Bank of Commerce (BOCH) 10-Q 2009 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2009

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 jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1901 Churn Creek Road Redding, California	96002
(Address of principal executive offices)	(Zip Code)

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yeso Noo

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

Large accelerated filero	Accelerated filero	Non-accelerated filerþ	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

Outstanding shares of Common Stock, no par value, as of March 31, 2009: 8,711,495

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index to Form 10-Q

	PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets March 31, 2009, December 31, 2008 and March 31, 2008		4
Condensed Consolidated Statements of Income Three months ended March 31, 2009, December 31, 2008 and March 31, 2008		5
Consolidated Statement of Stockholders’ Equity		6
Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2009 and 2008		7
Notes to Condensed Consolidated Financial Statements		8
Item 2 Management’s Discussion and Analysis Of Financial Condition and Results of Operations		18
Company Overview		18
Risk Factors		20
Economic Conditions and Geographic Concentration		20
Current Financial and Credit Market Conditions may persist or worsen		21
Valuation of Investments and Impairment of Securities		21
Changes in interest rates could reduce the Company’s Net interest Income and Earnings		21
Lending Risks Associated with Commercial Banking and Construction Activities		22
Adequacy of Allowance for Loan and Lease Losses (ALLL)		22
Potential Volatility of Deposits		22
Dividends		22
Participation in the Treasury Departments Capital Purchase Program restricts our ability to raise the common stock dividend and may result in dilution of common stockholders		23
Changes in Accounting Policies or Accounting Standards could materially affect how the Company reports its Financial Results and Condition		23
Government Regulation and Legislation		24
Certain Ownership Restrictions under California and Federal Law		24
Negative Publicity could Damage our Reputation		25
Environmental Risks		25
Shares Eligible for Future Sale		25
Technology and Computer Systems		25
Company Stock Price may be volatile due to Other Factors		26
Executive Overview		27
Sources of Income		27
Financial Highlights — Results of Operations		28
Net Interest Income and Net Interest Margin		29
Liquidity		30
Capital Management		30
Short term borrowings		31
Provision for loan and lease losses		31
Factors that may affect future results		32
Critical accounting policies		32
Average balances, Interest Income/Expense and Yields/Rates paid		35
Analysis of changes in net interest income and interest expense		36
Noninterest Income		37
Noninterest Expense		37
Income taxes		38
Asset quality		39
Allowance for loan and lease losses (ALLL)		40
Quarterly Income Statement		42

2

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Index

Item 3 Quantitative and Qualitative Disclosure about Market Risk	43
Item 4T Controls and Procedures	45
PART II. OTHER INFORMATION
Item 1 Legal Proceedings	45
Item 1a Risk Factors	45
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3 Defaults Upon Senior Securities	45
Item 4 Submission of Matters to a Vote of Security Holders	45
Item 5 Other Information	45
Item 6 Exhibits	45
SIGNATURES	46
EX-31.1
EX-31.2
EX-32

3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited)

Dollars in thousands	March 31, 2009		Dec. 31, 2008			March 31, 2008
ASSETS
Cash and due from banks	$	38,965	$	33,716		$	12,737
Federal funds sold and securities purchased under agreements to resell		56,655		51,475			25,995
Cash and cash equivalents		95,620		85,191			38,732
Securities available-for-sale at fair value (including pledged collateral of $66,210 at March 31, 2009, $68,735 at December 31, 2008 and $57,274 at March 31, 2008)		105,538		131,687			62,090
Securities held-to-maturity, at cost (estimated fair value of $0 at March 31, 2009, $0 at December 31, 2008 and $10,646 at March 31, 2008)		—		—			10,421
Loans, net of the allowance for loan losses of $7,701 at March 31, 2009, $8,429 at December 31, 2008 and $5,815 at March 31, 2008		525,182		518,946			506,374
Bank premises and equipment, net		10,553		10,672			11,370
Other assets		28,443		27,718			22,248
TOTAL ASSETS	$	765,336	$	774,214		$	651,235
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand — noninterest bearing	$	66,351	$	79,988		$	71,722
Demand — interest bearing		138,231		143,871			140,624
Savings accounts		72,873		67,136			42,946
Certificates of deposit		270,490		264,287			229,006
Total deposits		547,945		555,282			484,298
Securities sold under agreements to repurchase		10,813		13,853			12,455
Federal Home Loan Bank borrowings		120,000		120,000			85,000
Other liabilities		7,716		7,036			7,633
Junior subordinated debt payable to unconsolidated subsidiary grantor trust		15,465		15,465			15,465
Total Liabilities		701,939		711,636			604,851
Commitments and contingencies
Stockholders’ Equity:
Preferred stock (liquidation preference of $1,000 per share; issued 2008) 2,000,000 authorized; 17,000 shares issued and outstanding in 2009, and December 31, 2008, no outstanding at March 31, 2008		16,573		16,551			—
Common stock , no par value, 50,000,000 shares authorized; 8,711,495 shares issued and outstanding at March 31, 2009, 8,711,495 at December 31, 2008 and 8,707,745 at March 31, 2008		9,679		9,650			9,550
Common Stock Warrant		449		449			—
Retained earnings		36,541		36,009			37,135
Accumulated other comprehensive income (loss), net of tax		155		(81	)		(301	)
Total stockholders’ equity		63,397		62,578			46,384
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	765,336	$	774,214		$	651,235

See accompanying notes to condensed consolidated financial statements.

4

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31, 2009, December 31, 2008 and March 31, 2008

	For the Quarter Ended:
	March 31,			December 31,			March 31,
Dollars in thousands, except for per share data	2009			2008			2008
Interest income:
Interest and fees on loans	$	8,049		$	8,028		$	9,131
Interest on tax-exempt securities		296			313			274
Interest on U.S. government securities		1,192			873			481
Interest on federal funds sold and securities purchased under agreements to resell		25			39			58
Interest on other securities		117			81			22
Total interest income		9,679			9,334			9,966
Interest expense:
Interest on demand deposits		307			411			750
Interest on savings deposits		281			383			290
Interest on certificates of deposit		1,881			1,975			2,376
Securities sold under repurchase agreements		14			22			84
Interest on FHLB and other borrowings		581			638			731
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trust		215			263			315
Total interest expense		3,279			3,692			4,546
Net interest income		6,400			5,642			5,420
Provision for loan and lease losses		1,425			3,620			600
Net interest income after provision for loan and lease losses		4,975			2,022			4,820
Noninterest income:
Service charges on deposit accounts		92			108			62
Payroll and benefit processing fees		134			118			129
Earnings on cash surrender value — Bank owned life insurance		86			86			83
Net gain on sale of securities available-for-sale		404			33			242
Net loss on sale of derivative swap transaction		—			—			(225	)
Merchant credit card service income, net		74			85			83
Mortgage brokerage fee income		—			4			10
Other income		75			156			181
Total noninterest income		865			590			565
Noninterest expense:
Salaries and related benefits		2,127			2,001			1,949
Occupancy and equipment expense		572			1,339			644
FDIC insurance premium		273			99			58
Data processing fees		111			52			78
Professional service fees		159			270			118
Payroll processing fees		34			30			33
Deferred compensation expense		119			120			111
Stationery and supplies		53			70			62
Postage		81			30			34
Directors’ expense		37			71			48
Other expenses		394			425			430
Total noninterest expense		3,960			4,507			3,565
Income (loss) before provision (benefit) for income taxes		1,880			(1,895	)		1,820
Provision (benefit) for income taxes		610			(1,237	)		591
Net income (loss)	$	1,270		$	(658	)	$	1,229
Less preferred dividend and accretion on preferred stock	$	(237	)	$	(0	)	$	(0	)
Income available to common shareholders	$	1,033		$	(658	)	$	1,229
Basic earnings (loss) per share	$	0.12		$	(0.07	)	$	0.14
Weighted average shares — basic		8,711			8,755			8,719
Diluted earnings (loss) per share	$	0.12		$	(0.07	)	$	0.14
Weighted average shares — diluted		8,711			8,802			8,748
Cash dividends per share	$	0.06		$	0.08		$	0.08

See accompanying notes to condensed consolidated financial statements.

5

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity
Three months ended March 31, 2009

																	Accumulated
																	Other Comp-
																	Income
	Comprehensive			Preferred		Preferred				Common		Stock		Retained			(Loss),
Dollars in Thousands	Income			Shares		Amount		Warrant		Shares		Amount		Earnings			net of tax			Total
Balance at December 31, 2008					17,000	$	16,551,268	$	448,732		8,711,495	$	9,649,672	$	36,008,866		$	(80,897	)	$	62,577,641
Comprehensive Income:
Net Income		1,270,015													1,270,015						1,270,015
Other Comprehensive Income:
Unrealized (loss) gain arising during the period on derivative transactions, net		—
Net holding loss on derivatives		—
Unrealized gains on securities, net of reclassification adjustment		473,885
Less: reclassification adjustment for gains included in net income, net of tax		(237,796	)
Other Comprehensive Income		—
Total Comprehensive Income		1,506,104																236,089			236,089
Accretion on Preferred Stock							22,437														22,437
Common cash dividends $ (0.06 per share)															(522,690	)					(522,690	)
Preferred stock dividend															(214,861	)					(214,861	)
Compensation expense associated with stock options													28,902								28,902
Balance at March 31, 2009					17,000	$	16,573,705	$	448,732		8,711,495	$	9,678,574	$	36,541,330		$	155,192		$	63,397,533

See accompanying notes to condensed consolidated financial statements.

6

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2009 and 2008

Dollars in thousands	March 31, 2009			March 31, 2008
Cash flows from operating activities:
Net income	$	1,272		$	1,229
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		1,425			600
Provision for depreciation and amortization		260			302
Compensation expense associated with stock options		29			28
Tax benefits from the exercise of stock options		—			—
Gain on sale of securities available-for-sale		(404	)		(242	)
Amortization of investment premiums and accretion of discounts, net		51			7
Loss on sale of derivative swap transaction		—			225
Gain on sale of fixed assets		—			(6	)
Deferred income taxes		193			(698	)
(Increase) in cash surrender value of bank owned life policies		(86	)		(83	)
Effect of changes in:
Other assets		548			(1,308	)
Deferred compensation		82			111
Deferred loan fees		11			(53	)
Other liabilities		598			92
Net cash from operating activities		3,979			204
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		11,820			765
Proceeds from sales of available-for-sale securities		20,379			16,682
Proceeds from maturities of held-to-maturity securities		—			138
Purchases of available-for-sale securities		(5,631	)		(11,383	)
Investment in bank owned life policies		(1,191	)		—
Loan origination, net of principal repayments		(7,672	)		(20,638	)
Purchases of Bank premises and equipment, net		(140	)		(831	)
Proceeds on sale of fixed assets		—			127
Net cash from investing activities		17,565			(15,140	)
Cash flows from financing activities:
Net decrease in demand and savings accounts		(13,541	)		(4,623	)
Net increase in certificates of deposit		6,204			15,290
Net decrease in securities sold under agreement to repurchase		(3,040	)		(3,058	)
Proceeds from Federal Home Loan Bank advances		210,000			80,000
Repayments of Federal Home Loan Bank advances		(210,000	)		(55,000	)
Cash dividends paid on common stock		(523	)		(700	)
Cash dividends paid on preferred stock		(215	)		—
Proceeds from stock options exercised		—			29
Common Stock repurchase		—			(504	)
Tax benefits from the exercise of stock options		—			—
Net cash (used) from financing activities		(11,115	)		31,434
Net increase in cash and cash equivalents		10,429			16,498
Cash and cash equivalents, beginning of period		85,191			22,234
Cash and cash equivalents, end of period	$	95,620		$	38,732
Supplemental disclosures:
Cash paid during the period for:
Income taxes	$	—		$	250
Interest		3,318			4,445

See accompanying notes to condensed consolidated financial statements.

