##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005  Commission File Number 0-25135
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 BANK OF COMMERCE HOLDINGS
  California
    
    94-2823865(State or jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)1951 Churn Creek RoadRedding, California
    
    96002(Address of principal executive offices)
    
    (Zip Code)
  
   Common Stock, No Par Value per share
    
    NASDAQ National Market
 o þ
 Yes o No þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ
   Class
    
    Outstanding at February 28, 2006Common Stock, No par value per share
    
    8,662,896
 DOCUMENTS INCORPORATED BY REFERENCE
 Document
    
    Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Stockholders
    
    Part IIITo be held May 16, 2006 (Proxy Statement)




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##### Table of Contents



Bank of Commerce Holdings Form 10-K
 Table of Contents
 Part I.Item 1. Business
    
    
    4General
    
    
    4Primary market areas
    
    
    5Products and services
    
    
    5Government supervision and regulation
    
    
    7General
    
    
    7Dividends
    
    
    7Interstate Banking
    
    
    7Capital standards
    
    
    8Overview of the New Accord
    
    
    8State regulation and supervision
    
    
    9Changes in regulations
    
    
    9Prompt corrective action and other enforcement mechanisms
    
    
    9Safety and soundness standards
    
    
    10Community reinvestment act and fair lending developments
    
    
    10Recently enacted accounting rules
    
    
    10Competition
    
    
    12Employees
    
    
    12Item 1A) Forward Looking Statements and Risk factors that may affect results
    
    
    13Overview
    
    
    13Lending risks associated with commercial banking and construction activities
    
    
    14Dependence on real estate
    
    
    14Risks specific to operations in California
    
    
    14Interest rate risk
    
    
    15Potential volatility of deposits
    
    
    15Dividends
    
    
    15Government regulation and legislation
    
    
    15Economic conditions and geographical concentration
    
    
    15Reliance on key employees and others
    
    
    16Adequacy of allowance for loan and lease losses (ALLL)
    
    
    16Certain ownership restrictions under California and Federal law
    
    
    16Shares eligible for future sale
    
    
    16Technology and computer systems
    
    
    17Environmental risks
    
    
    17Dilution
    
    
    17Item 1B) Unresolved staff comments
    
    
    18Item 2. Properties
    
    
    18Item 3. Legal proceedings
    
    
    18Item 4. Submission of matters to a vote of security holders
    
    
    18Part II.Item 5. Market for Registrants common equity and related Shareholder matters
    
    
    19Equity compensation plan information
    
    
    20Item 6. Selected consolidated financial data
    
    
    22Item 7. Managements discussion and analysis of financial condition and results of operations
    
    
    22Executive overview
    
    
    22Risk Management
    
    
    23Liquidity risk management
    
    
    24Credit risk management
    
    
    25
 2




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Market risk management
    
    
    28Operational risk management
    
    
    28Critical accounting policies
    
    
    28General
    
    
    28Allowance for loan and lease losses (ALLL)
    
    
    29Stock-based compensation
    
    
    29Revenue recognition
    
    
    29Fixed Assets
    
    
    29Income taxes
    
    
    30Financial highlights  Results of operations
    
    
    30Key Financial Ratios
    
    
    30Sources of Income
    
    
    30Year ended December 31, 2005 compared to Year ended December 31, 2004
    
    
    31Year ended December 31, 2004 compared to Year ended December 31, 2003
    
    
    31Net Interest Income and net interest margin
    
    
    32Noninterest Income
    
    
    34Noninterest Expense
    
    
    34Income taxes
    
    
    35Asset Quality
    
    
    35Nonperforming assets
    
    
    36Available-for-sale securities
    
    
    36Deposit structure
    
    
    37Capital management and adequacy
    
    
    37Transactions with related parties
    
    
    38Impact of inflation
    
    
    39Commitments
    
    
    39Item 7a. Quantitative and qualitative disclosures to market risk
    
    
    40Item 8. Financial Statements and supplementary data
    
    
    42Item 9. Changes and disagreements with accountants
    
    
    78Item 9A. Controls and procedures
    
    
    78Part III.Item 10. Directors and Executive officers of the registrant
    
    
    79Item 11. Executive compensation
    
    
    79Item 12. Security ownership of beneficial owners and management and related stockholder matters
    
    
    79Item 13. Certain relationships and related transactions
    
    
    79Part IV.Item 14. Principal Accountant fees and services
    
    
    80Item 15. Exhibits, financial statements, certifications
    
    
    81EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  Documents Incorporated By Reference
  3




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PART I
 
 Item 1. BUSINESS
 
 General
  www.reddingbankofcommerce.com www.rosevillebankofcommerce.com www.sutterbankofcommerce.com www.sec.gov
    4




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Primary Market Areas
  
 Products and Services
   5




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6




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Government Supervision and Regulation
 The following discussion describes the elements of an extensive regulatory framework applicable to
financial holding companies and banks and specific information about the Holding Company and its
subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies
is intended primarily for the protection of depositors and the Bank Insurance Fund rather than for
the protection of stockholders and creditors.
 
 General
   
 Dividends
    
 Interstate Banking
 de
novo
 7




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




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State Regulation and Supervision
   
 Changes in Regulations
  
 Prompt Corrective Action and Other Enforcement Mechanisms
   Well
capitalized - Bank only
    

Adequately
capitalizedTotal risk-based capital of 10%;
    
    Total risk-based capital of 8%;Tier 1 risk-based capital of 6%; and
    
    Tier 1 risk-based capital of 4%; andLeverage ratio of 5%.
    
    Leverage ratio of 4%.
 9




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Undercapitalized
    

Significantly undercapitalizedTotal risk-based capital less than 8%;
    
    Total risk-based capital less than 6%;Tier 1 risk-based capital less than 4%; or
    
    Tier 1 risk-based capital less than 3%; orLeverage ratio less than 4%.
    
    Leverage ratio less than 3%.
 Critically undercapitalizedTangible equity to total assets less than 2%.
   
 Safety and Soundness Standards
   
 Community Reinvestment Act and Fair Lending Developments
  
 Recently Enacted Accounting Rules
 Accounting for Stock Based Compensation. Accounting for Stock Issued to Employees,
  10




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,
Accounting for Conditional Asset Retirement Obligations  an Interpretation of FASB Statement No.
143 .
 Accounting Changes and Error Corrections Accounting Changes, Reporting
Accounting Changes in Interim Financial Statements
 Accounting for Transfers of Financial
Assets. Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,
 11




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Competition
    
 Employees
  12




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ITEM 1A.
 Forward Looking Statements and Risk Factors That May Affect Results
 This report includes forward-looking statements within the meaning of the Securities Exchange
Act of 1934 (the Exchange Act) and the Private Securities Litigation Reform Act of 1995. These
statements are based on managements beliefs and assumptions, and on information available to
management as of the date of this document. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set forth under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements also include statements in which words such as expects, anticipates,
intend, plan, believes, estimate, consider or similar expressions or conditional verbs
such as will, should, would and could are intended to identify such forward looking
statements.. Forward-looking statements are not guarantees of future performance. They involve
risks, uncertainties and assumptions, including the risks discussed under the heading Risk Factors
That May Affect Results and elsewhere in this report. The Companys actual future results and
shareholder values may differ materially from those anticipated and expressed in these
forward-looking statements. Many of the factors that will determine these results and values,
including those discussed under the heading Risk Factors That May Affect Results, are beyond the
Companys ability to control or predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, the Company does not have any intention or and assumes no
obligation to update forward-looking statements after the date of the filing of this report, even
if new information, future events or other circumstances have made such statements incorrect or
misleading. Except as specifically noted herein all references to the Company refer to Bank of
Commerce Holdings, a California corporation, and its consolidated subsidiaries.
 
 Overview
      13




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




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Interest Rate Risk
  
 Potential Volatility of Deposits
  
 Dividends
  
 Government Regulation and Legislation
  
 Economic Conditions and Geographic Concentration
  15




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Reliance on Key Employees and Others
  
 Adequacy of Allowance for Loan and Lease Losses (ALLL)
  
 Certain Ownership Restrictions under California and Federal Law
   
 Shares Eligible for Future Sale
  16




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Technology and Computer Systems
   
 Environmental Risks
  
 Dilution
  
 ITEM 1(b). UNRESOLVED STAFF COMMENTS
  17




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




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PART II
 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
  Sales Price Per ShareQuarter Ended:
    
    High
    
    Low
    
    VolumeMarch 31, 2005
    
    $
    12.35
    
    
    $
    9.00
    
    
    
    107,051June 30, 2005
    
    $
    13.07
    
    
    $
    9.35
    
    
    
    95,929September 30, 2005
    
    $
    12.00
    
    
    $
    9.58
    
    
    
    156,528December 31, 2005
    
    $
    10.90
    
    
    $
    10.10
    
    
    
    95,224March 31, 2004
    
    $
    9.97
    
    
    $
    8.12
    
    
    
    165,741June 30, 2004
    
    $
    11.63
    
    
    $
    9.42
    
    
    
    63,972September 30, 2004
    
    $
    17.31
    
    
    $
    11.25
    
    
    
    339,007December 31, 2004
    
    $
    13.06
    
    
    $
    10.51
    
    
    
    108,119
    maximum
 19




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Equity Compensation Plan Information
  Number of securitiesremaining available forNumber of securities to be
    
    
    Weighted average exercise
    
    
    future issuance underissued upon exercise of
    
    
    price of outstanding
    
    
    equity compensation plansoutstanding options,
    
    
    options, warrants
    
    
    (excluding securitieswarrants and rights
    
    
    and rights
    
    
    reflected in column (a)).Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    608,316
    
    
    $
    5.20
    
    
    
    124,740Equity compensation
plans not approved
by security holders
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    608,316
    
    
    $
    5.20
    
    
    
    124,740
  20




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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
  In Thousands (Except Ratios and Per Share Data)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Statements of IncomeTotal Interest Income
    
    $
    27,864
    
    
    $
    20,996
    
    
    $
    19,279
    
    
    $
    18,565
    
    
    $
    20,216Net Interest Income
    
    $
    20,238
    
    
    $
    16,887
    
    
    $
    14,694
    
    
    $
    12,517
    
    
    $
    11,190Provision for Loan Losses
    
    $
    448
    
    
    $
    554
    
    
    $
    515
    
    
    $
    620
    
    
    $
    255Total Noninterest Income
    
    $
    2,124
    
    
    $
    2,196
    
    
    $
    2,150
    
    
    $
    2,091
    
    
    $
    2,823Total Noninterest Expense
    
    $
    11,748
    
    
    $
    10,620
    
    
    $
    9,660
    
    
    $
    8,267
    
    
    $
    7,143Total Revenues
    
    $
    29,988
    
    
    $
    23,192
    
    
    $
    21,429
    
    
    $
    20,656
    
    
    $
    23,039Net Income
    
    $
    6,278
    
    
    $
    4,978
    
    
    $
    4,183
    
    
    $
    3,696
    
    
    $
    4,274Balance SheetsTotal Assets
    
    $
    511,644
    
    
    $
    438,545
    
    
    $
    401,158
    
    
    $
    367,434
    
    
    $
    318,686Total Net Loans
    
    $
    363,305
    
    
    $
    318,801
    
    
    $
    278,204
    
    
    $
    280,351
    
    
    $
    216,960Allowance for Loan Losses
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916Total Deposits
    
