
    
    8,983
    
    
    
    8,945Cash dividend per common share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.24
    
    
    $
    0.20
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Nine months ended September 30, 2007 and 2006
 September 30,
    
    
    September 30,Dollars in thousands
    
    2007
    
    
    2006Cash flows from operating activities:Net Income
    
    $
    4,418
    
    
    $
    4,953Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan and lease losses
    
    
    121
    
    
    
    226Provision for depreciation and amortization
    
    
    759
    
    
    
    516Compensation expense associated with stock options
    
    
    48
    
    
    
    40Tax benefits from the exercise of stock options
    
    
    (118
    )
    
    
    (560
    )(Gain) Loss on sale of securities available for sale
    
    
    (46
    )
    
    
    171Amortization of investment premiums and accretion of
discounts, net
    
    
    (4
    )
    
    
    8Gain on sale of loans
    
    
    0
    
    
    
    (90
    )Proceeds from sales of loans
    
    
    0
    
    
    
    2,090Loans originated for sale
    
    
    0
    
    
    
    (2,000
    )Gain on sale of equipment
    
    
    (31
    )
    
    
    0Deferred Income Taxes, net
    
    
    (260
    )
    
    
    183Effect of changes in:Other assets
    
    
    494
    
    
    
    (4,742
    )Deferred loan fees
    
    
    (66
    )
    
    
    (43
    )Other liabilities
    
    
    (566
    )
    
    
    (842
    )Net cash (used in) /provided by operating activities
    
    
    4,749
    
    
    
    (90
    )Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    5,161
    
    
    
    8,100Proceeds from sales of available-for-sale securities
    
    
    20,569
    
    
    
    10,258Proceeds from maturities of held-to-maturity securities
    
    
    111
    
    
    
    518Purchases of available-for-sale securities
    
    
    (23,495
    )
    
    
    (26,155
    )Loan originations, net of principal repayments
    
    
    (52,237
    )
    
    
    (40,535
    )Purchases of premises and equipment
    
    
    (2,702
    )
    
    
    (2,236
    )Net cash used by investing activities
    
    
    (52,593
    )
    
    
    (50,050
    )Cash flows from financing activities:Net increase in deposits
    
    
    32,830
    
    
    
    57,077Net increase (decrease) in securities sold under
agreement to repurchase
    
    
    (10,362
    )
    
    
    12,376Proceeds from Federal Home Loan Bank advances
    
    
    20,000
    
    
    
    70,000Repayments of Federal Home Loan Bank advances
    
    
    (10,000
    )
    
    
    (70,000
    )Dividends paid on common stock
    
    
    (2,230
    )
    
    
    (1,846
    )Common stock Repurchase
    
    
    (1,930
    )
    
    
    0Excess tax benefits from the exercise of stock options
    
    
    118
    
    
    
    527Proceeds from stock options exercised
    
    
    498
    
    
    
    840Net cash from Trust Preferred
    
    
    0
    
    
    
    155Net cash provided by financing activities
    
    
    28,924
    
    
    
    69,129Net (decrease) increase in cash and cash equivalents
    
    
    (18,920
    )
    
    
    18,989Cash and cash equivalents, beginning of period
    
    
    39,266
    
    
    
    26,556Cash and cash equivalents, end of period
    
    $
    20,346
    
    
    $
    45,545Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    2,533
    
    
    $
    2,936
 See accompanying notes to condensed consolidated financial statements.
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Consolidation and Basis of Presentation
     2. 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 
 7




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Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited)
  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.
 3. Earnings per Share
  (Amounts in thousands, except per share data)
    
    Three Months Ended
    
    
    Nine Months EndedSept. 30, 2007
    
    
    Sept. 30, 2006
    
    
    Sept. 30, 2007
    
    
    Sept. 30, 2006Basic EPS Calculation:Numerator (net income)
    
    $
    1,331
    
    
    $
    1,672
    
    
    $
    4,418
    
    
    $
    4,953Denominator (average common
shares outstanding)
    
    
    8,904
    
    
    