7

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. Consolidation and Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Bank of Commerce Holdings (the “Holding Company”) and its subsidiaries Redding Bank of Commerce™, Roseville Bank of Commerce™ (“BOC” or the “Bank”) and Bank of Commerce Mortgage™ (collectively the “Company”). All significant inter-company balances and transactions have been eliminated. The condensed balance sheet as of December 31, 2008, which has been derived from audited financial statements audited by Moss Adams, LLP, independent public accountants, as indicated in their report not included herein, and the unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information contained in this report reflects all adjustments that in the opinion of management are necessary for a fair presentation of the results of the interim periods. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current financial statement presentation with no effect on previously reported equity and net income.

The accounting and reporting policies of the Company conform to 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.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2008 Annual Report on Form 10-K. The results of operations and cash flows for the 2009 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase agreements. Generally, federal funds are sold for a one-day period and securities purchased under agreements to resell are for no more than a 90-day period. Balances held in federal funds sold may exceed FDIC insurance limits.

     2. Recent Accounting pronouncements

On October 10, 2008, the FASB issued FAS 157-3,"Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active.” FAS 157-3 is a FASB Staff Position that clarifies the application of FASB Statement No. 157, “Fair Value Measurements,” for a non-active market and provides an illustrative example of key considerations in determining the fair value of financial assets under such conditions. The adoption of FAS 157-3 did not have a material impact on our consolidated financial statements.

On March 19, 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB No. 133”(SFAS 161).SFAS 161 requires expanded qualitative, quantitative and credit-risk disclosures about derivatives and hedging activities and their effects on the Companies financial position, financial performance and cash flows. SFAS 161 also clarifies that derivatives are subject to credit risk disclosures as required by SFAS No. 107,“Disclosures about Fair Value of Financial Instruments.”SFAS 161 is effective for the Companies financial statements for the year beginning on January 1, 2009. The adoption of SFAS No. 161 did not have a material impact on our consolidated financial statements.

On December 4, 2007, the FASB issued SFAS No. 141 (revised 2007),"Business Combinations”(SFAS 141R). SFAS 141R modifies the accounting for business combinations and requires, with limited exceptions, the acquirer in a business combination to recognize 100 percent of the assets acquired, liabilities assumed, and any non-controlling interest in the acquiree at the acquisition-date fair value. In addition, SFAS 141R requires the expensing of acquisition-related transaction and restructuring costs, and certain contingent assets and liabilities acquired, as well as contingent consideration, to be recognized at fair value. SFAS 141R also modifies the accounting for certain acquired income tax assets and liabilities. SFAS 141R is effective for new acquisitions consummated on or after January 1, 2009 and earlier adoption is not permitted.

In April 2009, the FASB issued the following three FSPsintended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities:

FSP FAS 157-4,“Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,”provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly. FSP FAS 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The provisions of FSP FAS 157-4 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 157-4 may have on the Company’s statements of income and condition.

8

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

FSP FAS 107-1 and APB 28-1,“Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Company’s statements of income and condition.

FSP FAS 115-2 and FAS 124-2,“Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may have on the Company’s statements of income and condition.

3. Earnings per Share

Basic earnings per share excludes dilution is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that subsequently shared in the earnings of the entity. Net income available to common stockholders is based on the net income of the Company adjusted for dividend payments and accretion associated with Preferred Stock. The following table displays the computation of earnings per share for the three months ended March 31, 2009 and 2008.

(Amounts in thousands, except per share data)

Earnings Per Share	March 31, 2009			March 31, 2008
Basic EPS Calculation:
Net Income	$	1,270		$	1,229
Less: preferred dividend		(215	)		—
Less: accretion on Preferred Stock		(22	)		—
Numerator: Earnings available to common stockholders	$	1,033		$	1,229
Denominator (average common shares outstanding)		8,711			8,719
Basic earnings per Share	$	0.12		$	0.14
Diluted EPS Calculation:
Net Income	$	1,270		$	1,229
Less: preferred dividend		(215	)		—
Less: accretion on Preferred Stock		(22	)		—
Numerator: Earnings available to common stockholders	$	1,033		$	1,229
Denominator:
Average common shares outstanding		8,711			8,719
Plus incremental shares from assumed conversions
Stock Options		—			29
Warrants		—			—
		8,711			8,748
Diluted earnings per Share	$	0.12		$	0.14
Anti-dilutive options not included in EPS Calculation		615			145
Anti-dilutive warrants not included in EPS Calculation		405			—

Vested stock options totaling 615,305 at an average price of $7.05 were outstanding as of March 31, 2009.

9

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

4. Stock Option Plans

For the first quarter of 2009, stock option compensation expense charged against income was $28,902 compared to $28,398 at March 31, 2008. At March 31, 2009, there was $234,401 of total unrecognized compensation costs related to non-vested share based payments which is expected to be recognized over a period of 3.6 years. No options were granted during the first quarter of 2009 or 2008.

During the three months ended March 31, 2009 and 2008 the Company received cash of $0 and $29,393 respectively, upon exercise of stock-based compensation arrangements.

5. Securities Portfolio

The Company’s available-for-sale securities consists of both debt and marketable equity securities. The portfolio is comprised of U.S. Treasury securities, U.S. Agency securities, mortgage-backed securities, and obligations of states and political subdivisions. Securities classified as available-for-sale are recorded at fair value. Unrealized gains and losses, after applicable income taxes, are reported in cumulative other comprehensive income. The Company uses the most current quotations to estimate the fair value of these securities.

The Company does not include federal funds sold as securities. These investments are included in cash and cash equivalents. Debt securities in the securities available-for-sale portfolio provide asset liquidity, in addition to the immediately liquid resources of cash and due from banks and federal funds sold.

Total available-for-sale securities decreased $26.1 million or 19.9% at March 31, 2009 compared to December 31, 2008. As of March 31, 2009, the Company has pledged a total of $66.2 million of securities for treasury, tax and loan accounts; public funds collateral; collateralized repurchase agreements and Federal Home Loan Bank borrowings.

The following table summarizes the amortized cost of the Company’s available-for-sale securities held on the date indicated.

	As of March 31, 2009
(Dollars in thousands)								Estimated
Available for sale securities	Amortized Costs		Unrealized Gains		Unrealized Losses			Fair Value
U.S. government & agencies	$	8,006	$	31	$	—		$	8,037
Obligations of state and political subdivisions		27,003		65		(1,424	)		25,644
Mortgage backed securities		70,282		1,840		(265	)		71,857
Other securities		0		0		0			0
Total	$	105,291	$	1,936	$	(1,689	)	$	105,538

10

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

	As of December 31, 2008
(Dollars in thousands)								Estimated
Available for sale securities	Amortized Costs		Unrealized Gains		Unrealized Losses			Fair Value
U.S. government & agencies	$	16,006	$	70	$	—		$	16,076
Obligations of state and political subdivisions		32,178		146		(1,303	)		31,021
Mortgage backed securities		83,657		1,278		(345	)		84,590
Total	$	131,841	$	1,493	$	(1,648	)	$	131,687

An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary. Significant judgment is required in the determination of whether an OTTI has occurred for an investment. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process. The ALCO Committee’s assessment of whether an OTTI loss should be recognized incorporates both quantitative and qualitative information. The ALCO Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific outlook. Management has evaluated all securities at March 31, 2009 and has determined that no securities are other than temporarily impaired. The following table presents the current fair value and associated unrealized losses on investments with unrealized losses at March 31, 2009. The table represents 37 securities compared with 40 securities at December 31, 2008. The table also discloses whether these securities have had unrealized losses for less than 12 months or for 12 months or longer.

March 31, 2009
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. government & agencies	$	0	$	0		$	0	$	0		$	0	$	0
Obligations of state and political subdivisions	$	20,906,886	$	(1,365,418	)	$	360,654	$	(59,346	)	$	21,267,540	$	(1,424,764	)
Mortgage backed securities	$	5,251,431	$	(25,921	)	$	2,130,969	$	(238,751	)	$	7,382,400	$	(264,672	)
Total temporarily impaired securities	$	26,158,317	$	(1,391,339	)	$	2,491,623	$	(298,097	)	$	28,649,940	$	(1,689,436	)

6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust

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

The proceeds from the issuance of the trust notes were transferred from the grantor trust to the Holding Company and from the Holding Company to the Bank as surplus capital. The trust notes accrue and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (“LIBOR”) plus 3.30%. The rate at March 31, 2009 was 4.39%. The rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the trust note is March 18, 2033, and the debt allows for prepayment after five years on the quarterly payment date.

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

11

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

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

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

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

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

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.

7. Preferred Stock and Warrants

Pursuant to a Letter Agreement dated November 14, 2008, and the Securities Purchase Agreement — Standard Terms the Company issued to the United States Department of the Treasury (“Treasury Department”) 17,000 shares of Bank of Commerce Holdings Series A Fixed Rate Perpetual Preferred Stock, without par value (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000 for a total price of $17 million. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company may not redeem the Series A Preferred Stock during the first three years except with the proceeds from a “qualified equity offering” (as defined in the Certificate of Determination described in Item 5.03). After three years, the Company may, at our option, redeem the Series A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock is generally non-voting. Prior to November 14, 2011, unless the Company has redeemed the Series A Preferred Stock or the Treasury Department has transferred the Series A Preferred Stock to a third party, the consent of the Treasury Department will be required for the Company to increase our common stock dividend or repurchase our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Securities Purchase Agreement. A consequence of the Series A Preferred Stock purchase includes certain restrictions on executive compensation that could limit the tax deductibility of compensation we pay to executive management.

As part of its purchase of the Series A Preferred Stock, the Treasury Department received a warrant (the “Warrant”) to purchase 405,405 shares of the Company’s common stock at an initial per share exercise price of $6.29. The Warrant provides for the adjustment of the exercise price and the number of shares of our common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of our common stock, and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date. If, on or prior to December 31, 2009, the Company receives aggregate gross cash proceeds of not less than $17 million from “qualified equity offerings” announced after November 14, 2008, the number of shares of common stock issuable pursuant to the Treasury Department’s exercise of the Warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Securities Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

Both the Series A Preferred Stock and Warrant will be accounted for as components of Tier 1 capital.

12

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

The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Upon the request of the Treasury Department at any time, we have agreed to promptly enter into a deposit arrangement pursuant to which the Series A Preferred Stock may be deposited and depositary shares (“Depositary Shares”) may be issued. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual restrictions on transfer, except that the Treasury Department may only transfer or exercise an aggregate of one-half of the Warrant Shares prior to the earlier of the redemption of 100% of the shares of Series A Preferred Stock and December 31, 2009.

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

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

The proceeds from Treasury were allocated based on the relative fair value of the warrants as compared with the fair value of the preferred stock. The fair value of the warrants was determined using a valuation model which incorporates assumptions including the Company’s common stock price, dividend yield, stock price volatility and the risk-free interest rate. The fair value of the preferred stock is determined based on assumptions regarding the discount rate (market rate) on the preferred stock which was estimated to be approximately 9% at the date of issuance. The discount on the preferred stock will be accreted to par value over a five-year term, which is the expected life of the preferred stock. Capital Purchase Plan participants may “opt out” by repaying the capital without raising additional capital subject to consultation with the appropriate Federal regulator.