    $
    372,116
    
    
    $
    352,878
    
    
    $
    327,539
    
    
    $
    314,447
    
    
    $
    281,436Stockholders Equity
    
    $
    39,138
    
    
    $
    35,283
    
    
    $
    30,511
    
    
    $
    27,667
    
    
    $
    27,240Performance Ratios 1Return on Average Assets 2
    
    
    1.34
    %
    
    
    1.22
    %
    
    
    1.10
    %
    
    
    1.09
    %
    
    
    1.49
    %Return on Average Stockholders Equity 3
    
    
    18.35
    %
    
    
    18.18
    %
    
    
    15.20
    %
    
    
    13.92
    %
    
    
    15.43
    %Dividend Payout
    
    
    35.74
    %
    
    
    39.29
    %
    
    
    42.09
    %
    
    
    46.57
    %
    
    
    41.94
    %Average Equity to Average Assets
    
    
    9.43
    %
    
    
    7.91
    %
    
    
    7.21
    %
    
    
    7.83
    %
    
    
    9.67
    %Tier 1 Risk-Based Capital-Bank 4
    
    
    12.08
    %
    
    
    10.80
    %
    
    
    10.77
    %
    
    
    9.14
    %
    
    
    10.93
    %Total Risk-Based Capital-Bank
    
    
    13.11
    %
    
    
    11.88
    %
    
    
    12.02
    %
    
    
    10.19
    %
    
    
    12.18
    %Net Interest Margin 5
    
    
    4.59
    %
    
    
    4.45
    %
    
    
    4.22
    %
    
    
    4.06
    %
    
    
    4.24
    %Average Earning Assets to Total Average Assets
    
    
    94.04
    %
    
    
    92.62
    %
    
    
    91.26
    %
    
    
    90.90
    %
    
    
    92.15
    %Nonperforming Assets to Total Assets 6
    
    
    0.08
    %
    
    
    0.54
    %
    
    
    1.16
    %
    
    
    .10
    %
    
    
    .11
    %Net Charge-offs to Average Loans
    
    
    .00
    %
    
    
    .12
    %
    
    
    .13
    %
    
    
    .01
    %
    
    
    .02
    %Allowance for Loan Losses to Total Loans
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %
    
    
    1.35
    %Nonperforming Loans to Allowance for Loan Losses
    
    
    9.15
    %
    
    
    61.64
    %
    
    
    126.34
    %
    
    
    0.20
    %
    
    
    11.97
    %Efficiency Ratio 7
    
    
    52.54
    %
    
    
    55.65
    %
    
    
    59.15
    %
    
    
    56.59
    %
    
    
    50.97
    %Share DataAverage Common Shares Outstanding  basic
    
    
    8,600
    
    
    
    8,283
    
    
    
    8,033
    
    
    
    8,013
    
    
    
    8,109Average Common Shares Outstanding  diluted
    
    
    8,845
    
    
    
    8,703
    
    
    
    8,327
    
    
    
    8,604
    
    
    
    8,568Book Value Per Common Share
    
    $
    4.52
    
    
    $
    4.27
    
    
    $
    3.80
    
    
    $
    3.45
    
    
    $
    3.36Basic Earnings Per Common Share
    
    $
    0.73
    
    
    $
    0.60
    
    
    $
    0.52
    
    
    $
    0.46
    
    
    $
    0.51Diluted Earnings Per Common Share
    
    $
    0.71
    
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.43
    
    
    $
    0.48Cash Dividends Per Common Share 8
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.22
 
 1
    
    Regulatory Capital Ratios and Asset Quality
Ratios are end of period ratios. With the exception of end of period ratios,
all ratios are based on average daily balances during the indicated period.2
    
    Return on average assets is net income divided
by average total assets.3
    
    Return on average equity is net income divided
by average stockholders equity.4
    
    Regulatory capital ratios are defined in
detail in the table on pages 37-38.5
    
    Net interest margin equals net interest income
as a percent of average interest-earning assets.6
    
    Non-performing assets includes all
nonperforming loans (nonaccrual loans, loans 90 days past due and still
accruing interest and restructured loans) and real estate acquired by
foreclosure.7
    
    The efficiency ratio is calculated by dividing
non-interest expense by the sum of net interest income and noninterest income.
The efficiency ratio measures how the Company spends in order to generate each
dollar of net revenue.8
    
    Cash dividends declared during the current
fiscal year 21




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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 The following discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and related notes thereto appearing elsewhere in this report. This report
includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the
Exchange Act) and the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and involve certain risks. These statements are based on
managements beliefs and assumptions, and on information available to management as of the date of
this document. Forward-looking statements include the information concerning possible or assumed
future results of operations of the Company set forth under the heading Managements Discussion
and Analysis of Financial Condition and Results of Operations. Forward-looking statements also
include statements in which words such as expects, anticipates, intend, plan, believes,
estimate, consider or similar expressions or conditional verbs such as will, should,
would and could are intended to identify such forward looking statements. The Companys actual
future results and stockholder values may differ materially from those anticipated and expressed in
these forward-looking statements. Many of the factors that will determine these results and
values, including those discussed under the heading Risk Factors That May Affect Results, are
beyond the Companys ability to control or predict. Investors are cautioned not to put undue
reliance on any forward-looking statements. In addition, the Company does not have any intention
to and assumes no obligation to update forward-looking statements after the date of the filing of
this report, even if new information, future events or other circumstances have made such
statements incorrect or misleading. Except as specifically noted herein all referenced to the
Company refer to Bank of Commerce Holdings, a California corporation, and its consolidated
subsidiaries.
 
 Executive Overview
      22




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Risk Management
 Overview
  Board Committees
  
    
    Loan Committee reviews credit risks and the adequacy of the allowance for loan losses.
    
    Asset/Liability Management Committee (ALCO) reviews liquidity and market risks.
    
    Audit Committee reviews the scope and coverage of internal and external audit activities.
    
    Nominating and Corporate Governance Committee evaluates corporate governance structure, charters, committee performance
and acts in best interests of the corporation and its stockholders with regard to the appointment of director nominees.
  Senior Leadership Committees
  
    
    The Senior Leadership Committee establishes short and long-term
strategies and operating plans. The committee establishes
performance measures and reviews performance to plan on a monthly
basis.
    
    The Credit Round Table Committee recommends corporate credit
practices and limits, including industry concentration limits and
approval requirements and exceptions.
    
    The Technology Steering Committee establishes technological
strategies, makes technology investment decisions, and manages the
implementation process.
    
    The ALCO Round Table Committee establishes and monitors liquidity
ranges, pricing, maturities, investment goals, and interest spread
on balance sheet accounts.
    
    The SOX 404 Compliance Team has established the master plan for
full documentation of the Companies internal controls and
compliance with the Sarbanes-Oxley Act, Section 404.
 Risk Management Controls
  23




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Liquidity Risk Management
 Liquidity Risk
       Short term borrowings
  2005
    
    
    2004
    
    
    2003Securities sold under agreements to repurchase with weighted average interest rates of
3.19%, 0.15% and 0.20% at December 31, 2005, 2004
and 2003, respectively
    
    $
    22,885,658
    
    
    $
    2,003,712
    
    
    $
    3,748,797Federal Home Loan Bank borrowings with weighted average interest rates of 4.17%, 2.56%
and 1.16% at December 31, 2005, 2004 and 2003, respectively
    
    
    55,000,000
    
    
    
    35,000,000
    
    
    
    30,000,000Total short term borrowings
    
    $
    77,885,658
    
    
    $
    37,003,712
    
    
    $
    33,748,797
 24




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Securities sold under agreements to repurchase:Maximum outstanding at any month end
    
    $
    24,308,869
    
    
    $
    10,238,525
    
    
    $
    5,497,582Average balance during the year
    
    
    17,812,885
    
    
    
    2,164,067
    
    
    
    3,899,800Weighted average interest rate during year
    
    
    2.42
    %
    
    
    2.44
    %
    
    
    2.45
    %Federal Home Loan Bank borrowings:Maximum outstanding at any month end
    
    $
    55,000,000
    
    
    $
    35,000,000
    
    
    $
    30,000,000Average Balance during the year
    
    
    34,032,738
    
    
    
    28,715,847
    
    
    
    14,820,597Weighted average interest rate during year
    
    
    3.37
    %
    
    
    1.53
    %
    
    
    1.49
    %
 
 Credit Risk Management
  Commercial portfolio credit risk management
   Real estate portfolio credit risk management
    25




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Concentrations of credit risk
  Nonperforming assets
  Allowance for loan and lease losses (ALLL)
   Accounting for Contingencies Accounting by Creditors for
Impairment of a Loan
   26




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##### Table of Contents



Years Ended December 31,
 (Dollars in thousands)

    
    Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Beginning Balance:
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916
    
    
    $
    2,710Provision for loan losses
    
    
    448
    
    
    
    554
    
    
    
    515
    
    
    
    620
    
    
    
    255Charge-offs:Commercial & Financial
    
    
    (83
    )
    
    
    (367
    )
    
    
    (379
    )
    
    
    (8
    )
    
    
    (191
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (18
    )
    
    
    (345
    )Other
    
    
    (10
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (0
    )
    
    
    (0
    )Total Charge-offs
    
    
    (93
    )
    
    
    (368
    )
    
    
    (380
    )
    
    
    (26
    )
    
    
    (536
    )Recoveries:Commercial & Financial
    
    
    93
    
    
    
    2
    
    
    
    11
    
    
    
    19
    
    
    
    35Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    452Other
    
    
    2
    
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    0Total Recoveries
    
    
    95
    
    
    
    5
    
    
    
    11
    
    
    
    19
    
    
    
    487Net Charge-offs
    
    
    2
    
    
    
    (363
    )
    
    
    (369
    )
    
    
    (7
    )
    
    
    (49
    )Ending Balance
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916Allowance for loan losses to
total loans
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %
    
    
    1.35
    %Net Charge-offs to average loans
    
    
    .00
    %
    
    
    .12
    %
    
    
    .13
    %
    
    
    .01
    %
    
    
    .02
    %
   Dec. 31, 2005
    
    
    Dec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002
    
    
    Dec. 30, 2001Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    ofcategory
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    categoryto total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total(Dollars in thousands)
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loansBalance at end of
period applicable to:Commercial and Financial
    