    8,764
    
    
    
    8,893
    
    
    
    8,723Basic earnings per share
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.50
    
    
    $
    0.57Diluted EPS Calculation:Numerator (net income)
    
    $
    1,331
    
    
    $
    1,672
    
    
    $
    4,418
    
    
    $
    4,953Denominator:Average common shares outstanding
    
    
    8,904
    
    
    
    8,764
    
    
    
    8,893
    
    
    
    8,723Dilutive effect of stock options
    
    
    74
    
    
    
    173
    
    
    
    90
    
    
    
    2228,978
    
    
    
    8,937
    
    
    
    8,983
    
    
    
    8,945Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.19
    
    
    $
    0.49
    
    
    $
    0.55
 8




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 4. Stock Option Plan
      5. Comprehensive Income
  9




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income as reported
    
    $
    1,331
    
    
    $
    1,672
    
    
    $
    4,418
    
    
    $
    4,953Other comprehensive income:Holding gain (loss) arising during
period on AFS securities, net of tax
    
    
    783
    
    
    
    734
    
    
    
    (148
    )
    
    
    58Reclassification adjustment on AFS
securities, net of tax
    
    
    0
    
    
    
    100
    
    
    
    (27
    )
    
    
    100Holding gain (loss) arising during
period on derivative transactions, net
of tax
    
    
    0
    
    
    
    138
    
    
    
    51
    
    
    
    138Reclassification adjustment on
derivative transactions, net of tax
    
    
    0
    
    
    
    0
    
    
    
    (24
    )
    
    
    0Total comprehensive income
    
    $
    2,114
    
    
    $
    2,644
    
    
    $
    4,270
    
    
    $
    5,249
 6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust
    10




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES  Notes to Unaudited Condensed Consolidated Financial Statements (Continued)  (Unaudited)
    7. Commitments and contingent liabilities
 Lease Commitments 
 (Dollars in thousands)2007
    
    $
    1382008
    
    $
    5922009
    
    $
    5582010
    
    $
    5242011
    
    $
    454Thereafter
    
    $
    1,040Total
    
    $
    3,306Minimum rental due in the future
Under non-cancelable subleases
    
    $
    0
 Legal Proceedings 
 11




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES  Notes to Unaudited Condensed Consolidated Financial Statements (Continued)  (Unaudited)
 FHLB Advances 
 Amount
    
    Interest Rate
    
    Maturity$15,000,000
    
    4.89%
    
    11/30/2007$10,000,000
    
    5.12%
    
    12/06/2007$10,000,000
    
    4.93%
    
    01/24/2008$  5,000,000
    
    5.23%
    
    04/28/2008$10,000,000
    
    4.97%
    
    01/24/2011$50,000,000
  Off-Balance Sheet Financial Instruments
    September 30, 2007
    
    September 30, 2006Commitment lines of credit
    
    $
    184,065,127
    
    
    $
    155,898,477Standby letters of credit
    
    
    6,600,143
    
    
    
    14,211,847Guaranteed commitments outstanding
    
    
    1,375,998
    
    
    
    1,248,000$
    192,041,268
    
    
    $
    171,358,324
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES  Notes to Unaudited Condensed Consolidated Financial Statements (Continued)  (Unaudited)
 Accounting for Income Tax Uncertainties (FIN 48)
    13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward Looking Statements and Risk Factors
 This discussion and information in the accompanying financial statements contains certain
forward-looking statements, which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those stated. These risks and
uncertainties include the Companys ability to maintain or expand its market share and net interest
margins, or to implement its marketing and growth strategies. Further, actual results may be
affected by the Companys ability to compete on price and other factors with other financial
institutions; customer acceptance of new products and services; and general trends in the banking
and the regulatory environment, as they relate to the Companys cost of funds and return on assets.
The reader is advised that this list of risks is not exhaustive and should not be construed as any
prediction by the Company as to which risks would cause actual results to differ materially from
those indicated by the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements.
 For additional information concerning risks and uncertainties related to the Company and its
operations please refer to the Companys Annual Report on Form 10-K for the year ended December 31,
2006, under the heading Risk factors that may affect results. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of any revision to these
forward-looking statements to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
 The following sections discuss significant changes and trends in financial condition, capital
resources and liquidity of the Company from December 31, 2006 to September 30, 2007. Also discussed
are significant trends and changes in the Companys results of operations for the three and nine
months ended September 30, 2007, compared to the same period in 2006. The consolidated financial
statements and related notes appearing elsewhere in this report are condensed and unaudited. The
following discussion and analysis is intended to provide greater detail of the Companys financial
condition and results.
 