8. Commitments and contingent liabilities

Lease Commitments —The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all non-cancelable operating leases as of March 31, 2009 are below:

(Dollars in thousands)
Operating Leases
2009	$	389
2010		524
2011		454
2012		279
2013		155
Thereafter		606
Total	$	2,407
Minimum rental due in the future Under non-cancelable subleases	$	8

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

13

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

FHLB Advances —The Company has advances from the Federal Home Loan Bank of San Francisco (“FHLB”) totaling $120,000,000 as of March 31, 2009 and $85,000,000 as of March 31, 2008. The FHLB advances bear fixed interest rates ranging from 0.29% to 3.97%. Interest is payable monthly and semiannually. The following table illustrates borrowings outstanding at the end of the period:

Advance Amount	Interest Rate	Maturity
$70,000,000	0.29%	05/26/2009
$15,000,000	3.41%	04/29/2011
$35,000,000	3.97%	11/23/2009
$120,000,000

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 $5,640,000 and to pledge $95,470,373 of its real estate mortgage loans to the FHLB as collateral as of March 31, 2009. At March 31, 2009, the Bank had available borrowing lines at the FHLB of $36,993,995 and additional federal fund borrowing lines at two correspondent banks totaling $25,000,000.

Off-Balance Sheet Financial Instruments- In the ordinary course of business, the Company enters various types of transactions, which involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letter of credits, which are not reflected in the accompanying consolidated balance sheets. These transactions may involve, to varying degrees, credit and interest rate risk more than the amount, if any recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to customers.

These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but generally includes real estate, securities and cash. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Bank upon default of performance.

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

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

Credit Commitments	March 31, 2009		March 31, 2008
Unfunded loan commitments	$	151,329,729	$	184,065,127
Standby letters of credit		6,785,969		6,600,143
Guaranteed commitments outstanding		1,350,399		1,375,998
	$	159,466,097	$	192,041,268

14

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

9. Accounting for Income Tax Uncertainties (FIN 48)

In June 2006, the FASB issued Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the law is uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted this Statement on January 1, 2007. As a result of the implementation of Interpretation 48, it was not necessary for the Company to recognize any increase in the liability for unrecognized tax benefits. Additionally, there were no unrecognized tax liabilities or benefits as of March 31, 2009.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and California state jurisdiction

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

10. Fair Value Measurement

SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. Effective January 1, 2008 the Company adopted SFAS No. 157, which enhances the disclosures about financial instruments carried at fair value.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2009, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

15

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

(Dollars in thousands)

Recurring Basis

					Fair Value Measurements
					At March 31, 2009
			Quoted Prices in		Significant Other		Significant
			Active Markets For		Observable		Unobservable
	Fair Value		Identical Assets		Inputs		Inputs
Description	March 31, 2009		Level (1)		(Level 2)		(Level 3)
Available for sale securities	$	105,538	$	0	$	105,538	$	0
Total assets measured at fair value	$	105,538	$	0	$	105,538	$	0
Total liabilities measured at fair value	$	—			$	—

The following methods were used to estimate the fair value of each class of financial instrument above:

Securities available-for-sale- Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions among other things.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

16

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

Non Recurring Basis

					Fair Value Measurements
					At March 31, 2009
			Quoted Prices in		Significant Other		Significant
			Active Markets For		Observable		Unobservable		Gains
	Fair Value		Identical Assets		Inputs		Inputs		(Losses)
Description	March 31, 2009		Level (1)		(Level 2)		(Level 3)		During period
Impaired Loans	$	6,473	$	0	$	0	$	6,473	$	(555	)
Total assets measured at fair value	$	6,473	$	0	$	0	$	6,473	$	(555	)
Liabilities	$	0	$	0	$	0	$	0	$	0
Total liabilities measured at fair value	$	0	$	0	$	0	$	0	$	0

Impaired loans —When available, we use observable market data, including pricing on recent closed market transactions, to value loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114,“Accounting by Creditors for Impairment of a Loan,” (SFAS 114).

The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.

In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

The Company had outstanding balances of $19.6 and $20.2 million in impaired loans as of March 31, 2009 and December 31, 2008, respectively. During the period $555,000 in impaired loans were written down. Impairment allowances totaled $1.1 million and $1.1 million at March 31, 2009 and December 31, 2008, respectively.

On April 20, 2009 the Company sold $14.3 million in impaired loans and booked a recovery of $227,000. Following the loan sale, non performing assets were 1.08% of total assets compared to 2.94% of total assets at March 31, 2009.

17

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

Forward Looking Statements and Risk Factors

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

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 under the heading “Risk factors that may affect results.”Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following sections discuss significant changes and trends in the financial condition, capital resources and liquidity of the Company from December 31, 2008 to March 31, 2009. Also discussed are significant trends and changes in the Company’s results of operations for the three months ended March 31, 2009, compared to the same period in 2008. The consolidated financial statements and related notes appearing elsewhere in this report are condensed and unaudited. The following discussion and analysis is intended to provide greater detail of the Company’s financial condition and results.

Company Overview

Bank of Commerce Holdings (the “Holding Company”) is a corporation organized under the laws of California and a financial holding company (“FHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Holding Company’s principal business is to serve as a holding company for Redding Bank of Commerce™, Roseville Bank of Commerce™, and Bank of Commerce Mortgage™, and for other banking or banking-related subsidiaries which the Holding Company may establish or acquire (collectively the “Company”). The Holding Company also has two unconsolidated subsidiaries, Bank of Commerce Holdings Trust and Bank of Commerce Holdings Trust II. The Company is listed on the NASDAQ National Market under the trading symbol BOCH (Bank of Commerce Holdings).

The Bank was incorporated as a California banking corporation on November 25, 1981, and received its certificate of authority to begin banking operations on October 22, 1982. The Bank operates five full service facilities in three diverse markets in Northern California. Bank of Commerce is proud of its reputation as Northern California’s premier bank for business. During 2007, the Company re-branded “Bank of Commerce|Bank of Choice™” reflecting a renewed commitment to making Bank of Commerce thebank of choice™for local businesses with a fresh focus on family and personal finances.

The Mortgage subsidiary, Bank of Commerce Mortgage™, an affiliate of Bank of Commerce, principal business is mortgage brokerage services. The subsidiary has an affiliated business agreement with BWC Mortgage Services. Under the terms of the agreement, BWC Mortgage Services underwrites or brokers mortgage products, manages the independent contractors, supporting staff and broker relationships with secondary market lenders. Bank of Commerce Mortgage, through this agreement, provides office space, equipment, and marketing support for the mortgage brokerage business. All loans are sold in the secondary market. Bank of Commerce Mortgage™ pays ten percent of gross premiums earned to BWC Mortgage Services.

18

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

The Company will provide free of charge upon request, or through links to publicly available filings accessed through its Internet website, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon as reasonably practical after such reports have been filed with the Securities and Exchange Commission. The Internet addresses of the Company arewww.bankofcommerceholdings.com,www.reddingbankofcommerce.com,www.rosevillebankofcommerce.com, andwww.bankofcommercemortgage.com. Reports may also be obtained through the Securities and Exchange Commission’s website atwww.sec.gov.

The Holding Company’s principal source of income is dividends from its subsidiaries. The Holding Company conducts its corporate business operations at the administrative office of the Bank located at 1951 Churn Creek Road, Redding, California. The Company conducts its business operations in two geographic market areas, Redding and Roseville, California. The Company considers Upstate California to be the major market area of the Bank.

The Bank is principally supervised and regulated by the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”), and conducts a general commercial banking business in the counties of El Dorado, Placer, Shasta, and Sacramento, California. Through the Bank and mortgage subsidiaries, the Company provides a wide range of financial services and products for business and consumer banking. The services offered by the Bank include those traditionally offered by banks of similar size and character in California. Products such as free checking, interest-bearing checking (“NOW”) and savings accounts, money market deposit accounts, sweep arrangements, commercial, construction, term loans, travelers checks, safe deposit boxes, collection services and electronic banking activities. The Bank is an affiliate of LPL Financial and offers wealth management services through the affiliation.

The services offered by the Mortgage Company include single and multi-family residential new financing, refinancing and equity lines of credit. All mortgage products are brokered and are not maintained on the Bank’s books. It is important to note that Redding Bank of Commerce does not originate or hold sub-prime loans, nor do we hold collateralized debt obligations or asset backed securities backed by sub-prime loans in our securities portfolio.

Most of the Bank’s customers are small to medium sized businesses, professionals and other individuals with medium to high net worth, and most of the Bank’s deposits are obtained from such customers. The primary business strategy of the Bank is to focus on its lending activities. The Bank’s principal lines of lending are (i) commercial, (ii) real estate construction and (iii) commercial real estate.

The majority of the loans of the Bank are direct loans made to individuals and small businesses in the major market area of the Bank. The Mortgage Company provides residential real estate new financing, refinancing and equity lines of credit, 100% sold in the secondary market. A relatively small portion of the loan portfolio of the Bank consists of loans to individuals for personal, family or household purposes. The Bank accepts the following as collateral for loans: real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and other general business assets such as accounts receivable and inventory.

The commercial loan portfolio of the Bank consists of a mix of revolving credit facilities and intermediate term loans. The loans are generally made for working capital, asset acquisition, business-expansion purposes, and are generally secured by a lien on the borrowers’ assets. The Bank also makes unsecured loans to borrowers who meet the Bank’s underwriting criteria for such loans. The Bank manages its commercial loan portfolio by monitoring its borrowers’ payment performance and their respective financial condition, and makes periodic and appropriate adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The primary sources of repayment of the commercial loans of the Bank are the borrower’s conversion of short-term assets to cash and operating cash flow. The net assets of the borrower or guarantor and/or the liquidation of collateral are usually identified as a secondary source of repayment.

19

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

The principal factors affecting the Bank’s risk of loss from commercial lending include each borrower’s ability to manage its business affairs and cash flows, local and general economic conditions and real estate values in the Bank’s service area. The Bank manages risk through its underwriting criteria, which includes strategies to match the borrower’s cash flow to loan repayment terms, and periodic evaluations of the borrower’s operations. The Bank’s evaluations of its borrowers are facilitated by management’s knowledge of local market conditions and periodic reviews by a consultant of the credit administration policies of the Bank.

The real estate construction loan portfolio of the Bank consists of a mix of commercial and residential construction loans, which are principally secured by the underlying projects. The real estate construction loans of the Bank are predominately made for projects, which are intended to be owner occupied. The Bank also makes real estate construction loans for speculative projects. The principal sources of repayment of the Bank’s construction loans are sale of the underlying collateral or permanent financing provided by the Bank or another lending source. The principal risks associated with real estate construction lending include project cost overruns that absorb the borrower’s equity in the project and deterioration of real estate values as a result of various factors, including competitive pressures and economic downturns.

The Bank manages its credit risk associated with real estate construction lending by establishing maximum loan-to-value ratios on projects on an as-completed basis, inspecting project status in advance of controlled disbursements and matching maturities with expected completion dates. Generally, the Bank requires a loan-to-value ratio of no more than 80% on single-family residential construction loans.

The commercial and construction loan portfolio of the Bank consists of loans secured by a variety of commercial and residential real property. The Mortgage Company makes real estate mortgage loans for both owner-occupied properties and investor properties. The Mortgage Company brokers and sells the residential real estate loans directly in the secondary market, servicing included. The Bank does not provide for warehouse funding.

The specific underwriting standards of the Bank and methods for each of its principal lines of lending include industry-accepted analysis and modeling, and certain proprietary techniques. The Bank’s underwriting criteria is designed to comply with applicable regulatory guidelines, including required loan-to-value ratios. The credit administration policies of the Bank contain mandatory lien position and debt service coverage requirements, and the Bank generally requires a guarantee from the owners of its private corporate borrowers.