    $
    1,900
    
    
    
    30.76
    %
    
    $
    2,087
    
    
    
    32.64
    %
    
    $
    2,315
    
    
    
    37.01
    %
    
    $
    2,047
    
    
    
    34.84
    %
    
    $
    1,691
    
    
    
    34.96
    %Commercial Real Estate
    
    $
    1,375
    
    
    
    41.11
    %
    
    $
    1,149
    
    
    
    41.83
    %
    
    $
    878
    
    
    
    36.46
    %
    
    $
    952
    
    
    
    43.67
    %
    
    $
    787
    
    
    
    37.68
    %Construction and
Development
    
    $
    936
    
    
    
    27.57
    %
    
    $
    588
    
    
    
    23.95
    %
    
    $
    456
    
    
    
    23.64
    %
    
    $
    494
    
    
    
    14.29
    %
    
    $
    408
    
    
    
    20.60
    %Consumer Loans
    
    $
    28
    
    
    
    0.53
    %
    
    $
    23
    
    
    
    0.21
    %
    
    $
    20
    
    
    
    0.16
    %
    
    $
    20
    
    
    
    0.25
    %
    
    $
    16
    
    
    
    0.20
    %Other Loans
    
    $
    0
    
    
    
    0.00
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    0
    
    
    
    0.22
    %
    
    $
    0
    
    
    
    0.23
    %
    
    $
    0
    
    
    
    0.33
    %Unallocated
    
    $
    77
    
    
    
    0.03
    %
    
    $
    19
    
    
    
    1.37
    %
    
    $
    6
    
    
    
    2.51
    %
    
    $
    16
    
    
    
    6.72
    %
    
    $
    14
    
    
    
    6.23
    %Total Allowance for
loan and lease losses
    
    $
    4,316
    
    
    
    100.00
    %
    
    $
    3,866
    
    
    
    100.00
    %
    
    $
    3,675
    
    
    
    100.00
    %
    
    $
    3,529
    
    
    
    100.00
    %
    
    $
    2,916
    
    
    
    100.00
    %
 27




---



##### Table of Contents



Market Risk Management
   Securities Portfolio
 available-for-sale held-to-maturity held-to-maturity available-for-sale held-to-maturity
 
 Operational Risk Management
  
 Critical Accounting Policies
 
 General
  28




---



##### Table of Contents



Allowance for Loan and Lease Losses (ALLL)
   
 Stock-Based Compensation
 Accounting for
Stock Issued to Employees
 
 Revenue recognition
  
 Fixed Assets
  29




---



##### Table of Contents



Income Taxes
  
 Financial Highlights  Results of Operations
  
 Key Financial Ratios
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001ProfitabilityReturn on average assets
    
    
    1.34
    %
    
    
    1.22
    %
    
    
    1.10
    %
    
    
    1.09
    %
    
    
    1.49
    %Return on average equity
    
    
    18.35
    %
    
    
    18.18
    %
    
    
    15.20
    %
    
    
    13.92
    %
    
    
    15.43
    %Average earning assets to total average assets
    
    
    94.04
    %
    
    
    92.62
    %
    
    
    91.26
    %
    
    
    90.90
    %
    
    
    92.15
    %Interest MarginNet interest margin
    
    
    4.59
    %
    
    
    4.45
    %
    
    
    4.22
    %
    
    
    4.06
    %
    
    
    4.24
    %Asset QualityAllowance for loan losses to total loans
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %
    
    
    1.35
    %Nonperforming assets to total assets
    
    
    0.08
    %
    
    
    0.54
    %
    
    
    1.16
    %
    
    
    0.10
    %
    
    
    0.11
    %Net charge-offs to average loans
    
    
    0.00
    %
    
    
    0.12
    %
    
    
    0.13
    %
    
    
    0.01
    %
    
    
    0.02
    %LiquidityLoans to deposits
    
    
    97.63
    %
    
    
    90.34
    %
    
    
    84.94
    %
    
    
    89.16
    %
    
    
    77.09
    %Liquidity ratio
    
    
    23.57
    %
    
    
    23.23
    %
    
    
    25.49
    %
    
    
    18.32
    %
    
    
    25.69
    %CapitalTier 1 risk-based capital  Bank
    
    
    12.08
    %
    
    
    10.80
    %
    
    
    10.77
    %
    
    
    9.14
    %
    
    
    10.93
    %Total risk-based capital  Bank
    
    
    13.11
    %
    
    
    11.88
    %
    
    
    12.02
    %
    
    
    10.19
    %
    
    
    12.18
    %EfficiencyEfficiency ratio
    
    
    52.54
    %
    
    
    55.65
    %
    
    
    59.15
    %
    
    
    56.59
    %
    
    
    50.97
    %
 www.fdic.gov
 
 Sources of Income
  30




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##### Table of Contents



Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
     
 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
     31




---



##### Table of Contents



Net Interest Income and Net Interest Margin
      Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
 (Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest Earning AssetsPortfolio loans
    
    $
    337,284
    
    
    $
    24,070
    
    
    
    7.14
    %
    
    $
    297,679
    
    
    $
    18,445
    
    
    
    6.20
    %
    
    $
    284,841
    
    
    $
    17,655
    
    
    
    6.20
    %Tax-exempt securities
    
    
    9,966
    
    
    
    332
    
    
    
    3.33
    %
    
    
    6,582
    
    
    
    226
    
    
    
    3.43
    %
    
    
    3,832
    
    
    
    140
    
    
    
    3.65
    %US government securities
    
    
    35,779
    
    
    
    1,272
    
    
    
    3.56
    %
    
    
    28,220
    
    
    
    781
    
    
    
    2.77
    %
    
    
    21,650
    
    
    
    567
    
    
    
    2.62
    %Mortgage backed securities
    
    
    41,181
    
    
    
    1,639
    
    
    
    3.98
    %
    
    
    36,159
    
    
    
    1,394
    
    
    
    3.86
    %
    
    
    20,139
    
    
    
    724
    
    
    
    3.60
    %Federal funds sold
    
    
    15,225
    
    
    
    491
    
    
    
    3.22
    %
    
    
    10,304
    
    
    
    143
    
    
    
    1.39
    %
    
    
    17,833
    
    
    
    193
    
    
    
    1.08
    %Other securities
    
    
    1,384
    
    
    
    60
    
    
    
    4.34
    %
    
    
    382
    
    
    
    7
    
    
    
    1.83
    %
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %Average Earning Assets
    
    $
    440,819
    
    
    $
    27,864
    
    
    
    6.32
    %
    
    $
    379,326
    
    
    $
    20,996
    
    
    
    5.54
    %
    
    $
    348,295
    
    
    $
    19,279
    
    
    
    5.54
    %Cash & due from banks
    
    
    15,208
    
    
    
    
    
    
    
    
    
    
    
    17,351
    
    
    
    
    
    
    
    
    
    
    
    21,817Bank premises and fixed assets
    
    
    5,563
    
    
    
    
    
    
    
    
    
    
    
    5,373
    
    
    
    
    
    
    
    
    
    
    
    5,538Other assets
    
    
    7,172
    
    
    
    
    
    
    
    
    
    
    
    7,519
    
    
    
    
    
    
    
    
    
    
    
    5,998Average Total Assets
    
    $
    468,762
    
    
    
    
    
    
    
    
    
    
    $
    409,569
    
    
    
    
    
    
    
    
    
    
    $
    381,648Interest Bearing LiabilitiesInterest bearing demand
    
    $
    112,236
    
    
    $
    939
    
    
    
    0.84
    %
    
    $
    101,884
    
    
    $
    430
    
    
    
    0.42
    %
    
    $
    94,677
    
    
    $
    464
    
    
    
    0.49
    %Savings deposits
    
    
    26,542
    
    
    
    183
    
    
    
    0.69
    %
    
    
    23,384
    
    
    
    104
    
    
    
    0.44
    %
    
    
    22,483
    
    
    
    133
    
    
    
    0.59
    %Certificates of deposit
    
    
    149,204
    
    
    
    4,331
    
    
    
    2.90
    %
    
    
    138,434
    
    
    
    2,876
    
    
    
    2.08
    %
    
    
    146,152
    
    
    
    3,571
    
    
    
    2.44
    %Other borrowings
    
    
    51,934
    
    
    
    2,174
    
    
    
    4.19
    %
    
    
    35,880
    
    
    
    699
    
    
    
    1.95
    %
    
    
    18,720
    
    
    
    417
    
    
    
    2.23
    %Average Interest Liabilities
    
    $
    339,916
    
    
    
    7,627
    
    
    
    2.24
    %
    
    
    299,582
    
    
    
    4,109
    
    
    
    1.37
    %
    
    
    282,032
    
    
    
    4,585
    
    
    
    1.63
    %Noninterest bearing Demand
    
    
    80,219
    
    
    
    
    
    
    
    
    
    
    
    73,163
    
    
    
    
    
    
    
    
    
    
    
    62,957Other liabilities
    
    
    4,417
    
    
    
    
    
    
    
    
    
    
    
    4,440
    
    
    
    
    
    
    
    
    
    
    
    4,145Stockholders equity
    
    
    44,210
    
    
    
    
    
    
    
    
    
    
    
    32,384
    
    
    
    
    
    
    
    
    
    
    
    32,514Average Liabilities and
Stockholders equity
    
    $
    468,762
    
    
    
    
    
    
    
    
    
    
    $
    409,569
    
    
    
    
    
    
    
    
    
    
    $
    381,648Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    20,237
    
    
    
    4.59
    %
    
    
    
    
    
    $
    16,887
    
    
    
    4.45
    %
    
    
    
    
    
    $
    14,694
    
    
    
    4.22
    %
 32




---



##### Table of Contents



Analysis of Changes in Net Interest Income
Years ended December 31,
 (Dollars in thousands)
    
    2005 over 2004
    
    
    
    
    
    
    2004 over 2003Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalIncrease (Decrease)
In Interest Income:Portfolio loans
    
    $
    2,826
    
    
    $
    2,799
    
    
    $
    5,625
    
    
    $
    801
    
    
    $
    (11
    )
    
    $
    790Tax-exempt securities
    
    
    113
    
    
    
    (7
    )
    
    
    106
    
    
    
    94
    
    
    
    (8
    )
    
    
    86US government securities
    
    
    269
    
    
    
    222
    
    
    
    491
    
    
    
    182
    
    
    
    32
    
    
    
    214Mortgage backed securities
    
    
    200
    
    
    
    45
    
    
    
    245
    
    
    
    619
    
    
    
    51
    
    
    
    670Federal funds sold
    
    
    159
    
    
    
    189
    
    
    
    348
    
    
    
    (105
    )
    
    
    55
    
    
    
    (50
    )Other securities
    
    
    43
    
    
    
    10
    
    
    
    53
    
    
    
    7
    
    
    
    0
    
    
    