 Corporate Overview
 th
  14




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  www.bankofcommerceholdings.com www.reddingbankofcommerce.com www.rosevillebankofcommerce.com, www.sutterbankofcommerce.com www.bankofcommercemortgage.com www.sec.gov
       15




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
     16




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 Risk Factors
 Economic Conditions and Geographic Concentration
   Changes in Interest Rates could reduce the Companys Net Interest Income and Earnings
     17




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
 Lending Risks Associated with Commercial Banking and Construction Activities
  Adequacy of Allowance for Loan and Lease Losses (ALLL)
   
 Potential Volatility of Deposits
   18




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Dividends
  Changes in Accounting Policies or Accounting Standards, and Changes in How Accounting Standards are
interpreted or applied, Could Materially Affect How the Company Reports its Financial Results and
Condition
 Critical
Accounting Policies).
  
 Government Regulation and Legislation
    19




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  
 Certain Ownership Restrictions under California and Federal Law
    Negative Publicity could Damage our Reputation
  
 Environmental Risks
  20




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Shares Eligible for Future Sale
  
 UNRESOLVED STAFF COMMENTS
  21




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 
 Executive Overview
       
 Sources of Income
  22




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 September 30, 2007
    
    
    September 30, 2006Profitability RatiosNet Interest Income to Average Assets
    
    
    3.76
    %
    
    
    4.09
    %Net Income to Average Equity
    
    
    9.76
    %
    
    
    11.46
    %Efficiency Ratio1
    
    
    62.07
    %
    
    
    54.69
    %Capital RatiosLeverage Ratio
    
    
    9.40
    %
    
    
    10.39
    %Risk Based Capital
    
    $
    61,318
    
    
    $
    64,937Tier 1 Capital
    
    
    10.19
    %
    
    
    12.11
    %Total Capital
    
    
    11.18
    %
    
    
    13.17
    %Per Common Share DataDividend Payout Ratio
    
    
    48.38
    %
    
    
    37.27
    %Book Value
    
    $
    5.04
    
    
    $
    4.92Market Price
    
    $
    11.00
    
    
    $
    10.95High
    
    $
    12.50
    
    
    $
    11.00Low
    
    $
    9.45
    
    
    $
    9.14
 
 Financial Highlights  Results of Operations
   
 Net Interest Income and Net Interest Margin
   
 1
    
    The efficiency ratio is noninterest expense divided by
total revenue (net interest income and noninterest income) 23




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
   
 Liquidity
    
 Capital Management
    24




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalSeptember 30, 2007
    
    Capital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    55,869,296
    
    
    
    9.40
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    55,869,296
    
    
    
    10.19
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    61,318,404
    
    
    
    11.18
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of CommerceLeverage
    
    $
    56,116,414
    
    
    
    9.31
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    56,116,414
    
    
    
    10.23
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    61,565,522
    
    
    
    11.23
    %
    
    
    10.0
    %
    
    
    8.0
    %
 
 Short and Long Term Borrowings
   
 Allowance for Loan and Lease Losses
  most significant
   25




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 
 Factors that may affect future results
       26




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 
 Critical Accounting Policies
   Preparation of financial statements
  Use of estimates
  Accounting Principles Generally Accepted in the United States of America
   27




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Allowance for Loan and Lease Losses (ALLL)
    Revenue recognition
  Stock-based Compensation
 Accounting for Stock Based
Compensation
 28




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  Income Taxes
  29




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  Table 1.
 