The Company continuously searches for expansion possibilities, through internal growth, strategic alliances, acquisitions or new office and product opportunities. Systematically, the Company will reevaluate the short and long-term profitability of all lines of business, and will not hesitate to reduce or eliminate unprofitable locations or lines of business. The Company remains a viable, independent bank by enhancing stockholder value. This has been realized by proactive management and commitment to staff, customers, and the markets served.

Risk Factors

Economic Conditions and Geographic Concentration

An economic slowdown could reduce demand for the Company’s products and services and lead to lower revenues and lower earnings. A change in California’s economic and business conditions may adversely affect the ability of our borrowers to repay their loans, causing us to incur higher credit losses. The Company earns revenue from interest and fees charged on loans and financial services. When the economy slows, the demand for these products and services may fall, reducing our interest and fee income, and our earnings. In addition, during periods of economic slowdown or recession, the Bank may experience a decline in collateral values and an increase in delinquencies and defaults due to the borrower’s ability to repay their loans. Several factors could cause the economy to slow down or even recede, including higher energy costs, higher interest rates, reduced consumer or corporate spending, a slowdown in housing, natural disasters, terrorist activities, military conflicts, and the normal cyclical nature of the economy.

The Company’s primary lending focus has historically been commercial real estate, commercial lending and, to a lesser extent, construction lending. At March 31, 2009, all of the Company’s real estate mortgage, real estate construction loans, and commercial real estate loans, were secured fully or in part by deeds of trust on underlying real estate. The Company’s dependence on real estate increases the risk of loss in the loan portfolio of the Company and its holdings of other real estate owned if economic conditions in California deteriorate in the future. Deterioration of the real estate market in California has had an adverse effect on the Company’s business, financial condition and results of operations.

20

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

Current financial and credit market conditions may persist or worsen, making it more difficult to access capital markets on favorable terms

Over the last year financial and credit markets have experienced unprecedented disruption and volatility. These conditions may continue or even worsen, affecting the Company’s ability to access capital markets on favorable terms. We may raise additional capital through the issuance of common stock, which could dilute existing stockholders, or reduce or eliminate our common stock dividend to preserve capital or in order to raise additional capital.

Valuation of Investments and Impairment of Securities

Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the fair value of these assets, it is possible that changes in risks in the near term could have an adverse material impact on our results of operations or equity.

Our investment portfolio is subject to market declines below amortized cost that may be other-than-temporary. A significant judgment in the valuation of investments is the determination of when an ‘other-than-temporary’ impairment has occurred. The ALCO Committee reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Any decline that is determined to be other-than-temporary is recorded as an ‘other-than-temporary’ impairment (“OTTI”) loss in the results of operations in the period in which the determination occurred.

An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI has occurred for an investment. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process.

The ALCO Committee’s assessment of whether an OTTI loss should be recognized incorporates both quantitative and qualitative information. The ALCO Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific outlook.

For securities considered to be OTTI, the security is adjusted to fair value and the resulting losses are recognized in Realized investment gains (losses) on the Consolidated Statements of Income.

Changes in Interest Rates could reduce the Company’s Net Interest Income and Earnings

The Company’s net interest income is the interest earned on loans, debt securities and other assets less the interest paid on deposits, long-term and short-term debt and other liabilities. Net interest income reflects both our net interest margin — the difference between the yield on earning assets and the interest paid on deposits and other sources of funding — and the amount (volume) of earning assets we hold. As a result, changes in either the net interest margin or the volume of earning assets could adversely affect our net interest income and earnings.

Changes in interest rates, up or down, could adversely affect the net interest margin. The yield we earn on our deposits and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other (timing differences). A significant portion of the Company’s assets are tied to variable rate pricing and the Company is considered to be asset sensitive. As a result, the Company is generally adversely affected by declining interest rates. In addition, changes in monetary policy, including changes in interest rates, influence the origination of loans, the purchase of investments and the generation of deposits, thereby affecting the rates received on loans and securities and paid on deposits, which could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Quantitative and Qualitative Disclosure about Market Risk.”

Changes in the slope of the “yield-curve”, or the spread between short-term and long-term interest rates could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning that short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, the Company will experience pressure on the net interest margin as the cost of funds increases relative to the yield that can be earned on assets.

21

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

The Company assesses interest rate risk by estimating the effect on earnings in various scenarios that differ based on assumptions about the direction, magnitude and speed of interest rate changes and the slope of the yield curve. The Company may hedge some interest rate risk with interest rate derivatives. The Company does not hedge all of its interest rate risk. There is risk that changes in interest rates could reduce our net interest income and earnings in material amounts, especially if actual conditions turn out to be materially different that the assumptions used in the model. One example: If interest rates rise or fall faster than assumed or the slope of the yield curve changes, the Company may incur losses on debt securities held as investments.

To reduce the interest rate risk, the Company may choose to rebalance the investment and loan portfolio, refinance debt outstanding or take other strategic actions. The Company may incur losses or expenses when taking such actions.

Lending Risks Associated with Commercial Banking and Construction Activities

The business strategy of the Company is to focus on commercial, single family and multi-family real estate loans, construction loans and commercial business loans. Loans secured by commercial real estate are generally larger and involve a greater degree of credit and transaction risk than residential mortgage (one-to-four family) loans. Because payments on loans secured by commercial and multi-family real estate properties are often dependent on successful operation or management of the underlying properties, repayment of such loans may be subject to a greater extent to the then prevailing conditions in the real estate market or the economy. Moreover, real estate construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Company may be confronted with a project which, when completed, has a value which is insufficient to assure full repayment of the construction loan. Although the Company manages lending risks through its underwriting and credit administration policies, no assurance can be given that such risks would not materialize, in which event the Company’s financial condition, results of operations, cash flows and business prospects could be materially adversely affected.

Adequacy of Allowance for Loan and Lease Losses (ALLL)

Higher credit losses could require the Company to increase the allowance for loan and lease losses through a charge to earnings. When the Company loans money or commits to loan money it incurs credit risk or the risk of losses if our borrowers do not repay their loans. The Company provides a reserve for credit risk by establishing an allowance through a charge to earnings. The amount of the allowance is based on an assessment of credit losses inherent in the loan portfolio (including unfunded credit commitments). The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair our borrower’s ability to repay their loans.

The Company might increase the allowance because of changing economic conditions or unexpected events. The Company’s allowance for loan and lease losses was approximately $7.7 million, or 1.45% of total loans at March 31, 2009.

Potential Volatility of Deposits

The Bank’s depositors could choose to take their money out of the bank and put it into alternative investments, causing an increase in funding costs and reducing net interest income. Checking, savings and money market account balances can decrease when customers perceive that alternative investments, such as the stock market, as providing a better risk/return tradeoff. When customers move funds out of bank deposits into other investments, the Bank will lose a relatively low cost source of funds, increasing funding costs.

At March 31, 2009, time certificates of deposit in excess of $100,000 represented approximately 25% of the dollar value of the total deposits of the Company. As such, these deposits are considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits could adversely affect the liquidity of the Company, profitability, business prospects, results of operations and cash flows. The Company monitors activity of volatile liability deposits on a quarterly basis.

Dividends

Bank of Commerce Holdings, the parent holding company, is a separate and distinct legal entity from its subsidiaries. The Company conducts no other significant activity than the management of its investment in the Bank and Mortgage Company and as such, the Company is dependent on these subsidiaries for income. The ability of the Bank and Mortgage Company to pay cash dividends in the future depends on the profitability, growth and capital needs of the Bank and Mortgage Company.

22

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

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

These dividends are used to pay dividends on common stock and interest and principal on debt. In addition, the California Financial Code restricts the ability of the Bank to pay dividends. No assurance can be given that the Company or the Bank will pay any dividends in the future or, if paid, such dividends will not be discontinued. Dividends from the Bank to the Holding Company are restricted under California law to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period, or, with the approval of California Superintendent of Banks, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year.

Participation in the Treasury Department’s Capital Purchase Program restricts our ability to raise the common stock dividend and may result in dilution of common stockholders

The U.S. government has taken action to restore liquidity and stability to financial and credit markets, including the enactment of the Emergency Economic Stabilization Act of 2008 (EESA) and the Troubled Asset Relief Program (TARP). As part of TARP, the Treasury Department implemented the Capital Purchase Program (CPP) to purchase senior preferred stock from qualifying financial institutions including Bank of Commerce Holdings. On November 14, 2008, we issued preferred securities and a common stock purchase warrant to the Treasury Department under the CPP. Prior to November 14, 2011, unless the Company has redeemed the preferred securities or the Treasury Department has transferred the securities to a third party, the Treasury Department’s consent will be required for us to increase our common stock dividend or repurchase our common stock other than in connection with benefit plans consistent with past practice. Under the anti-dilution provisions included in the terms of the department’s CPP investment, the per share exercise price of the warrant and the number of shares of our common stock issuable upon exercise of the warrant will be adjusted upon certain issuances of our common stock at or below a specified price relative to the initial exercise price. The exercise of the common stock purchase warrant could result in material dilution to existing common stockholders. As a condition to an additional CPP investment, the Company could be required to eliminate our common stock dividend.

As a participant in the CPP our business activities and corporate governance may be subject to additional restrictions and requirements, including requirements for lending activities and restrictions on compensation, some possibly with retroactive application, adopted by Congress, the Treasury Department or government agencies.

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

The Company’s accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Three of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amount would be reported under different conditions or using different assumptions (refer to “Critical Accounting Policies”).

From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of financial statements. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, SEC, banking regulators and outside auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond the Company’s control, can be hard to predict and could materially impact how we report our financial results and condition. The Company could be required to apply a new or revised standard retroactively or apply an existing standard differently, also retroactively, in each case resulting in restating prior period financial statements.

23

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

Government Regulation and Legislation

The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation, which govern almost all aspects of the operations of the Company and the Bank. The business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Such laws are subject to change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds and not for the protection of shareholders of the Company. The Company cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on the business and prospects of the Company, but it could be material and adverse.

Recent high-profile events have resulted in additional regulations. For example, Sarbanes-Oxley limits the types of non-audit services our outside auditors may provide to the company in order to preserve the independence of our auditors. If our auditors were found not to be “independent” under SEC rules, we could be required to engage new auditors and file new financial statements and audit reports with the SEC.

The Patriot Act which was enacted in the wake of the September 2001 terrorist attacks, requires the Company to implement new or revised policies and procedures related to anti-money laundering, compliance, suspicious activities, currency transaction reports and due diligence on customers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.

The American Recovery and Reinvestment Act of 2009 includes extensive new restrictions on the Company’s ability to pay retention awards, bonuses and other incentive compensation during the period in which the Company has any outstanding obligation arising from financial assistance provided to the Company under the TARP. Many of the restrictions are not limited to senior executives and cover other employees whose contributions to revenue and performance can be significant. The limitations may adversely affect the Company’s ability to recruit and retain key employees.

As long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to our common stock are prohibited until all accrued and unpaid dividends are paid on that preferred stock, subject to certain exceptions. In addition, until the U.S. Treasury ceases to own any of our securities sold under the TARP Capital Purchase Program, the compensation arrangements for the Company’s senior executive officers must comply with the U.S. Emergency Economic Stabilization Act of 2008 (EESA) and the rules and regulations thereunder. EESA requires the following provisions with respect to our Chief Executive Officer: limits on compensation to exclude incentives to take unnecessary and excessive risks; a claw-back with respect to incentive compensation based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; and a prohibition on golden parachute payments. EESA also limits the deductibility of compensation earned by our senior executive officers to $500,000 per year.