    7Total Increase (Decrease)
    
    
    3,610
    
    
    
    3,258
    
    
    
    6,868
    
    
    
    1,598
    
    
    
    119
    
    
    
    1,717(Decrease) Increase
In Interest Expense:Interest bearing demand
    
    
    87
    
    
    
    422
    
    
    
    509
    
    
    
    30
    
    
    
    (64
    )
    
    
    (34
    )Savings accounts
    
    
    22
    
    
    
    57
    
    
    
    79
    
    
    
    4
    
    
    
    (33
    )
    
    
    (29
    )Certificates of deposit
    
    
    313
    
    
    
    1,142
    
    
    
    1,455
    
    
    
    (165
    )
    
    
    (530
    )
    
    
    (695
    )Other borrowings
    
    
    672
    
    
    
    803
    
    
    
    1,475
    
    
    
    335
    
    
    
    (53
    )
    
    
    282Total (Decrease) Increase
    
    
    1,094
    
    
    
    2,424
    
    
    
    3,518
    
    
    
    204
    
    
    
    (680
    )
    
    
    (476
    )Net (Decrease) Increase
    
    $
    2,516
    
    
    $
    834
    
    
    $
    3,350
    
    
    $
    1,394
    
    
    $
    799
    
    
    $
    2,193
 33




---



##### Table of Contents



Noninterest Income
  (Dollars in thousands)
    
    Years Ended December 31,2005
    
    
    2004
    
    
    2003Noninterest income:Service charges on deposit accounts
    
    $
    394
    
    
    $
    476
    
    
    $
    348Payroll and benefit processing fees
    
    
    357
    
    
    
    343
    
    
    
    331Earnings on cash surrender-
Bank owned life insurance
    
    
    209
    
    
    
    259
    
    
    
    233Net realized gain on sale of
securities available-for-sale
    
    
    (2
    )
    
    
    0
    
    
    
    88Net gain on sale of loans
    
    
    146
    
    
    
    95
    
    
    
    101Merchant credit card service income, net
    
    
    346
    
    
    
    434
    
    
    
    408Mortgage brokerage fee income
    
    
    249
    
    
    
    186
    
    
    
    251Other income
    
    
    425
    
    
    
    403
    
    
    
    390Total Noninterest income
    
    $
    2,124
    
    
    $
    2,196
    
    
    $
    2,150
   
 Noninterest Expense
  (Dollars in thousands)
    
    Years Ended December 31,2005
    
    
    2004
    
    
    2003Salaries & related benefits
    
    $
    6,884
    
    
    $
    5,938
    
    
    $
    5,451Occupancy & equipment expense
    
    
    1,572
    
    
    
    1,534
    
    
    
    1,471FDIC insurance premium
    
    
    49
    
    
    
    48
    
    
    
    49Data processing fees
    
    
    303
    
    
    
    254
    
    
    
    217Professional service fees
    
    
    649
    
    
    
    803
    
    
    
    654Payroll processing fees
    
    
    111
    
    
    
    0
    
    
    
    0Deferred compensation expense
    
    
    321
    
    
    
    281
    
    
    
    256Stationery & supplies
    
    
    241
    
    
    
    208
    
    
    
    219Postage
    
    
    104
    
    
    
    97
    
    
    
    103Directors expenses
    
    
    220
    
    
    
    267
    
    
    
    241Other expenses
    
    
    1,295
    
    
    
    1,190
    
    
    
    999Total Noninterest expense
    
    $
    11,749
    
    
    $
    10,620
    
    
    $
    9,660
  34




---



##### Table of Contents



Income Taxes
   (Dollars in thousands)
    
    Years Ended December 31,2005
    
    
    2004
    
    
    2003Income tax provision
    
    $
    3,887
    
    
    $
    2,931
    
    
    $
    2,487Effective tax rate
    
    
    38.2
    %
    
    
    37.1
    %
    
    
    37.3
    %
 
 Asset Quality
   (Dollars in thousands)
    As of December 31,2005
    
    
    %
    
    
    2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %
    
    
    2001
    
    
    %Commercial & financial
    
    $
    115,401
    
    
    
    31.36
    %
    
    $
    105,545
    
    
    
    32.64
    %
    
    $
    104,509
    
    
    
    37.01
    %
    
    $
    99,084
    
    
    
    34.84
    %
    
    $
    76,913
    
    
    
    34.96
    %Real Estate-construction
    
    $
    105,094
    
    
    
    28.56
    %
    
    
    77,439
    
    
    
    23.95
    %
    
    
    66,741
    
    
    
    23.64
    %
    
    
    40,662
    
    
    
    14.29
    %
    
    
    45,331
    
    
    
    20.60
    %Real Estate-commercial
    
    $
    142,992
    
    
    
    38.86
    %
    
    
    135,260
    
    
    
    41.83
    %
    
    
    102,953
    
    
    
    36.46
    %
    
    
    124,210
    
    
    
    43.67
    %
    
    
    82,892
    
    
    
    37.68
    %Real Estate- mortgage
    
    $
    3,669
    
    
    
    1.00
    %
    
    
    4,423
    
    
    
    1.37
    %
    
    
    7,086
    
    
    
    2.51
    %
    
    
    19,126
    
    
    
    6.72
    %
    
    
    13,725
    
    
    
    6.23
    %Installment
    
    $
    439
    
    
    
    0.12
    %
    
    
    300
    
    
    
    0.10
    %
    
    
    451
    
    
    
    0.16
    %
    
    
    720
    
    
    
    0.25
    %
    
    
    440
    
    
    
    0.20
    %Other loans
    
    $
    446
    
    
    
    0.10
    %
    
    
    353
    
    
    
    0.11
    %
    
    
    632
    
    
    
    0.22
    %
    
    
    662
    
    
    
    0.23
    %
    
    
    709
    
    
    
    0.33
    %Gross Loans
    
    $
    368,041
    
    
    
    100.00
    %
    
    
    323,320
    
    
    
    100.00
    %
    
    
    282,372
    
    
    
    100.00
    %
    
    
    284,464
    
    
    
    100.00
    %
    
    
    220,010
    
    
    
    100.00
    %Less:Deferred loan fees and
costs
    
    
    420
    
    
    
    
    
    
    
    653
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    584
    
    
    
    
    
    
    
    134Allowance for Loan losses
    
    
    4,316
    
    
    
    
    
    
    
    3,866
    
    
    
    
    
    
    
    3,675
    
    
    
    
    
    
    
    3,529
    
    
    
    
    
    
    
    2,916Net Loans
    
    $
    363,305
    
    
    
    
    
    
    $
    318,801
    
    
    
    
    
    
    $
    278,203
    
    
    
    
    
    
    $
    280,351
    
    
    
    
    
    
    $
    216,960
  35




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##### Table of Contents



Nonperforming Assets
  (Dollars in thousands)
    
    As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Nonaccrual loans
    
    $
    372
    
    
    $
    2,383
    
    
    $
    3,931
    
    
    $
    0
    
    
    $
    5990 days past due and
still accruing interest
    
    
    0
    
    
    
    0
    
    
    
    712
    
    
    
    7
    
    
    
    290Total nonperforming loans
    
    
    372
    
    
    
    2,383
    
    
    
    4,643
    
    
    
    7
    
    
    
    349Other real estate owned
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    338
    
    
    
    0Total nonperforming assets
    
    $
    372
    
    
    $
    2,383
    
    
    $
    4,643
    
    
    $
    345
    
    
    $
    349
  Loan Maturity Schedule
  After One(Dollars in thousands)
    
    Within One Year
    
    
    through Five Years
    
    
    After Five Years
    
    
    TotalCommercial & financial
    
    $
    46,999
    
    
    $
    54,630
    
    
    $
    13,772
    
    
    $
    115,401Real Estate   construction
    
    
    101,188
    
    
    
    3,565
    
    
    
    341
    
    
    
    105,094Real Estate  commercial
    
    
    124,671
    
    
    
    8,116
    
    
    
    10,205
    
    
    
    142,992Real Estate
 mortgage
    
    
    732
    
    
    
    214
    
    
    
    2,723
    
    
    
    3,669Installment loans
    
    
    439
    
    
    
    0
    
    
    
    0
    
    
    
    439Other loans
    
    
    447
    
    
    
    0
    
    
    
    0
    
    
    
    447Total gross loans
    
    $
    274,476
    
    
    $
    66,525
    
    
    $
    27,041
    
    
    $
    368,042Loans due after one year
with:Fixed Rates
    
    
    
    
    
    $
    18,281
    
    
    $
    20,318
    
    
    $
    38,599Variable Rates
    
    
    
    
    
    
    48,244
    
    
    
    6,723
    
    
    
    54,967Total
    
    
    
    
    
    $
    66,525
    
    
    $
    27,041
    
    
    $
    93,566
 
 Available-for-sale securities
  Over One through
    
    
    Over Five through
    
    
    OverWithin One
    
    
    Five
    
    
    Ten
    
    
    Ten(Dollars in thousands)
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    TotalAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. government & agencies
    
    $
    5,501
    
    
    
    2.70
    %
    
    $
    35,296
    
    
    
    4.08
    %
    
    $
    2,997
    
    
    
    4.02
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    43,794
    
    
    
    3.93
    %Obligations of state and
political subdivisions
    
    
    71
    
    
    
    1.35
    %
    
    
    1,209
    
    
    
    2.30
    %
    
    
    3,363
    
    
    
    3.62
    %
    
    
    1,705
    
    
    
    3.57
    %
    
    
    6,348
    
    
    
    3.34
    %Mortgage backed securities
    
    
    0
    
    
    
    0.00
    %
    
    
    2,953
    
    
    
    3.34
    %
    
    
    14,277
    
    
    
    4.05
    %
    
    
    24,788
    
    
    
    4.34
    %
    
    
    42,018
    
    
    
    4.28
    %Corporate and other bonds
    
    
    2,046
    
    
    
    4.25
    %
    
    
    2,000
    
    
    
    4.48
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    4,046
    
    
    
    4.36
    %Bankers Acceptances
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Total
    
    $
    7,618
    
    
    
    2.83
    %
    
    $
    41,458
    
    
    
    4.00
    %
    
    $
    20,637
    
    
    
    3.97
    %
    
    $
    26,493
    
    
    
    4.30
    %
    
    $
    96,206
    
    
    
    4.00
    %
 36




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##### Table of Contents



Deposit Structure
  Years Ended December 31,(Dollars in thousands)
    
    2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldNOW accounts
    
    $
    84,070
    
    
    
    0.67
    %
    
    $
    75,154
    
    
    
    0.30
    %
    
    $
    52,508
    
    
    
    0.31
    %Savings
    
    
    26,542
    
    
    
    0.69
    %
    
    
    23,384
    
    
    
    0.44
    %
    
    
    22,483
    
    
    