 Average Balances, Interest Income/Expense and Yields/Rates Paid
 (Unaudited, Dollars in thousands)
 Nine Months Ended
    
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    
    September 30, 2006Average
    
    
    
    
    
    
    
    Yield/
    
    
    
    Average
    
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    
    Rate
    
    
    
    Balance
    
    
    Interest
    
    
    
    RateEarning AssetsPortfolio Loans
    
    $
    424,593
    
    
    $
    26,779
    
    
    
    8.41
    %
    
    
    $
    388,886
    
    
    $
    23,881
    
    
    
    8.19
    %Tax-exempt Securities
    
    
    31,774
    
    
    
    936
    
    
    
    3.93
    %
    
    
    
    18,059
    
    
    
    494
    
    
    
    3.65
    %US Government Securities
    
    
    73,810
    
    
    
    2,446
    
    
    
    4.42
    %
    
    
    
    83,440
    
    
    
    2,575
    
    
    
    4.11
    %Federal Funds Sold
    
    
    14,809
    
    
    
    580
    
    
    
    5.22
    %
    
    
    
    17,335
    
    
    
    658
    
    
    
    5.06
    %Other Securities
    
    
    2,000
    
    
    
    67
    
    
    
    4.47
    %
    
    
    
    3,437
    
    
    
    113
    
    
    
    4.38
    %Average Earning Assets
    
    $
    546,986
    
    
    $
    30,808
    
    
    
    7.51
    %
    
    
    $
    511,157
    
    
    $
    27,721
    
    
    
    7.23
    %Cash & Due From Banks
    
    $
    14,084
    
    
    
    
    
    
    
    
    
    
    
    $
    14,161Bank Premises
    
    
    9,938
    
    
    
    
    
    
    
    
    
    
    
    
    6,500Allowance for Loan and Lease Losses
    
    
    ( 4,916
    )
    
    
    
    
    
    
    
    
    
    
    
    ( 4,459
    )Other Assets
    
    
    16,996
    
    
    
    
    
    
    
    
    
    
    
    
    14,969Average Total Assets
    
    $
    583,088
    
    
    
    
    
    
    
    
    
    
    
    $
    542,328Interest Bearing LiabilitiesDemand Interest Bearing
    
    $
    115,937
    
    
    $
    1,935
    
    
    
    2.23
    %
    
    
    $
    106,002
    
    
    $
    968
    
    
    
    1.22
    %Savings Deposits
    
    
    38,553
    
    
    
    885
    
    
    
    3.06
    %
    
    
    
    25,095
    
    
    
    209
    
    
    
    1.11
    %Certificates of Deposit
    
    
    215,219
    
    
    
    7,934
    
    
    
    4.92
    %
    
    
    
    182,478
    
    
    
    5,844
    
    
    
    4.27
    %Repurchase Agreements
    
    
    35,427
    
    
    
    1,012
    
    
    
    3.81
    %
    
    
    
    28,010
    
    
    
    794
    
    
    
    3.78
    %FHLB Borrowings
    
    
    44,396
    
    
    
    1,799
    
    
    
    5.40
    %
    
    
    
    64,597
    
    
    
    2,492
    
    
    
    5.14
    %Trust Preferred Borrowings
    
    
    15,000
    
    
    
    814
    
    
    
    7.24
    %
    
    
    
    15,000
    
    
    
    796
    
    
    
    7.08
    %Average Interest Bearing Liabilities
    
    
    464,532
    
    
    $
    14,379
    
    
    
    4.13
    %
    
    
    
    421,182
    
    
    $
    11,103
    
    
    
    3.51
    %Non interest Demand
    
    
    71,880
    
    
    
    
    
    
    
    
    
    
    
    
    78,388Other Liabilities
    
    
    1,419
    
    
    
    
    
    
    
    
    
    
    
    
    4,547Shareholder Equity
    
    
    45,257
    
    
    
    
    
    
    
    
    
    
    
    
    38,211Average
Liabilities and Stockholders Equity
    
    $
    583,088
    
    
    
    
    
    
    
    
    
    
    
    $
    542,328Net Interest Income and Net Interest Margin
    
    
    
    
    
    $
    16,429
    
    
    
    4.00
    %
    
    
    
    
    
    
    $
    16,618
    
    
    
    4.33
    %
  30




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  Table 2.
 