The American Recovery and Reinvestment Act of 2009 (Stimulus Act), which was signed into law on February 17, 2009, imposes extensive new restrictions on participants in the TARP Capital Purchase Program. The new restrictions include additional limits on executive compensation such as prohibiting the payment or accrual of any bonus, retention award or incentive compensation to the Company’s Chief Executive Officer except for the payment of long-term restricted stock; prohibiting any compensation plan that would encourage the manipulation of earnings; and extending the claw-back required by EESA to the top 5 most highly compensated employees. The Stimulus Act also requires compliance with new corporate governance standards including an annual “say on pay” shareholder vote, the adoption of policies regarding excessive or luxury expenditures, and a certification by our Chief Executive Officer and Chief Financial Officer that we have complied with the standards in the Stimulus Act. The full impact of the Stimulus Act is not yet certain because it calls for additional regulatory action. The Company will continue to monitor the effect of the Stimulus Act and the anticipated regulations.

From time to time, Congress considers legislation that could significantly change our regulatory environment, potentially increasing the cost of doing business, limiting activities or affecting the competitive balance among banks, savings associations, credit unions and other financial institutions.

Certain Ownership Restrictions under California and Federal Law

Federal law prohibits a person or group of persons “acting in concert” from acquiring “control” of a bank holding company unless the FRB has been given 60 days prior written notice of such proposed acquisition and within that time period the FRB has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days, the period during which such a disapproval may be issued. An acquisition may be made before the expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the action.

24

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

Under a rebuttal presumption established by the FRB, the acquisition of more than 10% of a class of voting stock of a bank with a class of securities registered under Section 12 of the Exchange Act (such as the common stock), would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any “company” would be required to obtain the approval of the FRB under the BHCA, before acquiring 25% (5% in the case of an acquirer that is, or is deemed to be, a bank holding company) or more of the outstanding shares of the Company’s common stock, or such lesser number of shares as constitute control. See “Regulation and Supervision of Bank Holding Companies” in the Company’s 2008 Annual Report on Form 10-K.

Under the California Financial Code, no person shall, directly or indirectly, acquire control of a California licensed bank or a bank holding company unless the Commissioner has approved such acquisition of control. A person would be deemed to have acquired control of the Company and the Bank under this state law if such person, directly or indirectly, has the power (i) to vote 25% or more of the voting power of the Company or (ii) to direct or cause the direction of the management and policies of the Company. For purposes of this law, a person who directly or indirectly owns or controls 10% or more of the common stock would be presumed to direct or cause the direction of the management and policies of the Company and thereby control the Company.

Negative Publicity could Damage our Reputation

Reputation risk, or the risk to the Company’s earnings and capital from negative public opinion, is inherent in the financial services business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from actual or alleged conduct in any number of activities, including lending practices, corporate governance, acquisitions, and from actions taken by government regulators and community organizations in response to that conduct.

Environmental Risks

The Company, in its ordinary course of business, acquires real property securing loans that are in default, and there is a risk that hazardous substance or waste, contaminants or pollutants could exist on such properties. The Company may be required to remove or remediate such substances from the affected properties at its expense, and the cost of such removal or remediation may substantially exceed the value of the affected properties or the loans secured by such properties. Furthermore, the Company may not have adequate remedies against the prior owners or other responsible parties to recover its costs. Finally, the Company may find it difficult or impossible to sell the affected properties either before or following any such removal. In addition, the Company may be considered liable for environmental liabilities concerning its borrowers’ properties, if, among other things, it participates in the management of its borrowers’ operations. The occurrence of such an event could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Shares Eligible for Future Sale

As of March 31, 2009, the Company had 8,711,495 shares of Common Stock outstanding, of which 6,409,494 shares are eligible for sale in the public market without restriction and 2,302,001 shares are eligible for sale in the public market pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Future sales of substantial amounts of the Company’s common stock, or the perception that such sales could occur, could have a material adverse effect on the market price of the common stock. In addition, options to acquire 615,305 shares of the issued and outstanding shares of common stock at exercise prices ranging from $5.42 to $11.59 have been issued to directors and certain employees of the Company under the Company’s 1998 Stock Option Plan. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Company’s common stock.

Technology and Computer Systems

Advances and changes in technology can significantly affect the business and operations of the Company. The Company faces many challenges including the increased demand for providing computer access to bank accounts and the systems to perform banking transactions electronically. The Company’s ability to compete depends on its ability to continue to adapt its technology on a timely and cost-effective basis to meet these requirements. In addition, the Company’s business and operations are susceptible to negative impacts from computer system failures, communication and energy disruption and unethical individuals with the technological ability to cause disruptions or failures of the Company’s data processing systems.

25

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

Company Stock Price may be volatile due to Other Factors

The Company’s stock price can fluctuate widely in response to a variety of factors, in addition to those described above, including:

• General business and economic conditions;

• Recommendations by securities analysts;

• New technologies introduced or services offered by our competitors;

• News reports relating to trends, concerns and other issues in the financial services industry;

• Natural disasters; and

• Geopolitical conditions, such as acts or threats of terrorism or military conflicts.

26

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

Executive Overview

Our Company was established to make a profitable return while serving the financial needs of the communities of our markets. We are in the financial services business, and no line of financial services is beyond our charter as long as it serves the needs of businesses and professionals in our communities. The mission of our Company is to provide its stockholders with a safe, profitable return on their investment, over the long term. Management will attempt to minimize risk to our stockholders by making prudent business decisions, will maintain adequate levels of capital and reserves, and will maintain effective communications with stockholders. Our Company’s most valuable asset is its customers. We will consider their needs first when we design our products and services. Thehigh-qualitycustomer experience is an important mission of our Company, and how well we accomplish this mission will have a direct influence on our profitability.

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

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

We define risks to include not only credit, market and liquidity risk — the traditional concerns for financial institutions — but also operational risks, including risks related to systems, processes or external events, as well as legal, regulatory and reputation risks.

Our management processes, structures and policies help to ensure compliance with laws and regulations and provide clear lines for decision-making and accountability. Results are important, but equally important is how we achieve those results. Our core values and commitment to high ethical standards is material to sustaining public trust and confidence in our Company. 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, 2008, under the heading “Risk Management”.

Sources of Income

The Company derives its income from two principal sources: (i) net interest income, which is the difference between the interest income it receives on interest-earning assets and the interest expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit services, income from SBA lending, electronic-based cash management services, mortgage brokerage fee income and merchant credit card processing services. The income of the Bank depends to a great extent on net interest income. These interest rate factors are highly sensitive to many factors, which are beyond the Company’s control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Because of the Bank’s predisposition to variable rate pricing and non-interest bearing demand deposit accounts, the Bank is considered asset sensitive. As a result, the Company is adversely affected by declining interest rates.

27

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

	March 31, 2009			March 31, 2008
Profitability Ratios
Net Interest Income to Average Assets		3.33	%		3.49	%
Net Income to Average Equity		8.05	%		10.54	%
Efficiency Ratio1		54.48	%		59.57	%
Capital Ratios
Leverage Ratio		9.53	%		9.15	%
Risk Based Capital	$	81,193,549		$	63,081,047
Tier 1 Capital		11.44	%		9.90	%
Total Capital		12.69	%		10.98	%
Per Common Share Data
Dividend Payout Ratio		41.09	%		56.92	%
Book Value	$	7.28		$	5.33
Market Price	$	5.04		$	8.00
High	$	5.05		$	8.59
Low	$	3.90		$	6.00

Financial Highlights — Results of Operations

Balance Sheet

Our Company believes that 2009 and beyond may be redefining the financial services industry. During 2009 and 2008, the focus of the Company has been on strengthening the balance sheet, by providing appropriate reserves, strong capital, and significant liquidity. Our strength and security continue to compare favorably with our industry peers.

Our balance sheet decreased by $8.9 million or 1.15% over the year end 2008. As a commercial bank, this is anticipated as customer funds are paid toward corporate taxes during the period. Loans, the single largest asset of the Company grew by $6.2 million over year end and $18.8 million over the same period a year ago.

Deposit balances decreased by $7.3 million over the year end 2008 for the same reasons as above. Deposits have increased $63.6 million over the same period a year ago, and can be attributed to the Buenaventura office opened during 2008.

Management has taken aggressive actions in provisioning for loan losses, charging down impairments and keeping an attentive eye on expenses.

The Commercial and Industrial portfolio is performing well given the current market conditions while real estate development properties and construction related lending remains under stress. Our loan portfolio will likely continue to be influenced by weakness in real estate values, the effects of higher energy prices and higher unemployment levels. Net charge offs were $2.1 million at March 31, 2009 compared to net charge offs of $3.0 million for the same period a year ago. The charge-offs were centered in real estate development loans. One development property was taken into other real estate owned (OREO) during 2008. OREO was $2.9 million at March 31, 2009 and zero for the same period a year ago. We are committed to working with our customers to find potential solutions when our customers experience financial difficulties.

Elevated provisions are associated with an aggressive reclassification of loans and management’s aggressive stance in recognizing impaired loans. Our Company has provided $1.4 million in provisions for loan and lease losses for the three months ended March 31, 2009 compared to $600,000 for the same period a year ago. The Company’s allowance for loan losses was 1.45% of total loans at March 31, 2009 compared to 1.14% of total loans for the same period a year ago.

Our Company continues to maintain a relatively low-risk, liquid and valuable available-for-sale investment portfolio.

¹ 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.

28

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

The capital ratios of Bank of Commerce continue to be above well-capitalized guidelines established by regulatory agencies. With our strong capital position, we find significantly more opportunities now for acquisitions, portfolio purchases and attractive loan and asset purchases.

On October 14, 2008, the FDIC expanded deposit insurance coverage with the new Transaction Account Guarantee Program under its Temporary Liquidity Guarantee Program. The new program provides customers of financial institutions that choose to participate in it full FDIC insurance for all deposit balances in noninterest-bearing transaction deposit accounts through December 31, 2009. Bank of Commerce has opted to participate in this program to provide an additional level of security to our customers.

Income Statement

Net income for the first quarter of 2009 totaled $1,270,000 an increase of 3.34% from the $1,229,000 reported for the same quarterly period of 2008. On the same basis, diluted earnings per common share for the first quarter of 2009 was $0.12, compared to $0.14 for the same period of 2008, a decrease of 14.3%. Return on average assets (ROA) and return on average equity (ROE) for the first quarter of 2009 were 0.66% and 8.05%, respectively, compared with 0.79% and 10.54%, respectively, for the first quarter of 2008.

Net Interest Income and Net Interest Margin

Net interest income is the primary source of the Company’s income. Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, securities and Federal Funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. Net interest income for the quarter ended March 31, 2009 was $6.4 million compared with $5.4 million for the same period in 2008, an increase of 18.1%.

Average earning assets for the three-months ended March 31, 2009 increased $134.7 million or 22.9% compared with the same period in the prior year. Average loans, the largest component of average earning assets, increased $20.3 million or 4.0% on average compared with the prior year period.

During the fourth quarter 2008, the Company used low cost Federal Home Loan Bank borrowings to purchase $50.0 million in investment securities. Average securities including federal funds sold increased $114.4 million over the same period a year ago. The yield on earning assets decreased to 5.37% for the three-month period ended March 31, 2009 compared to 6.80% for the same period a year ago.

The decrease in average earning asset yields is primarily due to multiple interest rate drops in the loan portfolio during the period.

Average deposits and borrowings increased by $108.0 million over the same period a year ago. The yield on funding costs decreased to 2.13% compared with 3.58% for the same period a year ago. Federal Home Loan Bank borrowings have seen a significant drop in costs as the Treasury continues to provide liquidity to the financial services industries.