    0.59
    %Money market accounts
    
    
    28,166
    
    
    
    1.32
    %
    
    
    26,730
    
    
    
    0.76
    %
    
    
    42,169
    
    
    
    0.74
    %Certificates of deposit
    
    
    149,204
    
    
    
    2.96
    %
    
    
    138,434
    
    
    
    2.08
    %
    
    
    146,152
    
    
    
    2.44
    %Other borrowings
    
    
    51,934
    
    
    
    3.04
    %
    
    
    35,880
    
    
    
    1.95
    %
    
    
    18,720
    
    
    
    2.23
    %Interest bearing deposits
    
    
    339,916
    
    
    
    
    
    
    
    299,582
    
    
    
    
    
    
    
    282,032Noninterest bearing deposits
    
    
    80,219
    
    
    
    
    
    
    
    73,163
    
    
    
    
    
    
    
    62,957Total
    
    $
    420,135
    
    
    
    
    
    
    $
    372,745
    
    
    
    
    
    
    $
    344,989
  Deposit Maturity Schedule
 (Dollars in thousands)
    
    2005Three months or less
    
    $
    42,826Three through six months
    
    
    21,589Six through twelve months
    
    
    21,589Over twelve months
    
    
    9,897Total
    
    $
    95,901
 
 Capital Management and Adequacy
    37




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##### Table of Contents



Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalDecember 31, 2005
    
    Capital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe Company
Leverage
    
    $
    50,427,990
    
    
    
    10.19
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    50,427,990
    
    
    
    12.05
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    54,744,369
    
    
    
    13.09
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of
Commerce
Leverage
    
    $
    50,530,699
    
    
    
    10.22
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    50,530,699
    
    
    
    12.08
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    54,841,378
    
    
    
    13.11
    %
    
    
    10.00
    %
    
    
    8.0
    %
  
 Transactions with Related Parties
    December 31,2005
    
    
    2004Balance at beginning of year
    
    $
    3,622,750
    
    
    $
    4,123,712New loan additions
    
    
    11,318
    
    
    
    541,097Other additions
    
    
    0
    
    
    
    0Principal repayments
    
    
    (1,779,317
    )
    
    
    (1,042,059
    )Balance at end of year
    
    $
    1,854,751
    
    
    $
    3,622,750
 38




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##### Table of Contents



Impact of Inflation
  
 Commitments
 Off-Balance Sheet Financial Instruments
  December 31,2005
    
    
    2004Off-balance sheet commitments:Commitments to extend credit
    
    $
    159,485,594
    
    
    $
    128,837,320Standby letters of credit
    
    
    9,771,080
    
    
    
    7,064,798
    Commitments and Contingent Liabilities
   Less than
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    One Year
    
    
    1 -3 Years
    
    
    3  5 Years
    
    
    yearsTrust Preferred obligation
    
    $
    15,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,310FHLB Borrowings
    
    $
    55,000
    
    
    $
    30,000
    
    
    $
    25,000
    
    
    
    
    
    
    
    Operating lease obligations
    
    $
    3,139
    
    
    $
    0
    
    
    $
    1,541
    
    
    $
    1,026
    
    
    $
    572Repurchase Agreements
    
    $
    22,886
    
    
    $
    22,886
    
    
    
    
    
    
    
    
    
    
    
    Time Certificates of Deposit
    
    $
    149,256
    
    
    $
    69,230
    
    
    $
    79,630
    
    
    $
    396
    
    
    
    Total
    
    $
    245,591
    
    
    $
    122,116
    
    
    $
    106,171
    
    
    $
    1,422
    
    
    $
    15,882
 39




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##### Table of Contents



ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      40




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##### Table of Contents



(Dollars in thousands)
    
    At December 31, 2005Within 3
    
    
    3 Months to
    
    
    One Year toMonths
    
    
    One Year
    
    
    Five Years
    
    Over Five Years
    
    
    TotalInterest-Earning AssetsHeld-to-maturity securities
    
    $
    130
    
    
    $
    
    
    
    $
    1,882
    
    
    $
    4,921
    
    
    $
    6,933Available-for-sale securities
    
    
    2,900
    
    
    
    10,366
    
    
    
    47,469
    
    
    
    33,279
    
    
    
    94,014Federal funds sold
    
    
    9,120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,120Loans, net
    
    
    283,022
    
    
    
    30,653
    
    
    
    46,399
    
    
    
    3,232
    
    
    
    363,306Total Interest-earning Assets
    
    $
    295,172
    
    
    $
    41,019
    
    
    $
    95,750
    
    
    $
    41,432
    
    
    $
    473,373Interest-Bearing LiabilitiesDemand  Interest bearing
    
    $
    
    
    
    
    15,201
    
    
    $
    62,420
    
    
    $
    31,480
    
    
    $
    109,101Savings Accounts
    
    
    
    
    
    
    
    
    
    
    16,524
    
    
    
    11,016
    
    
    
    27,540Certificates of deposit
    
    
    87,667
    
    
    
    48,680
    
    
    
    12,879
    
    
    
    30
    
    
    
    149,256Repurchase Agreements
    
    
    22,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,886Other borrowings
    
    
    8,333
    
    
    
    22,917
    
    
    
    23,750
    
    
    
    
    
    
    
    55,000Total Interest-bearing Liabilities
    
    $
    118,886
    
    
    $
    86,798
    
    
    $
    115,573
    
    
    $
    42,526
    
    
    $
    363,783GAP in dollars
    
    $
    176,286
    
    (
    $
    45,779
    )
    (
    $
    19,823
    )
    (
    $
    1,094
    )
    
    $
    109,590Cumulative GAP in dollars
    
    
    
    
    
    $
    130,507
    
    
    $
    110,684
    
    
    $
    109,590As a percentage of earning assets:GAP Ratio
    
    
    2.48
    
    
    
    0.47
    
    
    
    0.83
    
    
    
    0.97
    
    
    
    1.30Cumulative GAP Ratio
    
    
    2.48
    
    
    
    -1.12
    
    
    
    -0.21
    
    
    
    -0.03Gap as % of Earning Assets
    
    
    37.24
    %
    
    
    -9.67
    %
    
    
    -4.19
    %
    
    
    -0.23
    %
    
    
    23.15
    %Cumulative Gap as % of Earning
Assets
    
    
    37.24
    %
    
    
    27.57
    %
    
    
    23.38
    %
    
    
    23.15
    %
    
    
    23.15
    %Demand Deposits
    
    $
    39,414
    
    
    $
    946
    
    
    $
    27,472
    
    
    $
    18,387
    
    
    $
    86,219
  41




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    43Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    45Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003
    
    
    46Consolidated Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and 2003
    
    
    47Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    49Notes to Consolidated Financial Statements for the years ended December 31, 2005, 2004 and 2003
    
    
    51
 42




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 
 43




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 
 44




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
  2005
    
    
    2004ASSETSCash and due from banks
    
    $
    17,435,887
    
    
    $
    13,120,951Federal funds sold and securities purchased under agreements to resell
    
    
    9,120,000
    
    
    
    6,120,000Cash and cash equivalents
    
    
    26,555,887
    
    
    
    19,240,951Securities available-for-sale (including pledged collateral of
$50,102,000 at December 31, 2005 and $35,345,000 at
December 31, 2004)
    
    
    94,014,027
    
    
    
    82,443,193Securities held-to-maturity, at cost
(estimated fair value of $6,881,172 at December 31 2005
and $487,092 at December 31, 2004)
    
    
    6,932,652
    
    
    
    448,753Loans, net of the allowance for loan and lease losses of $4,316,379
at December 31, 2005 and $3,866,498 at December 31, 2004
    
    
    363,305,161
    
    
    
    318,800,587Bank premises and equipment, net
    
    
    5,630,684
    
    
    
    5,484,196Other assets
    
    
    15,205,234
    
    
    
    12,127,127TOTAL ASSETS
    
    $
    511,643,645
    
    
    $
    438,544,807LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Demand  noninterest bearing
    
    $
    86,219,092
    
    
    $
    82,262,500Demand  interest bearing
    
    
    109,100,520
    
    
    
    108,644,844Savings accounts
    
    
    27,539,918
    
    
    
    23,471,100Certificates of deposit
    
    
    149,256,239
    
    
    
    138,499,839Total Deposits
    
    
    372,115,769
    
    
    
    352,878,283Securities sold under agreements to repurchase
    
    
    22,885,658
    
    
    
    2,003,712Federal Home Loan Bank borrowings
    
    
    55,000,000
    
    
    
    35,000,000Other liabilities
    
    
    7,194,315
    
    
    
    8,379,475Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    15,310,000
    
    
    
    5,000,000Total liabilities
    
    
    472,505,742
    
    
    
    403,261,470Commitments and contingencies (Note 17)Stockholders equity:Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued and outstanding in 2005 and 2004
    
    
    
    
    
    
    Common stock, no par value; 10,000,000 shares
authorized; 8,657,896 shares issued and outstanding in 2005
and 8,502,831 shares issued and outstanding in 2004
    
    
    11,009,346
    
    
    
    10,536,562Retained earnings
    
    
    29,418,643
    
    
    
    25,079,522Accumulated other comprehensive (loss) income, net of tax
    
    
    (1,290,086
    )
    
    
    (332,747
    )Total stockholders equity
    
    
    39,137,903
    
    
    
    35,283,337TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    511,643,645
    
    
    $
    438,544,807
 See accompanying notes to consolidated financial statements.
 45




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
  2005
    
    
    2004
    
    
    2003Interest income:Interest and fees on loans
    
    $
    24,069,980
    
    
    $
    18,444,703
    
    
    $
    17,655,479Interest on tax-exempt securities
    
    
    332,385
    
    
    
    225,976
    
    
    
    139,895Interest on U.S. government securities
    
    
    2,910,695
    
    
    
    2,175,274
    
    
    
    1,290,481Interest on federal funds sold and securities purchased
under agreement to resell
    
    
    491,019
    
    
    
    143,449
    
    
    
    193,089Interest on other securities
    
    
    59,909
    
    
    
    6,788
    
    
    
    0Total interest income
    
    
    27,863,988
    
    
    
    20,996,190
    
    
    
    19,278,944Interest expense:Interest on demand deposits
    
    
    938,532
    
    
    
    429,699
    
    
    
    463,708Interest on savings deposits
    
    
    182,994
    
    
    
    103,670
    
    
    
    132,758Interest on certificates of deposit
    
    
    4,331,468
    
    
    
    2,876,236
    
    
    
    3,570,686Interest on FHLB and other borrowings
    
    
    1,592,516
    
    
    
    449,432
    
    
    
    233,649Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trust
    
    
    580,935
    
    
    
    250,495
    
    
    
    183,805Total interest expense
    
    
    7,626,445
    
    
    
    4,109,532
    
    
    
    4,584,606Net interest income
    
    
    20,237,543
    
    
    