 Analysis of Changes in
Net Interest Income and Interest Expense(Unaudited)September 30, 2007
    
    
    over
    
    
    September 30, 2006(Dollars in thousands)
    
    Volume
    
    
    Rate
    
    
    TotalIncrease(Decrease) In
Interest IncomePortfolio Loans
    
    $
    2,467
    
    
    $
    431
    
    
    $
    2,898Tax-exempt Securities
    
    
    417
    
    
    
    25
    
    
    
    442US Government Securities
    
    
    (256
    )
    
    
    127
    
    
    
    (129
    )Federal Funds Sold
    
    
    (92
    )
    
    
    14
    
    
    
    (78
    )Other Securities
    
    
    (47
    )
    
    
    1
    
    
    
    (46
    )Total Increase
    
    $
    2,489
    
    
    $
    598
    
    
    $
    3,087Increase(Decrease) In Interest ExpenseInterest Bearing Demand
    
    $
    433
    
    
    $
    534
    
    
    $
    967Savings Deposits
    
    
    431
    
    
    
    245
    
    
    
    676Certificates of Deposit
    
    
    1,501
    
    
    
    589
    
    
    
    2,090Repurchase Agreements
    
    
    214
    
    
    
    4
    
    
    
    218FHLB Borrowings
    
    
    (777
    )
    
    
    84
    
    
    
    (693
    )Trust Preferred
Borrowings
    
    
    6
    
    
    
    12
    
    
    
    18Total Increase
    
    $
    1,808
    
    
    $
    1,468
    
    
    $
    3,276Net Increase
    
    $
    681
    
    
    $
    (870
    )
    
    $
    (189
    )
    31




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Noninterest Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Dollars in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Noninterest incomeService charges on deposit accounts
    
    $
    70
    
    
    $
    81
    
    
    $
    215
    
    
    $
    255Payroll and benefit processing fees
    
    
    90
    
    
    
    89
    
    
    
    287
    
    
    
    287Earnings on cash surrender value -
Bank owned insurance
    
    
    100
    
    
    
    80
    
    
    
    294
    
    
    
    231Net loss on sale of securities available-for-sale
    
    
    0
    
    
    
    (171
    )
    
    
    46
    
    
    
    (171
    )Net gain on sale of loans
    
    
    0
    
    
    
    90
    
    
    
    0
    
    
    
    90Merchant credit card service income, net
    
    
    109
    
    
    
    110
    
    
    
    297
    
    
    
    280Mortgage brokerage fee income
    
    
    21
    
    
    
    32
    
    
    
    56
    
    
    
    84Other Income
    
    
    136
    
    
    
    117
    
    
    
    447
    
    
    
    331Total Noninterest income
    
    $
    526
    
    
    $
    428
    
    
    $
    1,642
    
    
    $
    1,387
 .
  
 Noninterest Expense
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Dollars in Thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Noninterest ExpenseSalaries and related benefits
    
    $
    2,402
    
    
    $
    1,996
    
    
    $
    6,458
    
    
    $
    5,870Occupancy and equipment expense
    
    
    635
    
    
    
    467
    
    
    
    1,636
    
    
    
    1,350FDIC insurance premium
    
    
    13
    
    
    
    12
    
    
    
    39
    
    
    
    36Data processing expense
    
    
    82
    
    
    
    53
    
    
    
    227
    
    
    
    169Professional service fees
    
    
    216
    
    
    
    149
    
    
    
    663
    
    
    
    503Payroll and Benefit expense
    
    
    25
    
    
    
    24
    
    
    
    81
    
    
    
    78Deferred compensation expense
    
    
    105
    
    
    
    94
    
    
    
    303
    
    
    