¹ The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income)

29

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

Liquidity

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

The Asset Liability Management Committee (“ALCO”) establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid resources of cash and due from banks and federal funds sold, asset liquidity is supported by debt securities in the available for sale security portfolio and wholesale lines of credit with the Federal Home Loan Bank and borrowing lines with other financial institutions. Customer core deposits have historically provided the Company with a source of relatively stable and low-cost funds.

The Company’s consolidated liquidity position remains adequate to meet short-term and long-term future contingencies. At March 31, 2009, the Company had overnight investments of $95.6 million, available lines of credit at the Federal Home Loan bank of approximately $36.9 million, and two federal funds borrowing line with correspondent banks of $25.0 million.

Capital Management

The Company has an active program for managing stockholder capital. Capital is used to fund organic growth, acquisitions, pay dividends and repurchase shares. The objective of effective capital management is to produce above market long-term returns by using capital when returns are perceived to be high and issuing capital when costs are perceived to be low.

Periodically, the Board of Directors authorizes the Company to repurchase shares. Share repurchase announcements are published in press releases and SEC 8-K filings. Typically we do not give any public notice before repurchasing shares. Various factors determine the amount and timing of our share repurchases, including our capital requirements, market conditions and legal considerations. These factors can change at any time and there can be no assurance as to the number of shares repurchased or the timing of the repurchases.

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

The Company and bank are subject to various regulatory capital adequacy requirements as prescribed by the Federal Reserve Bank. Risk-based capital guidelines establish a risk-adjusted ratio relating capital to difference categories of assets and off-balance sheet exposures.

As of March 31, 2009, 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.

						Well			Minimum
			Actual			Capitalized			Capital
March 31, 2009	Capital		Ratio			Requirement			Requirement
The Company
Leverage	$	73,242,341		9.50	%		n/a			4.0	%
Tier 1 Risk-Based		73,242,341		11.45	%		n/a			4.0	%
Total Risk-Based		81,238,930		12.70	%		n/a			8.0	%
Redding Bank of Commerce
Leverage	$	73,196,960		9.53	%		5.0	%		4.0	%
Tier 1 Risk-Based		73,196,960		11.44	%		6.0	%		4.0	%
Total Risk-Based		81,193,549		12.69	%		10.00	%		8.0	%

30

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

Short and Long Term Borrowings

The Company actively uses Federal Home Loan Bank (“FHLB”) advances as a source of wholesale funding to support growth strategies as well as to provide liquidity. At March 31, 2009, the Company’s FHLB advances were of fixed term borrowings without call or put option features.

At March 31, 2009, the Bank had $120 million in FHLB term advances outstanding at an average rate of 1.92% compared to $80.5 million at an average rate of 3.60% at March 31, 2008.

Provision for Loan and Lease Losses

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

The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer, Sacramento and Tehama counties, in California, and the location of the four 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 March 31, 2009 and December 31, 2008, the Company had pledged $95,470,373 and $96,721,113, 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.

The allowance for loan and lease losses is the Company’smost significantmanagement accounting estimate. The Company follows a methodology for calculating the appropriate level for the allowance for loan and lease losses as discussed under “Asset Quality” and “Allowance for Loan and Lease Losses (ALLL)” in this document. The entire allowance is used to absorb credit losses inherent in the loan portfolio. The allowance includes an amount for imprecision or uncertainty to incorporate a range of probable outcomes inherent in estimates used for the allowance, which may change from period to period. This portion of the total allowance is the results of the Company’s judgment of risks inherent in the portfolio, economic uncertainties, historical loss experience and other subjective factors, including industry trends. The methodology used is refined to calculate a portion of the allowance for each portfolio type to reflect our view of the risk in these portfolios.

Changes in the estimate of the allowance for loan and lease losses and the related provision expense can materially affect net income. Determining the allowance for loan and lease losses requires management to make forecasts of losses that are highly uncertain and require a high degree of judgment.

Provision for loan and lease losses of $1,425,000 were provided for the three-months ended March 31, 2009 compared with $3,620,000 for the three-months ended December 31, 2008 and $600,000 for the three-months ended March 31, 2008. The Company’s allowance for loan and lease losses was 1.45% of total loans at March 31, 2009, 1.60% at December 31, 2008 and 1.14% at March 31, 2008, while its ratio of non-performing assets to total assets was 2.94% at March 31, 2009, 2.98% at December 31, 2008, and 2.45% at March 31, 2008. Two commercial credits totaling $1.6 million were charged off during the first quarter 2009.

31

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

Factors that may affect future results

As a financial services company, our earnings are significantly affected by general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economies in which we operate. For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans. Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts including the aftermath of the war with Iraq, could impact business conditions in the United States.

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

We operate in a highly competitive industry that could become even more competitive because of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can now merge creating a financial holding company that can offer virtually any type of financial service, including banking, securities underwriting, insurance (agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

The holding company, subsidiary bank and non-bank subsidiary are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not investors. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies including changes in interpretation and implementation could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer. Our failure to comply with the laws, regulations or policies could result in sanctions by regulatory agencies and damage our reputation. For more information, refer to the “Supervision and Regulation” section in the Company’s 2008 Annual Report on Form 10-K.

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

The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that our bank may pay to the holding company. For more information, refer to “Dividends and Other Distributions” in the Company’s 2008 Annual Report on Form 10-K.

Critical Accounting Policies

The Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods.

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 2 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company’s 2008 Annual Report on Form 10-K. Not all of the significant accounting policies presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2008 Annual Report on Form 10-K require management to make difficult, subjective or complex judgments or estimates.

32

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

Preparation of financial statements

The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.

Use of estimates

These estimates result in judgments regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. Actual results may differ from these estimates under different assumptions or conditions.

Accounting Principles Generally Accepted in the United States of America

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s significant accounting policies are presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2008 Annual Report on Form 10-K.

The Company follows accounting policies typical to the commercial banking industry and in compliance with various regulations and guidelines as established by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”) and the Bank’s primary federal regulator, the Federal Deposit Insurance Corporation (“FDIC”). The following is a brief description of the Company’s current accounting policies involving significant management judgments.

Valuation of Investments and Impairment of Securities

Invested assets are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain invested assets and the level of uncertainty related to changes in the fair value of these assets, it is possible that changes in risks in the near term could have an adverse material impact on our results of operations or equity.

Our investment portfolio is subject to market declines below amortized cost that may be other-than-temporary. A significant judgment in the valuation of investments is the determination of when an ‘other-than-temporary’ impairment has occurred. The ALCO Committee reviews the investment portfolio on at least a quarterly basis, with ongoing analysis as new information becomes available. Any decline that is determined to be other-than-temporary is recorded as an ‘other-than-temporary’ impairment (“OTTI”) loss in the results of operations in the period in which the determination occurred.

An investment is impaired if the fair value of the investment is less than its cost adjusted for accretion, amortization and OTTI, otherwise defined as an unrealized loss. When an investment is impaired, the impairment is evaluated to determine whether it is temporary or other-than-temporary.

Significant judgment is required in the determination of whether an OTTI has occurred for an investment. The Company follows a consistent and systematic process for determining and recording an OTTI loss. The Company has designated the ALCO Committee responsible for the OTTI process.

The ALCO Committee’s assessment of whether an OTTI loss should be recognized incorporates both quantitative and qualitative information. The ALCO Committee considers a number of factors including, but not limited to: (a) the length of time and the extent to which the fair value has been less than amortized cost, (b) the financial condition and near term prospects of the issuer, (c) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for an anticipated recovery in value, (d) whether the debtor is current on interest and principal payments and (e) general market conditions and industry or sector specific outlook.

For securities considered to be OTTI, the security is adjusted to fair value and the resulting losses are recognized in Realized investment gains (losses) on the Consolidated Statement of Income.

33

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

Allowance for Loan and Lease Losses (“ALLL”)

The allowance for loan and lease losses is the Company’smost significantmanagement accounting estimate. The allowance for loan and lease losses is management’s best estimate of the probable losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, which requires that losses on impaired loans be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The Company’s allowance for loan and lease losses is the accumulation of various components that are calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed pursuant to Statement of Financial Accounting Standards (“SFAS”) Statement No. 5,Accounting for Contingenciesor SFAS No. 114,Accounting by Creditors for Impairment of a Loan. Management’s estimate of each SFAS No. 5 component is based on certain observable data that management believes is the most reflective of the underlying credit losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data, taking into account the interaction of the SFAS No. 5 components over time.

An essential element of the methodology for determining the allowance for loan and lease losses is the Company’s credit risk evaluation process, which includes credit risk grading individual, commercial, construction, commercial real estate, and consumer loans. Loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement.

That process includes reviewing borrower’s current financial information, historical payment experience, credit documentation, public information, and other information specific to each individual borrower. Loans are reviewed on an annual or rotational basis and/or as management become aware of information affecting the borrower’s ability to fulfill its obligations. Credit risk grades carry a dollar weighted risk percentage.

For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, we measure impairment based on the present value of expected future principal and interest cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. When developing the estimate of future cash flows for a loan, we consider all available information reflecting past events and current conditions, including the effect of existing environmental factors. In addition to the ALLL, an allowance for unfunded loan commitments and letters of credit is determined using estimates of the probability of funding. This reserve is carried as a liability on the consolidated balance sheet.

Revenue recognition

The Company’s primary source of revenue is interest income. Interest income is recorded on an accrual basis. Note 2 to the Consolidated Financial Statements contained in the Company’s 2008 Annual Report on Form 10-K offers an explanation of the process for determining when the accrual of interest income is discontinued on an impaired loan.

Income Taxes

The Company files a consolidated federal and state income tax return. 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. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. The Company’s deferred tax assets are described further in Note 13 of the Notes to Consolidated Financial Statements in the Company’s 2008 Annual Report on Form 10-K.

34

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

The following table presents the Company’s daily average balance sheet information together with interest income and yields earned on average interest-bearing assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.

Table 1.

Average Balances, Interest Income/Expense and Yields/Rates Paid
(Unaudited, Dollars in thousands)

			Three Months Ended								Three Months Ended
			March 31, 2009								March 31, 2008
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Earning Assets
Portfolio Loans2	$	524,367		$	8,049		6.14	%	$	504,091		$	9,131		7.25	%
Tax-exempt Securities3		29,304			296		4.04	%		27,901			274		3.93	%
US Government Securities		11,316			127		4.49	%		15,272			142		3.72	%
Mortgage backed Securities		80,263			1,065		5.31	%		29,055			339		4.67	%
Federal Funds Sold		38,222			25		0.26	%		8,014			58		2.89	%
Other Securities		37,557			117		1.25	%		2,000			22		4.40	%
Average Earning Assets	$	721,029		$	9,679		5.37	%	$	586,333		$	9,966		6.80	%
Cash & Due From Banks	$	17,614							$	12,708
Bank Premises		10,623								11,303
Allowance for Loan Losses		( 8,402	)							(8,441	)
Other Assets		27,814								20,116
Average Total Assets	$	768,678							$	622,019
Interest Bearing Liabilities
Demand Interest Bearing	$	137,608		$	307		0.89	%	$	141,709		$	750		2.12	%
Savings Deposits		65,803			281		1.71	%		41,195			290		2.82	%
Certificates of Deposit		265,296			1,881		2.84	%		216,051			2,376		4.40	%
Repurchase Agreements		11,940			14		0.47	%		13,052			84		2.57	%
FHLB Borrowings		120,000			581		1.94	%		80,569			731		3.63	%
Trust Preferred Borrowings		15,000			215		5.73	%		15,000			315		8.40	%
		615,647		$	3,279		2.13	%		507,576		$	4,546		3.58	%
Noninterest bearing demand		74,637								66,825
Other Liabilities		5,219								995
Stockholders’ Equity		73,175								46,623
Average Liabilities and Stockholders’ Equity	$	768,678							$	622,019
Net Interest Income and Net Interest Margin				$	6,400		3.55	%				$	5,420		3.70	%

Interest income on loans includes FASB No. 91 fee expense of approximately $62,000 and FASB No. 91 fee income of approximately $36,000 for the period ended March 31, 2009 and 2008, respectively.