    16,886,658
    
    
    
    14,694,338Provision for loan and lease losses
    
    
    447,700
    
    
    
    554,000
    
    
    
    515,000Net interest income after provision for loan and lease
losses
    
    
    19,789,843
    
    
    
    16,332,658
    
    
    
    14,179,338Noninterest income:Service charges on deposit accounts
    
    
    393,661
    
    
    
    475,971
    
    
    
    348,086Payroll and benefit processing fees
    
    
    356,957
    
    
    
    343,086
    
    
    
    331,492Earnings on
cash surrender value 
Bank owned life insurance
    
    
    209,322
    
    
    
    258,539
    
    
    
    233,094Net (loss) gain on sale of securities available-for-sale
    
    
    (1,537
    )
    
    
    0
    
    
    
    88,395Net gain on sale of loans
    
    
    145,594
    
    
    
    94,878
    
    
    
    101,005Merchant credit card service income, net
    
    
    345,721
    
    
    
    433,822
    
    
    
    407,945Mortgage brokerage fee income
    
    
    249,049
    
    
    
    186,188
    
    
    
    250,451Other income
    
    
    424,973
    
    
    
    403,437
    
    
    
    389,698Total noninterest income
    
    
    2,123,740
    
    
    
    2,195,921
    
    
    
    2,150,166Noninterest expense:Salaries and related benefits
    
    
    6,883,754
    
    
    
    5,938,672
    
    
    
    5,450,874Occupancy and equipment expense
    
    
    1,572,458
    
    
    
    1,534,490
    
    
    
    1,470,722FDIC insurance premium
    
    
    48,659
    
    
    
    47,843
    
    
    
    49,431Data processing fees
    
    
    303,316
    
    
    
    253,895
    
    
    
    217,169Professional service fees
    
    
    648,871
    
    
    
    802,742
    
    
    
    653,698Payroll processing fees
    
    
    110,376
    
    
    
    0
    
    
    
    0Deferred compensation expense
    
    
    321,321
    
    
    
    280,771
    
    
    
    255,612Stationery and supplies
    
    
    241,144
    
    
    
    208,102
    
    
    
    219,473Postage
    
    
    104,439
    
    
    
    96,780
    
    
    
    102,650Directors expenses
    
    
    219,687
    
    
    
    266,911
    
    
    
    241,384Other expenses
    
    
    1,294,684
    
    
    
    1,189,790
    
    
    
    999,157Total noninterest expense
    
    
    11,748,709
    
    
    
    10,619,996
    
    
    
    9,660,170Income before income taxes
    
    
    10,164,874
    
    
    
    7,908,583
    
    
    
    6,669,334Provision for income taxes
    
    
    3,886,504
    
    
    
    2,930,908
    
    
    
    2,486,658Net Income
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    $
    4,182,676Basic earnings per share
    
    $
    0.73
    
    
    $
    0.60
    
    
    $
    0.52Weighted average shares  basic
    
    
    8,600,270
    
    
    
    8,282,588
    
    
    
    8,033,484Diluted earnings per share
    
    $
    0.71
    
    
    $
    0.57
    
    
    $
    0.50Weighted average shares  diluted
    
    
    8,844,626
    
    
    
    8,702,611
    
    
    
    8,326,908
 See accompanying notes to consolidated financial statements.
 46




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
  AccumulatedOtherComprehensiveComprehensive
    
    
    Common
    
    
    Stock
    
    
    Retained
    
    
    Income (Loss),Income
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    net of tax
    
    
    TotalBalance at January 01, 2003
    
    
    
    
    
    
    7,924,608
    
    
    $
    8,714,767
    
    
    $
    18,813,703
    
    
    $
    138,660
    
    
    $
    27,667,130Comprehensive Income:Net Income
    
    
    4,182,676
    
    
    
    
    
    
    
    
    
    
    
    4,182,676
    
    
    
    
    
    
    
    4,182,676Other
Comprehensive Income, net of taxUnrealized losses on securities, net
of reclassification adjustment
    
    
    (347,918
    )Less: reclassification adjustment for
gains included in net
income, net of tax
    
    
    (55,441
    )Other Comprehensive Income
    
    
    (403,359
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (403,359
    )
    
    
    (403,359
    )Total Comprehensive Income
    
    $
    3,779,317Cash dividends ($0.22 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 1,760,239
    )
    
    
    
    
    
    
    (1,760,239
    )Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    22,404
    
    
    
    
    
    
    
    
    
    
    
    22,404Stock options exercised
    
    
    
    
    
    
    205,566
    
    
    
    621,452
    
    
    
    
    
    
    
    
    
    
    
    621,452Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,129
    
    
    
    
    
    
    
    181,129Balance at December 31, 2003
    
    
    
    
    
    
    8,130,174
    
    
    $
    9,358,623
    
    
    $
    21,417,269
    
    
    ($
    264,699
    )
    
    $
    30,511,193Comprehensive Income:Net Income
    
    
    4,977,675
    
    
    
    
    
    
    
    
    
    
    
    4,977,675
    
    
    
    
    
    
    
    4,977,675Other Comprehensive Income,
net of tax
Unrealized losses on securities, net of
reclassification adjustment
    
    
    (68,048
    )Less: reclassification adjustment
for gains included in net
income, net of tax
    
    
    (0
    )Other Comprehensive Income
    
    
    (68,048
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,048
    )
    
    
    (68,048
    )Total Comprehensive Income
    
    $
    4,909,627Cash dividends ($0.23 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 1,955,584
    )
    
    
    
    
    
    
    ( 1,955,584
    )Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    3,856
    
    
    
    
    
    
    
    
    
    
    
    3,856Stock options exercised
    
    
    
    
    
    
    372,657
    
    
    
    1,174,083
    
    
    
    
    
    
    
    
    
    
    
    1,174,083Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640,162
    
    
    
    
    
    
    
    640,162Balance at December 31, 2004
    
    
    
    
    
    
    8,502,831
    
    
    $
    10,536,562
    
    
    $
    25,079,522
    
    
    ($
    332,747
    )
    
    $

    35,283,337
  See accompanying notes to the consolidated financial statements.
 47




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedOtherComprehensiveComprehensive
    
    
    Common
    
    
    Stock
    
    
    Retained
    
    
    Income(Loss),Income
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    net of tax
    
    
    TotalBalance at December 31, 2004
    
    
    
    
    
    
    8,502,831
    
    
    $
    10,536,562
    
    
    $
    25,079,522
    
    
    ($
    332,747
    )
    
    $
    35,283,337Comprehensive Income:Net Income
    
    
    6,278,370
    
    
    
    
    
    
    
    
    
    
    
    6,278,370
    
    
    
    
    
    
    
    6,278,370Other Comprehensive Income:Other Comprehensive Income,
net of taxUnrealized losses on securities,
net
of reclassification adjustment
    
    
    (956,436
    )Less: reclassification adjustment
for gains included in net
income, net of tax
    
    
    (903
    )Other Comprehensive Income
    
    
    (957,339
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (957,339
    )
    
    
    (957,339
    )Total Comprehensive Income
    
    $
    5,321,031Cash dividends ($0.26 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 2,243,347
    )
    
    
    
    
    
    
    (2,243,347
    )Compensation expense associated with
stock options
    
    
    
    
    
    
    
    
    
    
    5,784
    
    
    
    
    
    
    
    
    
    
    
    5,785Stock options exercised
    
    
    
    
    
    
    155,065
    
    
    
    467,000
    
    
    
    
    
    
    
    
    
    
    
    467,000Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304,098
    
    
    
    
    
    
    
    304,097Balance at December 31, 2005
    
    
    
    
    
    
    8,657,896
    
    
    $
    11,009,346
    
    
    $
    29,418,643
    
    
    ($
    1,290,086
    )
    
    $
    39,137,903
 48




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    $
    4,182,676Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    447,700
    
    
    
    554,000
    
    
    
    515,000Provision for depreciation and amortization
    
    
    564,779
    
    
    
    610,997
    
    
    
    691,859Compensation expense associated with stock options
    
    
    5,784
    
    
    
    3,856
    
    
    
    22,404Loss (Gain) on sale of securities available-for-sale
    
    
    1,537
    
    
    
    0
    
    
    
    (88,395
    )Amortization of securities premiums and accretion
of discounts, net
    
    
    96,188
    
    
    
    272,479
    
    
    
    325,112Gain on sale of loans
    
    
    (145,594
    )
    
    
    (94,878
    )
    
    
    (101,005
    )Gain on sale of fixed assets
    
    
    (50
    )
    
    
    (50
    )
    
    
    (2,036
    )Proceeds from sale of loans
    
    
    3,645,594
    
    
    
    1,664,878
    
    
    
    1,193,689Loans originated for sale
    
    
    (3,500,000
    )
    
    
    (1,570,000
    )
    
    
    (1,092,684
    )Deferred income taxes
    
    
    (398,727
    )
    
    
    (314,555
    )
    
    
    (514,197
    )Effect of changes in:Other assets
    
    
    (1,776,933
    )
    
    
    1,912,172
    
    
    
    (364,438
    )Deferred loan fees
    
    
    (232,565
    )
    
    
    158,604
    
    
    
    (89,540
    )Other liabilities
    
    
    (1,573,694
    )
    
    
    4,699,608
    
    
    
    479,422Net cash provided by operating activities
    
    
    3,412,389
    
    
    
    12,874,786
    
    
    
    5,157,867Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    23,560,650
    
    
    
    32,797,174
    
    
    
    20,115,204Proceeds from sale of available-for-sale securities
    
    
    141,270
    
    
    
    0
    
    
    
    15,244,634Purchases of available-for-sale securities
    
    
    (37,224,733
    )
    
    
    (45,599,957
    )
    
    
    (73,979,119
    )Purchases of held-to-maturity securities
    
    
    (6,540,000
    )
    
    
    0
    
    
    
    0Maturities of held-to-maturity securities
    
    
    50,569
    
    
    
    948,022
    
    
    
    1,025,791Loan originations, net of principal repayments
    
    
    (44,719,709
    )
    
    
    (41,348,638
    )
    
    
    1,721,867Purchase of Bank premises and equipment, net
    
    
    (711,217
    )
    
    
    (282,354
    )
    
    
    (1,017,857
    )Net cash used in investing activities
    
    
    (65,443,170
    )
    
    
    (53,485,753
    )
    
    
    (36,889,480
    )Cash flows from financing activities:Net increase in demand deposits and savings accounts
    
    
    8,481,086
    
    
    
    26,909,207
    
    
    
    23,252,044Net increase (decrease) in certificates of deposit
    
    
    10,756,400
    
    
    
    (1,569,567
    )
    
    
    (10,160,051
    )Increase (decrease) in securities sold under
agreements to repurchase
    
    
    20,881,946
    
    
    
    (1,745,085
    )
    