    272Stationery and Supplies
    
    
    34
    
    
    
    71
    
    
    
    141
    
    
    
    180Postage
    
    
    39
    
    
    
    26
    
    
    
    106
    
    
    
    91Directors expense
    
    
    86
    
    
    
    45
    
    
    
    207
    
    
    
    170Other expenses
    
    
    391
    
    
    
    362
    
    
    
    1,356
    
    
    
    1,128Total Noninterest expense
    
    $
    4,028
    
    
    $
    3,299
    
    
    $
    11,217
    
    
    $
    9,847
 32




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)
   
 Income Taxes
     Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,Income Taxes
    
    2007
    
    2006
    
    2007
    
    2006Tax provision
    
    $
    693
    
    
    $
    915
    
    
    $
    2,315
    
    
    $
    2,979Effective tax rate
    
    
    34.2
    %
    
    
    35.4
    %
    
    
    34.4
    %
    
    
    37.6
    %
  Accounting for Uncertainty in Income Taxes
 33




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)
    September 30, 2007
    
    
    December 31, 2006Deferred Tax AssetsState Franchise taxes
    
    
    197,031
    
    
    
    276,048Deferred compensation
    
    
    1,888,885
    
    
    
    1,735,541Loan loss reserves
    
    
    2,260,163
    
    
    
    1,926,296Net unrealized losses on securities available-for-sale
    
    
    758,747
    
    
    
    655,559Other
    
    
    187,857
    
    
    
    208,910Total Deferred Tax Assets
    
    
    5,292,683
    
    
    
    4,802,354Deferred Tax LiabilitiesDepreciation
    
    
    (152,602
    )
    
    
    (229,998
    )Deferred loan origination costs
    
    
    (552,014
    )
    
    
    (413,431
    )Deferred state taxes
    
    
    (270,315
    )
    
    
    (245,348
    )Other
    
    
    (158,240
    )
    
    
    0Total Deferred Tax Liabilities
    
    
    (1,133,171
    )
    
    
    (888,777
    )Total Net Deferred Tax Asset
    
    $
    4,159,512
    
    
    $
    3,913,577
 
 Asset Quality
   Portfolio Loans
    
    September 30, 2007
    
    
    December 31, 2006Commercial and financial loans
    
    $
    146,164
    
    
    $
    121,754Real estate-construction loans
    
    
    121,936
    
    
    
    110,693Real estate-commercial
    
    
    165,594
    
    
    
    159,370Real estate-other
    
    
    25,698
    
    
    
    12,986Real estate-mortgage
    
    
    1,360
    
    
    
    4,278Installment
    
    
    153
    
    
    
    203Agricultural
    
    
    4,494
    
    
    
    3,971Other loans
    
    
    1,065
    
    
    
    937Less:Net deferred loan fees
    
    
    (232
    )
    
    
    (298
    )Allowance for loan losses
    
    
    (5,061
    )
    
    
    (4,904
    )Total net loans
    
    $
    461,171
    
    
    $
    408,990
 34




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)
    (Dollars in thousands)Non performing assets
    
    September 30, 2007
    
    
    December 31, 2006Nonaccrual loans
    
    $
    1,030
    
    
    $
    090 days
past due and still accruing interest
    
    
    0
    
    
    
    0Total nonaccrual loans
    
    
    1,030
    
    
    
    0Other Real Estate Owned
    
    
    0
    
    
    
    0Total non performing assets
    
    $
    1,030
    
    
    $
    0
 
 Allowance for Loan and Lease Losses (ALLL)
  Accounting for Contingencies Accounting by Creditors for Impairment of a Loan. Accounting for Contingencies
  35




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)
    Three Months Ended
    
    
    Nine Months Ended(Dollars in thousands)
    
    September 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,Allowance for Loan Losses
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Beginning balance for Loan Losses
    
    $
    4,943
    
    
    $
    4,502
    
    
    $
    4,904
    
    
    $
    4,316Provision for Loan Losses
    
    
    115
    
    
    
    72
    
    
    