2	Average non-performing loans of $19.8 million are included
3	The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis.

35

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

The following tables set forth changes in interest income and expense for each major category of earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the periods indicated. Changes attributable to rate/volume have been allocated to volume changes.

Table 2

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

	March 31, 2009			Over			March 31, 2008
(Dollars in thousands)	Volume			Rate			Total
Increase(Decrease) In Interest Income
Portfolio Loans	$	311		$	(1,393	)		(1,082	)
Tax-exempt Securities		14			8			22
US Government Securities		(44	)		29			(15	)
Mortgage Back Securities		679			47			726
Federal Funds Sold		20			(53	)		(33	)
Other Securities		111			(16	)		95
Total Increase (Decrease)	$	1,091		$	(1,378	)	$	(287	)
Increase(Decrease) In Interest Expense
Interest Bearing Demand	$	(9	)	$	(434	)	$	(443	)
Savings Deposits		105			(114	)		(9	)
Certificates of Deposit		349			(844	)		(495	)
Repurchase Agreements		(1	)		(69	)		(70	)
FHLB Borrowings		191			(341	)		(150	)
Trust Preferred Borrowings		0			(100	)		(100	)
Total Increase (Decrease)	$	635		$	(1902	)	$	( 1,267	)
Net Increase	$	456		$	524		$	980

Average earning assets for the three-months ended March 31, 2009 increased $134.7 million or 22.9% compared with the same period in the prior year. Average loans, the largest component of average earning assets, increased $20.3 million or 4.0% on average compared with the prior year period.

During the fourth quarter 2008, the Company used low cost Federal Home Loan Bank borrowings to purchase $50.0 million in investment securities. Average securities including federal funds sold increased $114.4 million over the same period a year ago. The yield on earning assets decreased to 5.37% for the three-month period ended March 31, 2009 compared to 6.80% for the same period a year ago.

The decrease in average earning asset yields is primarily due to multiple interest rate drops in the loan portfolio during the period.

Average deposits and borrowings increased by $108.0 million over the same period a year ago. The yield on funding costs decreased to 2.13% compared with 3.58% for the same period a year ago. Federal Home Loan Bank borrowings have seen a significant drop in costs as the Treasury continues to provide liquidity to the financial services industries.

36

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

The Company’s non-interest income consists of service charges on deposit accounts, other fee income, processing fees for credit card payments and gains or losses on security sales. The following table sets forth a summary of noninterest income for the periods indicated.

Noninterest Income

	Three Months Ended
(Dollars in thousands)	March 31, 2009		March 31, 2008
Noninterest income
Service charges on deposit accounts	$	92	$	62
Payroll and benefit processing fees		134		129
Earnings on cash surrender value — Bank owned life insurance		86		83
Net gain on sale of securities available-for-sale		404		242
Net loss on sale of derivative swap		—		(225	)
Merchant credit card service income, net		74		83
Mortgage brokerage fee income		—		10
Other income		75		181
Total noninterest income	$	865	$	565

Noninterest income increased $300,000 or 53.1% for the quarter ended March 31, 2009 over March 31, 2008. The increase is primarily related to gains on available-for-sale investment securities that were sold during the period. All other items compare favorably to the prior period.

Noninterest Expense

	Three Months Ended
(Dollars in thousands)	March 31, 2009		March 31, 2008
Noninterest expense
Salaries and related benefits	$	2,127	$	1,949
Occupancy and equipment expense		572		644
FDIC insurance premium		273		58
Data processing fees		111		78
Professional service fees		159		118
Payroll processing fees		34		33
Deferred compensation expense		119		111
Stationery and supplies		53		62
Postage		81		34
Directors’ expense		37		48
Other expenses		394		430
Total noninterest expense	$	3,960	$	3,565

Noninterest expense for the quarter ended March 31, 2009 was $3.9 million, an increase of $395,000 or 11.08% over the same period a year ago. The increase is primarily related to the increase in FDIC insurance premium in anticipation of a 20 basis point special assessment during 2009. Salaries and benefits have increased $178,000 or 9.13% related to increased costs to employee insurance benefits during the period.

37

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

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.

The Company’s effective tax rate varies with changes in the relative amounts of its non-taxable income and non-deductible expenses. The decrease in the Company’s tax provision is attributable to increases in non-taxable income related to increases in the municipal security portfolio, classification of enterprise zone qualified credits and California Affordable Housing project which affords federal and state tax credits. The principal difference between statutory tax rates and the Company’s effective tax rate is the benefit derived from key life proceeds, investing in tax-exempt securities and preferential state tax treatment for qualified enterprise zone loans.

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

(Dollars in thousands)
Income Taxes	March 31, 2009			March 31, 2008
Tax provision	$	610		$	591
Effective tax rate		32.41	%		32.5	%

The Company’s provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Company’s net income before taxes. Increases and decreases in the provision for taxes reflect changes in the Company’s net income before tax, and takes into consideration strategies to increase tax exempt income and tax credits.

The Company had a net deferred tax asset of $4.7 million at March 31, 2009. The Company does not reasonably estimate that the deferred tax asset will change significantly within the next twelve months. Deferred tax assets are recognized subject to management judgment that realization is more likely than not. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.

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

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2009 consist of the following:

Deferred Tax Assets	March 31, 2009			March 31, 2008
State Franchise taxes	$	(72,047	)	$	186,193
Deferred compensation		2,174,628			1,962,157
Loan loss reserves		3,848,649			3,585,204
Other Comprehensive Income		(108,560	)		124,016
Other		24,768			398,793
Total Deferred Tax Assets	$	5,867,438		$	6,256,363
Deferred Tax Liabilities
Depreciation		(1,128,350	)		(180,882	)
Deferred loan origination costs					(452,281	)
Deferred state taxes					(413,227	)
Other		—			—
Total Deferred Tax Liabilities		(1,128,350	)		(1,046,390	)
Total Net Deferred Tax Asset	$	4,739,088		$	5,209,973

38

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

Asset Quality

The Company concentrates its lending activities primarily within El Dorado, Placer, Sacramento, Shasta, and Tehama counties, California, and the location of the Bank’s four full services branches, specifically identified as Upstate California. The Company manages its credit risk through diversification of its loan portfolio and the application of underwriting policies and procedures and credit monitoring practices. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay the loans is dependent upon the professional services, commercial real estate market and the residential real estate development industry sectors. Generally, the loans are secured by real estate or other assets located in California and are expected to be repaid from cash flows of the borrower or proceeds from the sale of collateral. The Company’s dependence on real estate increases the risk of loss in the loan portfolio of the Company and its holdings of other real estate owned as economic conditions in California continue to deteriorate in the future. Deterioration of the real estate market in California has had an adverse effect on the Company’s business, financial condition and results of operations. The recent slowdown in residential development and construction markets has led to an increase in nonperforming loans which has made it prudent to strengthen our reserve position at this time. Management has taken cautious steps to ensure the proper funding of loan reserves. Credit quality, expense control and the bottom line remain top focus. A number of larger institutions have announced significant losses. These losses stemmed from securities collateralized with sub-prime mortgages and other troubled assets. It is important to note thatRedding Bank of Commerce does not originate or hold sub-prime loans, nor do we hold collateralized debt obligations or asset backed securities backed by sub-prime loans in our securities portfolio. However, as a lending institution, we are not immune to the residential real estate slowdown.

The following table sets forth the amounts of loans outstanding by category as of the dates indicated:

(Dollars in thousands)
Portfolio Loans	March 31, 2009			December 31, 2008
Commercial and financial loans	$	167,162		$	164,083
Real estate-construction loans		73,155			84,218
Real estate-commercial		229,361			217,914
Real estate-mortgage		20,929			20,285
Real estate-other		41,363			39,915
Installment		155			145
Other loans		856			902
Less:
Net deferred loan costs (fees)		(98	)		(87	)
Allowance for loan losses		(7,701	)		(8,429	)
Total net loans	$	525,182		$	518,946

The Company’s practice is to place an asset on nonaccrual status when one of the following events occur: (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 are loans that are on nonaccrual, are 90 days past due and still accruing or have been restructured. The portfolio mix reflects increases in commercial real estate and the other real estate category. Construction and development loans have declined since December 31, 2008; and now represent 13.9% of total loans compared to 16.2% at December 31, 2008.

Non accrual and impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due and payable. The Bank had outstanding balances of $19.6 and $20.2 in impaired loans that had impairment allowances of $1,100,000 and $1,100,000 as of March 31, 2009 and December 31, 2008, respectively.

Subsequent to March 31, 2009, the Company received a new appraisal related to two credits totaling $3.5 million that are currently in nonaccrual status and considered impaired at March 31, 2009. The two credits relate to loan participations wherein the Company is not the lead lender. The lead lender ordered an updated appraisal for the collateral securing the two credits and forwarded it to the Company in April 2009. As part of the Company’s normal processes and controls related to the review and evaluation of appraisals from non-bank approved appraisers, the Company will evaluate the assumptions and other components used in the appraisal during the 2^nd quarter of 2009. The results of this evaluation will be incorporated into the Company’s FAS 114 analysis for these credits during the 2^nd quarter of 2009. The specific reserve for these credits is $500,000 at March 31, 2009. This reserve was determined based on discounted cash flow analysis. Management believes the $500,000 specific reserve for these credits is adequate and appropriate. However, management’s evaluation of the aforementioned appraisal and the related incorporation of the appraisal into management’s FAS 114 analysis could result in additional reserves being required for these credits and additional provisions to the Allowance for Loan and Lease Losses during the 2^nd quarter of 2009. On April 20, 2009 the Company sold $14.3 million in impaired loans and booked a recovery of $227,000. Following the loan sale non performing assets were 1.08% of total assets compared to 2.94% of total assets at March 31, 2009.

39

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

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

(Dollars in thousands)
Non performing assets	March 31, 2009		December 31, 2008
Nonaccrual loans	$	19,599	$	20,154
90 days past due and still accruing interest		0		0
Total nonaccrual loans		19,599		20,154
Other Real Estate Owned		2,934		2,934
Total non performing assets	$	22,533	$	23,088

The OREO is a single parcel of land located in the Company’s Sacramento, California market. Prior to foreclosure, the project was in the entitlement phase of development; the Company in coordination with the other participating banks will continue the entitlement processes in conjunction with establishing a marketing plan to ultimately dispose of the project. A recent valuation of the property fully supports any additional improvement costs until such time the property is sold. The Company’s foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose of the properties.

Material future additions to the allowance for loan losses may be necessary if material adverse economic conditions persist and the performance of the loan portfolio of the Company deteriorates. Future additions to the Company’s allowance for loan and lease losses may also be required to reflect market changes and other factors affecting the Company’s real estate and real estate related portfolios. Moreover, the FDIC and the DFI, as an integral part of their examination process, review the Company’s allowance for loan and lease losses and the carrying value of its assets. The Bank was most recently examined by the FDIC in this regard during the second quarter of 2008. No adjustments were made to management’s estimates for the allowance for loan and lease losses during the examination.