    
    44,412Proceeds from Federal Home Loan Bank advances
    
    
    88,000,000
    
    
    
    95,000,000
    
    
    
    55,000,000Repayments of Federal Home Loan Bank advances
    
    
    (68,000,000
    )
    
    
    (90,000,000
    )
    
    
    (43,000,000
    )Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    10,310,000
    
    
    
    0
    
    
    
    5,000,000Cash dividends
    
    
    (1,550,715
    )
    
    
    (1,955,584
    )
    
    
    (1,760,239
    )Equity transactions, net
    
    
    467,000
    
    
    
    1,174,083
    
    
    
    802,582Net cash provided by financing activities
    
    
    69,345,717
    
    
    
    27,813,054
    
    
    
    29,178,748Net increase (decrease) in cash and cash equivalents
    
    
    7,314,936
    
    
    
    (12,797,913
    )
    
    
    (2,552,865
    )Cash and cash equivalents at beginning of year
    
    
    19,240,951
    
    
    
    32,038,864
    
    
    
    34,591,729Cash and cash equivalents at end of year
    
    $
    26,555,887
    
    
    $
    19,240,951
    
    
    $
    32,038,864
 49




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 2005
    
    
    2004
    
    
    2003Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    3,755,000
    
    
    $
    1,959,700
    
    
    $
    2,258,200Interest
    
    $
    7,467,150
    
    
    $
    4,083,048
    
    
    $
    4,655,112
 See accompanying notes to consolidated financial statements.
 50




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##### Table of Contents



BANK OF
COMMERCE HOLDINGS AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    THE BUSINESS OF THE COMPANY
   2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Principles of Consolidation
 51




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Cash
and Cash Equivalents
 Securities
purchased under agreements to resell
 Securities
 Loans 
 52




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Allowance for Loan and Lease Losses 
 Bank Premises and Equipment 
 Securities Sold under Agreements to Repurchase 
 Federal Home Loan Bank Borrowings 
 Goodwill
and Other Intangibles
 53




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 Earnings
Per Share
 2005
    
    
    2004
    
    
    2003Basic EPS CalculationNumerator (net income)
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    $
    4,182,676Denominator (weighted average common shares
outstanding)
    
    
    8,600,270
    
    
    
    8,282,588
    
    
    
    8,033,484Basic EPS
    
    $
    0.73
    
    
    $
    0.60
    
    
    $
    0.52Diluted EPS CalculationNumerator (net income)
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    $
    4,182,676Denominator:Weighted average common shares outstanding
    
    
    8,600,270
    
    
    
    8,282,588
    
    
    
    8,033,484Diluted effect of stock options
    
    
    244,356
    
    
    
    420,023
    
    
    
    293,424Adjusted weighted average common shares
outstanding
    
    
    8,844,626
    
    
    
    8,702,611
    
    
    
    8,326,908Diluted EPS
    
    $
    0.71
    
    
    $
    0.57
    
    
    $
    0.50
 Other Real Estate Owned 
  Income Taxes 
 54




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Stock
Option Plan Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation, Accounting for Stock-Based Compensation -
Transition and Disclosure
  Year Ended December 312005
    
    
    2004
    
    
    2003Net income before option expense less
compensation expense associated with stock options
    
    $
    6,284,154
    
    
    $
    4,981,531
    
    
    $
    4,205,080(5,784
    )
    
    
    (3,856
    )
    
    
    (22,404
    )Net income as reported
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    $
    4,182,676Deduct:Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    (306,870
    )
    
    
    (149,639
    )
    
    
    (77,803
    )Pro forma net income
    
    $
    5,971,500
    
    
    $
    4,828,036
    
    
    $
    4,104,873Earnings per share:Basic  as reported
    
    $
    0.73
    
    
    $
    0.60
    
    
    $
    0.52Basic  pro forma
    
    $
    0.69
    
    
    $
    0.58
    
    
    $
    0.51Diluted  as reported
    
    $
    0.71
    
    
    $
    0.57
    
    
    $
    0.50Diluted  pro forma
    
    $
    0.68
    
    
    $
    0.55
    
    
    $
    0.49
  55




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Comprehensive
Income
 Operating Segments
 Transfer
of Financial Assets 
 Recent Accounting Pronouncements
 Statement of Financial Accounting Standards No. 123 (revised 2004)  In December 2004 the
FASB revised SFAS No. 123, Accounting for Stock Based Compensation. Accounting for Stock Issued to Employees,
   56




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     On March 30, 2005, the FASB issued Interpretation No. 47 , Accounting for Conditional Asset
Retirement Obligations  an Interpretation of FASB Statement No. 143 (FIN 47). .
 On May 5, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (FAS 154), replacing APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements .
 On August 11, 2005, The Financial Accounting Standards Board Issues Revised Exposure Draft
on Accounting for Transfers of Financial Assets  The Financial Accounting Standards Board
issued a revised Exposure Draft, The proposed
statement seeks to clarify the derecognition requirements for financial assets that were
developed initially in FASB Statement No. 125, and revised in Statement 140, and to
change and simplify the initial measurement of interest related to transferred financial
assets held by a transferor. The proposed changes principally apply to securitizations and
loan participations.
 57




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    RESTRICTIONS ON CASH AND DUE FROM BANKS
  4.
    
    SECURITIES
  December 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    43,793,691
    
    
    $
    0
    
    
    $
    (894,167
    )
    
    $
    42,899,524Obligations of state and political
subdivisions
    
    
    6,347,437
    
    
    
    30,213
    
    
    
    (199,013
    )
    
    
    6,178,637Mortgage-backed securities
    
    
    42,018,403
    
    
    
    0
    
    
    
    (1,093,908
    )
    
    
    40,924,495Corporate Bonds
    
    
    4,047,030
    
    
    
    0
    
    
    
    (35,659
    )
    
    
    4,011,371$
    96,206,561
    
    
    $
    30,213
    
    
    $
    (2,222,747
    )
    
    $
    94,014,027
 December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    34,012,555
    
    
    $
    14,897
    
    
    $
    (436,410
    )
    
    $
    33,591,042Obligations of state and political
subdivisions
    
    
    6,517,077
    
    
    
    59,603
    
    
    
    (101,592
    )
    
    
    6,475,088Mortgage-backed securities
    
    
    42,478,977
    
    
    
    41,595
    
    
    
    (143,509
    )
    
    
    42,377,063$
    83,008,609
    
    
    $
    116,095
    
    
    $
    (681,511
    )
    
    $
    82,443,193
  December 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    323,773
    
    
    $
    38,339
    
    
    $
    0
    
    
    $
    344,328Obligations of state and political
Subdivisions
    
    
    6,608,879
    
    
    
    77
    
    
    
    (72,112
    )
    
    
    6,536,844$
    6,932,652
    
    
    $
    38,416
    
    (
    $
    72,112
    )
    
    $
    6,881,172
 December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    448,753
    
    
    $
    38,339
    
    
    $
    0
    
    
    $
    487,092
 58




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Available-for-Sale
    
    
    Held-to-MaturityEstimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    7,618,271
    
    
    $
    7,540,720
    
    
    $
    130,373
    
    
    $
    130,239Due after one year through five years
    
    
    41,458,212
    
    
    
    40,648,727
    
    
    
    1,881,395
    
    
    
    1,860,489Due after five years through ten years
    
    
    20,637,107
    
    
    
    19,991,730
    
    
    
    4,597,111
    
    
    
    4,546,116Due after ten years
    
    
    26,492,971
    
    
    
    25,832,850
    
    
    
    323,773
    
    
    
    344,328$
    96,206,561
    
    
    $
    94,014,027
    
    
    $
    6,932,652
    
    
    $
    6,881,172
  Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury
securities and
Obligations of U.
S. Agencies
    
    $
    27,810,886
    
    
    ($
    344,747
    )
    
    $
    15,982,805
    
    
    ($
    549,420
    )
    
    $
    43,793,691
    
    
    ($
    894,167
    )Obligations of
state and political
subdivisions
    
    $
    1,124,037
    
    
    ($
    22,971
    )
    
    $
    4,226,173
    
    
    ($
    176,041
    )
    
    $
    5,350,210
    
    
    ($
    199,013
    )H-T-M Obligations
of state and
political
subdivisions
    
    $
    6,608,879
    
    
    ($
    72,112
    )
    
    
    0
    
    
    
    0
    
    
    $
    6,608,879
    
    
    ($
    72,112
    )Mortgage
- backed
securities
    
    $
    33,439,557
    
    
    ($
    857,477
    )
    
    $
    8,578,846
    
    
    ($
    236,432
    )
    
    $
    42,018,403
    
    
    ($
    1,093,908
    )Corporate Bonds
    
    $
    4,047,030
    
    
    ($
    35,659
    )
    
    
    0
    
    
    
    0
    
    
    $
    4,047,030
    
    
    ($
    35,659
    )Total temporarily
impaired securities
    
    $
    73,030,389
    
    
    ($
    1,332,966
    )
    
    $
    28,787,824
    
    
    ($
    961,893
    )
    
    $
    101,818,213
    
    
    ($
    2,294,859
    )
  59




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   5.
    
    LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
  December 31,2005
    
    
    2004Commercial and financial loans
    
    $
    115,400,728
    
    
    $
    105,544,794Real estate  construction loans
    
    
    105,094,301
    
    
    
    77,438,755Real estate  commercial
    
    
    142,992,349
    
    
    
    135,260,186Real estate  mortgage
    
    
    3,669,353
    
    
    
    4,423,104Installment loans
    
    
    439,044
    
    
    
    300,337Other
    
    
    446,170
    
    
    
    352,879368,041,945
    
    
    
    323,320,055Less:Deferred loan fees, net
    
    
    420,405
    
    
    
    652,970Allowance for loan and lease losses
    
    
    4,316,379
    
    
    
    3,866,498$
    363,305,161
    
    
    $
    318,800,587
    60




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Years Ended December 31,2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    3,866,498
    
    
    $
    3,675,084
    
    
    $
    3,528,968Provision for loan losses
    
    
    447,700
    
    
    
    554,000
    
    
    
    515,000Loans charged off
    
    
    (92,958
    )
    
    
    (368,300
    )
    
    
    (379,717
    )Recoveries of loans previously charged off
    
    
    95,139
    
    
    
    5,714
    
    
    
    10,833Balance at end of year
    
    $
    4,316,379
    
    
    $
    3,866,498
    
    
    $
    3,675,084
 6.
    
    BANK PREMISES AND EQUIPMENT
  Estimated
    
    December 31,Lives
    
    2005
    
    
    2004Land
    
    
    
    $
    1,507,628
    
    
    $
    1,507,628Bank buildings
    
    31.5 years
    
    
    4,134,364
    
    
    
    3,723,075Furniture, fixtures and equipment
    
    3 - 7 years
    
    
    4,187,004
    
    
    
    5,255,2579,828,996
    
    
    
    10,485,960Less accumulated depreciation
    
    
    
    
    (4,619,257
    )
    
    
    (5,056,342
    )5,209,739
    
    
    
    5,429,618Construction in progress
    
    
    
    
    420,945
    
    
    
    54,578$
    5,630,684
    
    
    $
    5,484,196
  61




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7.
    