    121
    
    
    
    226Charge offs:Commercial
    
    
    0
    
    
    
    (0
    )
    
    
    0
    
    
    
    (269
    )Real Estate
    
    
    0
    
    
    
    (0
    )
    
    
    0
    
    
    
    0Other
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (1
    )Total Charge offs
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (270
    )Recoveries:Commercial
    
    
    1
    
    
    
    180
    
    
    
    26
    
    
    
    475Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    2
    
    
    
    0
    
    
    
    10
    
    
    
    6Total Recoveries
    
    
    3
    
    
    
    180
    
    
    
    36
    
    
    
    481Ending Balance
    
    $
    5,061
    
    
    $
    4,753
    
    
    $
    5,061
    
    
    $
    4,753ALLL to total loans
    
    
    1.09
    %
    
    
    1.16
    %
    
    
    1.09
    %
    
    
    1.16
    %Net Charge offs to average loans
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.01
    %
 
 Securities Portfolio
    36




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)
   as of September 30, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated(Dollars in thousands)
    
    Costs
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    26,992
    
    
    $
    7
    
    
    $
    (395
    )
    
    $
    26,604Obligations of state and
political subdivisions
    
    
    23,697
    
    
    
    42
    
    
    
    (431
    )
    
    
    23,308Mortgage backed securities
    
    
    42,577
    
    
    
    1
    
    
    
    (1,011
    )
    
    
    41,567Other securities
    
    
    2,000
    
    
    
    0
    
    
    
    (56
    )
    
    
    1,944Total
    
    $
    95,266
    
    
    $
    50
    
    
    $
    (1,893
    )
    
    $
    93,423
 as of September 30, 2007Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Estimated(Dollars in thousands)
    
    Costs
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    35,954
    
    
    $
    19
    
    
    $
    (785
    )
    
    $
    35,188Obligations of state and
political subdivisions
    
    
    20,026
    
    
    
    129
    
    
    
    (159
    )
    
    
    19,996Mortgage backed securities
    
    
    41,558
    
    
    
    124
    
    
    
    (1,224
    )
    
    
    40,458Other securities
    
    
    2,000
    
    
    
    0
    
    
    
    (28
    )
    
    
    1,972Total
    
    $
    99,538
    
    
    $
    272
    
    
    $
    (2,196
    )
    
    $
    97,614
  37




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   
    
    Assets and liabilities may mature or reprice at different times (for example, if assets
reprice faster than liabilities and interest rates fall, earnings will initially decline);
    
    Assets and liabilities may reprice at the same time but by different amounts (for
example, the level of interest rates in the market is falling and the Company may reduce
rates paid on checking and savings deposit accounts by an amount that is less than the
general decline in market rates);
    
    Short-term and long-term market interest rates may change by different amounts (for
example, the shape of the yield curve may affect new loan yields and funding costs
differently); or
    
    The remaining maturities of various assets and liabilities may shorten or lengthen as
interest rates change (for example, if long-term mortgage rates decline sharply,
mortgage-backed securities held in the securities available-for-sale may prepay
significantly earlier than anticipated, which could reduce portfolio income.)
     38




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39




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ITEM 4. CONTROLS AND PROCEDURES
     40




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PART II. Other Information
 
 Item 1. Legal proceedings
  
 Item 1a. Risk Factors
  
 Item 2. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Total
    
    MaximumTotal Number
    
    
    
    
    
    Number of
    
    Approximate Dollarof Shares
    
    Average Price
    
    Shares
    
    Value of Shares thatPeriod
    
    Purchased
    
    Paid per Share
    
    Purchased
    
    may yet be PurchasedSeptember 1, 2007 through September 30, 2007
    
    
    169,336
    
    
    $
    11.40
    
    
    
    169,336
    
    
    $
    470,282
 
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
    
 41




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SIGNATURES
  BANK OF COMMERCE HOLDINGS
 Date:  November 9, 2007
    /s/ Linda J. MilesLinda J. MilesExecutive Vice President &
Chief Financial Officer 42