Non-performing assets were 2.94% of total assets as of March 31, 2009 compared to 2.98% at December 31, 2008. On April 20, 2009 the Company sold $14.3 million in impaired loans and booked a recovery of $227,000. Following the loan sale non-performing assets were 1.08% of total assets compared to 2.94% of total assets at March 31, 2009.

Allowance for Loan and Lease Losses (ALLL)

The allowance for loan and lease losses is management’s estimate of the amount of probable loan losses in the loan portfolio. The Company determines the allowance for loan losses based on an ongoing evaluation. The evaluation is inherently subjective because it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The Company makes provisions to the ALLL on a regular basis through charges to operations that are reflected in the Company’s statements of income as a provision for loan losses. When a loan is deemed uncollectible, it is charged against the allowance. Any recoveries of previously charged-off loans are credited back to the allowance. There is no precise method of predicting specific losses or amounts that ultimately may be charged-off on particular categories of the loan portfolio.

Material future additions to the allowance for loan losses might be necessary if material adverse changes in economic conditions occur and the performance of the loan portfolio of the Company deteriorates. Future additions to the Company’s allowance for loan and lease losses may also be required in order to reflect changes in the markets for real estate in which the Company’s real estate related portfolios are located and other factors which may result in adjustments which are necessary to ensure that the Company’s foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose of the properties.

Moreover, the FDIC and the DFI, as an integral part of their examination process, periodically review the Company’s allowance for loan and lease losses and the carrying value of its assets. The Bank was most recently examined by the FDIC in this regard during the second quarter of 2008. No adjustments were made to management’s estimates for the allowance for loan and lease losses during the examination.

The Company’s allowance for loan and lease losses is the accumulation of various components that are calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed pursuant to SFAS No. 5,Accounting for Contingenciesor SFAS No. 114,Accounting by Creditors for Impairment of a Loan.Management’s estimate of each SFAS No. 5Accounting for Contingenciescomponent is based on certain observable data that management believes is the most reflective of the underlying loan losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data, taking into account the interaction of the SFAS No. 5 components over time.

40

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

An essential element of the methodology for determining the allowance for loan and lease losses is the Company’s loan risk evaluation process, which includes loan risk grading individual commercial, construction, commercial real estate and most consumer loans. Loans are assigned loan risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrower’s current financial information, historical payment experience, loan documentation, public information, and other information specific to each individual borrower. Loans are reviewed on an annual or rotational basis or as management become aware of information affecting the borrower’s ability to fulfill its obligations. Loan risk grades carry a dollar weighted risk percentage.

The ALLL is a general reserve available against the total loan portfolio. It is maintained without any inter-allocation to the categories of the loan portfolio, and the entire allowance is available to cover loan losses. 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, various regulatory agencies, as an integral part of the examination process, periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination. Accordingly, it is not possible to predict the effect future economic trends may have on the level of the provision for loan losses in future periods. In addition to the ALLL, 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 condensed consolidated balance sheet.

The ALLL should not be interpreted as an indication that charge-offs in future periods will occur in the stated amounts or proportions.

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

(Dollars in thousands)
Allowance for Loan and Lease
Losses	March 31, 2009			March 31, 2008
Beginning balance for Loan Losses	$	8,429		$	8,233
Provision for Loan Losses		1,425			600
Charge offs:
Commercial		(1,658	)		(0	)
Real Estate		(497	)		(3,020	)
Other		(0	)		(0	)
Total Charge offs		(2,155	)		(3,020	)
Recoveries:
Commercial		1			0
Real Estate		0			0
Other		1			2
Total Recoveries		2			2
Ending Balance	$	7,701		$	5,815
ALLL to total loans		1.45	%		1.14	%
Net Charge offs to average loans		0.04	%		0.60	%

The allowance for loan and lease losses totaled $7.7 million at March 31, 2009 compared to $8.4 million at December 31, 2008 and $5.8 million at March 31, 2008. The Company’s allowance for loan losses was 1.45% of total loans at March 31, 2009, 1.60% at December 31, 2008 and 1.14% at March 31, 2008. Provisions for loan losses for the quarter ended March 31, 2009 were $1,425,000 compared to $600,000 for the same quarter in 2008.

The Company continues to be aggressive in identifying non-performing assets. Elevated provisions are associated with a reclassification of loans, following completion of a total portfolio review, and management’s aggressive stance in recognizing impaired loans. Two commercial credits totaling $1.6 million which were fully reserved were charged off during the first quarter 2009.

The Company’s ratio of non-performing assets to total assets was 2.94% at March 31, 2009, compared to 2.98% at December 31, 2008. The Company’s OREO consists of one commercial development property at $2.9 million.

41

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

QUARTERLY INCOME STATEMENT

	March 31,			December 31,			September 30,			June 30,			March 31,
Dollars in thousands, except for per share data	2009			2008			2008			2008			2008
Interest income:
Interest and fees on loans	$	8,049		$	8,028		$	8,252		$	8,171		$	9,131
Interest on tax-exempt securities		296			313			308			302			274
Interest on U.S. government securities		1,192			873			582			533			481
Interest on federal funds sold and securities purchased under agreements to resell		25			39			116			90			58
Interest on other securities		117			81			13			23			22
Total interest income		9,679			9,334			9,271			9,119			9,966
Interest expense:
Interest on demand deposits		307			411			514			498			750
Interest on savings deposits		281			383			543			360			290
Interest on certificates of deposit		1,881			1,975			1,963			2,238			2,376
Securities sold under repurchase agreements		14			22			32			35			84
Interest on FHLB and other borrowings		581			638			662			781			731
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trust		215			263			317			161			315
Total interest expense		3,279			3,692			4,031			4,073			4,546
Net interest income		6,400			5,642			5,240			5,046			5,420
Provision for loan and lease losses		1,425			3,620			1,300			1,000			600
Net interest income after provision for loan and lease losses		4,975			2,022			3,940			4,046			4,820
Noninterest income:
Service charges on deposit accounts		92			108			91			50			62
Payroll and benefit processing fees		134			118			107			99			129
Earnings on cash surrender value — bank owned life insurance		86			86			86			85			83
Net gain on sale of securities available-for-sale		404			33			159			194			242
Net loss on sale of derivative swap transaction		—			—			—			—			(225	)
Merchant credit card service income, net		74			85			99			97			83
Mortgage brokerage fee income		—			4			2			5			10
Other income		75			156			207			187			181
Total noninterest income		865			590			751			717			565
Noninterest expense:
Salaries and related benefits		2,127			2,001			1,909			1,892			1,949
Occupancy and equipment expense		572			1,339			613			640			644
FDIC insurance premium		273			99			113			113			58
Data processing fees		111			52			81			65			78
Professional service fees		159			270			146			133			118
Payroll processing fees		34			30			26			27			33
Deferred compensation expense		119			120			118			113			111
Stationery and supplies		53			70			50			80			62
Postage		81			30			32			38			34
Directors’ expense		37			71			81			94			48
Other expenses		394			425			443			418			430
Total noninterest expense		3,960			4,507			3,612			3,613			3,565
Income (loss) before provision for income taxes		1,882			(1,895	)		1,079			1,150			1,820
Provision (benefit) for income taxes		610			(1,237	)		362			244			591
Net income (loss)	$	1,270		$	(658	)	$	717		$	906		$	1,229
Less preferred dividend and accretion on preferred stock	$	(237	)	$	(0	)	$	(0	)	$	(0	)	$	(0	)
Income available to common shareholders	$	1,033		$	(658	)	$	717		$	906		$	1,229
Basic earnings (loss) per share	$	0.12		$	(0.07	)	$	0.08		$	0.10		$	0.14
Weighted average shares — basic		8,711			8,755			8,711			8,748			8,719
Diluted earnings (loss) per share	$	0.12		$	(0.07	)	$	0.08		$	0.10		$	0.14
Weighted average shares — diluted		8,711			8,802			8,713			8,751			8,748
Cash dividends per share	$	0.06		$	0.08		$	0.08		$	0.08		$	0.08

42

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Interest rate risk, which potentially can have a significant earnings impact, is an integral part of financial services. The Company is subject to interest rate risk for the following reasons:

• 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.)

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

The Board of Directors has overall responsibility for the Company’s interest rate risk management policies. The Company has an Asset/Liability Management Committee (“ALCO”) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. The internal ALCO Roundtable group maintains a net interest income forecast using different rate scenarios utilizing a simulation model. This group updates the net interest income forecast for changing assumptions and differing outlooks based on economic and market conditions.

The simulation model used includes measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative sensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experience, recognizing the timing differences of rate changes. In the simulation of net interest margin and net income the forecast balance sheet is processed against five rate scenarios. These five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in the future and four additional rate ramp scenarios ranging for + 200 to - 200 basis points in 100 basis point increments, unless the rate environment cannot move in these basis point increments before reaching zero.

43

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

The formal policies and practices adopted by the Company to monitor and manage interest rate risk exposure measure risk in two ways: (i) repricing opportunities for earning assets and interest-bearing liabilities and (ii) changes in net interest income for declining interest rate shocks of 100 to 200 basis points. Because of the Company’s predisposition to variable rate, pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a result, management anticipates that, in a declining interest rate environment, the Company’s net interest income and margin would be expected to decline, and, in an increasing interest rate environment, the Company’s net interest income and margin would be expected to increase. However, no assurance can be given that under such circumstances the Company would experience the described relationships to declining or increasing interest rates. Because the Company is asset sensitive, the Company is adversely affected by declining rates rather than rising rates.

To estimate the effect of interest rate shocks on the Company’s net interest income, management uses a model to prepare an analysis of interest rate risk exposure. Such analysis calculates the change in net interest income given a change in the federal funds rate of 100 or 200 basis points up or down. All changes are measured in dollars and are compared to projected net interest income. Management’s most recent calculation estimated an annualized reduction in net interest income attributable to a 50 and 100 basis point decline in the federal funds rate. At December 31, 2008, the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point decline in the federal funds rate was $741,121 and $1,036,979, respectively, with a similar and opposite result attributable to a 100 and 200 basis point increase in the federal funds rate.

The ALCO has established a policy limitation to interest rate risk of -14% of net interest margin and -20% of the present value of equity.

The securities portfolio is integral to our asset liability management process. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity, regulatory requirements and the relative mix of our cash positions.

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

The Company may use derivatives as part of our interest rate risk management, including interest rate swaps, caps and floors. At inception, the relationship between hedging instruments and hedged items is formally documented with our risk management objective, strategy and our evaluation of effectiveness of the hedge transactions. This includes linking all derivatives designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific transactions. Periodically, as required, we formally assess whether the derivative we designated in the hedging relationship is expected to be and has been highly effective in offsetting changes in fair values or cash flows of the hedged item. The Company’s use of derivatives is monitored by the Directors ALCO committee.

44

ITEM 4T. CONTROLS AND PROCEDURES

The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information required to be disclosed is accumulated and communicated to management in a timely manner. Management has reviewed this system of disclosure controls and procedures as of the end of the period covered by this report and believe that the system is operating effectively to ensure appropriate disclosure.

During the quarter ended March 31, 2009, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.

PART II. Other Information

Item 1. Legal proceedings

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

Item 1a. Risk Factors

There have been no material changes from the risk factors previously disclosed in the registrant’s Form 10-K.

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

None

Item 3. Defaults upon Senior Securities

N/A.

Item 4. Submission of Matters to a vote of Security Holders

N/A

Item 5. Other Information

Item 6. Exhibits

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

45

SIGNATURES

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

	BANK OF COMMERCE HOLDINGS                      (Registrant)
Date: May 1, 2009	/s/ Samuel D. Jimenez
	Samuel D. Jimenez
	Senior Vice President and Chief Financial Officer

46