    OTHER ASSETS
  December 31,2005
    
    
    2004Cash surrender value of bank owned life insurance
policies
    
    $
    4,977,147
    
    
    $
    4,810,851Deferred tax asset, net
    
    
    3,752,268
    
    
    
    2,683,763Accrued interest on loans
    
    
    1,794,294
    
    
    
    1,495,967Accrued interest on investment securities
    
    
    748,225
    
    
    
    474,451Goldman Sachs Sweep account receivable
    
    
    18,339
    
    
    
    176,172Federal Home Loan Bank Stock
    
    
    2,585,000
    
    
    
    1,678,300Core Deposit Intangible, net of accumulated
amortization of $508,136 and $401,336
    
    
    261,009
    
    
    
    367,809Investment in junior subordinated debt payable to
subsidiary grantor trust
    
    
    310,000
    
    
    
    0Other
    
    
    758,952
    
    
    
    439,814$
    15,205,234
    
    
    $
    12,127,127
 8.
    
    DEPOSITS
  Time Deposit Maturity Schedule
 2006
    
    $
    138,789,0232007
    
    
    9,090,6102008
    
    
    980,1572009
    
    
    396,4492010
    
    
    0Thereafter
    
    
    0Total
    
    $
    149,256,239
 9.
    
    OTHER LIABILITIES
  December 31,2005
    
    
    2004Deferred compensation
    
    $
    3,500,969
    
    
    $
    3,161,765Employee incentive payable
    
    
    656,356
    
    
    
    518,852Accrued 401(k) match payable
    
    
    36,729
    
    
    
    35,000Accrued interest payable
    
    
    388,229
    
    
    
    228,934Reserve for off-balance sheet commitments
    
    
    391,876
    
    
    
    302,876Investment purchase payable
    
    
    0
    
    
    
    3,320,384Taxes payable
    
    
    206,641
    
    
    
    572,623Dividend payable
    
    
    692,632
    
    
    
    0Goldman Sachs Sweep account payable
    
    
    784,031
    
    
    
    0Other
    
    
    536,852
    
    
    
    239,041$
    7,194,315
    
    
    $
    8,379,475
 62




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10.
    
    FEDERAL HOME LOAN BANK ADVANCES
  11.
    
    JUNIOR SUBORDINATED DEBT PAYABLE TO UNCONSOLIDATED SUBSIDIARY GRANTOR TRUST
    63




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    12.
    
    INCOME TAXES
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    3,396,316
    
    
    $
    2,571,071
    
    
    $
    2,171,432State
    
    
    888,915
    
    
    
    674,392
    
    
    
    568,351Total currently payable
    
    
    4,285,231
    
    
    
    3,245,463
    
    
    
    2,739,783Deferred:Federal
    
    
    (333,092
    )
    
    
    (224,682
    )
    
    
    (153,895
    )State
    
    
    (65,635
    )
    
    
    (89,873
    )
    
    
    (99,230
    )Total deferred provision
    
    
    (398,727
    )
    
    
    (314,555
    )
    
    
    (253,125
    )Total provision for income taxes
    
    $
    3,886,504
    
    
    $
    2,930,908
    
    
    $
    2,486,658
 64




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Income tax expense attributable to income before income taxes differed from the amounts
computed by applying the U.S. federal income tax rate of 34 percent to income before income
taxes because of the following:
 % of Pretax Income2005
    
    
    2004
    
    
    2003Income tax at the Federal statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State franchise tax, net of Federal tax benefit
    
    
    5.35
    
    
    
    4.85
    
    
    
    4.64Tax-exempt interest
    
    
    (1.01
    )
    
    
    (0.91
    )
    
    
    (0.67
    )Other
    
    
    (0.11
    )
    
    
    (0.88
    )
    
    
    (0.69
    )38.23
    %
    
    
    37.06
    %
    
    
    37.28
    %
 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2005 and 2004 consist of the following:
 2005
    
    
    2004Deferred tax assets:State franchise taxes
    
    $
    280,605
    
    
    $
    174,456Deferred compensation
    
    
    1,569,835
    
    
    
    1,417,735Loan loss reserves
    
    
    1,673,718
    
    
    
    1,475,084Net unrealized losses on securities available-for-sale
    
    
    902,447
    
    
    
    232,669Other
    
    
    235,839
    
    
    
    227,384Total deferred tax assets
    
    
    4,662,444
    
    
    
    3,527,328Deferred tax liabilities:Depreciation
    
    
    (300,845
    )
    
    
    (318,439
    )Deferred loan origination costs
    
    
    (395,547
    )
    
    
    (333,658
    )Deferred state taxes
    
    
    (213,784
    )
    
    
    (191,468
    )Total deferred tax liabilities
    
    
    (910,176
    )
    
    
    (843,565
    )Net deferred tax asset
    
    $
    3,752,268
    
    
    $
    2,683,763
 13.
    
    STOCK OPTION PLAN
 On February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the Plan)
which was approved by the Companys stockholders on April 21, 1998. The Plan provides for
awards in the form of options, which may constitute incentive stock options (Incentive
Options) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the
Code), or non-statutory stock options (NSOs) to key personnel of the Company, including
directors. The Plan provides that Incentive Options under the Plan may not be granted at
less than 100% of fair market value of the Companys common stock on the date of the grant.
NSOs may not be granted at less than 85% of the fair market value of the common stock on the
date of the grant. The purpose of the plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging key personnel to focus on
critical long range objectives, (b) increasing the ability of the Company to attract and
retain key personnel and (c) linking key personnel directly to stockholder interests through
increased stock ownership.
 65




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 A total of 1,782,000 shares of the Companys common stock are reserved for grant under
the Plan.
 The Plan provides that all options under the Plan shall vest at a rate of at least 20% per
year from the date of the grant. Vesting may be accelerated in case of an optionees death,
disability, and retirement or in case of a change of control.
 The following table presents the changes in outstanding stock options for the periods
indicated:
 WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceOptions outstanding, December 31, 2002
    
    
    1,237,332
    
    
    $
    3.53Granted
    
    
    13,500
    
    
    $
    6.75Exercised
    
    
    (205,566
    )
    
    $
    3.03Forfeited
    
    
    (10,470
    )
    
    $
    5.76Options outstanding, December 31, 2003
    
    
    1,034,796
    
    
    $
    3.50Granted
    
    
    111,000
    
    
    $
    10.63Exercised
    
    
    (372,665
    )
    
    $
    3.15Forfeited
    
    
    ( 7,200
    )
    
    $
    5.89Options outstanding, December 31, 2004
    
    
    765,931
    
    
    $
    4.80Granted
    
    
    6,000
    
    
    $
    10.90Exercised
    
    
    (155,065
    )
    
    $
    3.02Forfeited
    
    
    (8,550
    )
    
    $
    9.66Options outstanding, December 31, 2005
    
    
    608,316
    
    
    $
    5.20
 At December 31, 2005, 124,740 shares were available for future grants under the Plan. As of
December 31, 2005, 2004 and 2003, respectively, 539,314, 572,488 and 916,536 shares
respectively were available to be exercised. The weighted average option cost for
December 31, 2005, 2004 and 2003, respectively, was $4.11, $7.74 and $14.31, respectively.
 The Company uses the intrinsic value based method for measuring compensation cost related to
the Plan. Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date over the amount an employee or
director must pay to acquire the stock. This cost is amortized on a straight-line basis
over the vesting period of the options granted. Compensation cost related to the discount
on non-qualified options as of December 31, 2005, 2004 and 2003 was $5,784, $3,856 and
$22,404 respectively.
 66




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Weighted Avg.Exercise
    
    
    
    
    
    Remaining ContractualPrices
    
    Options Outstanding
    
    Life (Years)
    
    Options Exercisable$
    2.75
    
    
    
    269,600
    
    
    
    2.3
    
    
    
    269,600$
    3.23
    
    
    
    69,836
    
    
    
    2.3
    
    
    
    69,836$
    5.42
    
    
    
    29,250
    
    
    
    5.4
    
    
    
    23,400$
    6.67
    
    
    
    63,000
    
    
    
    5.6
    
    
    
    50,400$
    7.30
    
    
    
    55,130
    
    
    
    6.5
    
    
    
    33,078$
    6.75
    
    
    
    13,500
    
    
    
    7.0
    
    
    
    5,400$
    10.72
    
    
    
    7,500
    
    
    
    8.4
    
    
    
    7,500$
    10.60
    
    
    
    73,500
    
    
    
    8.5
    
    
    
    73,500$
    10.76
    
    
    
    3,000
    
    
    
    8.9
    
    
    
    3,000$
    9.11
    
    
    
    18,000
    
    
    
    8.3
    
    
    
    3,600$
    11.59
    
    
    
    3,500
    
    
    
    9.4
    
    
    
    0$
    10.20
    
    
    
    2,500
    
    
    
    9.4
    
    
    
    0608,316
    
    
    
    
    
    
    
    539,314
 The fair value of the options granted during 2005, 2004 and 2003, is estimated as $20,068,
$364,769 and $28,142, respectively, on the date of grant using a binomial option-pricing
model with the following assumptions: volatility of 32.36%, 30.88% and 22.75%, respectively,
risk-free interest rate of 3.92%, 3.62% and 3.27%, respectively, expected dividends of $0.24
per share per year for 2005 and $0.23 per share in 2004, annual dividend rate of 2.49%,
2.00% and 3.55%, assumed forfeiture rate of zero and an expected life of seven years.
 There were 6,000 options granted in 2005, 111,000 options granted in 2004 and 13,500 options
granted in 2003. The fair value per share of the 2005, 2004 and 2003 awards was $3.34, $3.29
and $2.22, respectively.
 14.
    
    CAPITAL STOCK
 On August 24, 2001, the Board of Directors authorized a common stock repurchase of up
to 5%, or approximately 425,000 shares, of the Companys common stock on an annual basis for
the next seven years. The number of shares is adjusted on an annual basis to coincide with
new issues and forfeitures. No shares were repurchased during 2005, 2004 or 2003. Shares
purchased are retired by a charge to common stock and retained earnings for the cost. To
date, the Company has repurchased 1,423,311 shares at an average price of $6.84.
 The Company paid a quarterly cash dividend of $0.06, $0.06 and $0.06 on April 8, 2005, July
8, 2005 and October 7, 2005, respectively, to stockholders of record as of March 31, 2005,
June 30, 2005 and September 30, 2005, respectively. The fourth quarter dividend of $0.08 per
share is payable to shareholders of record as of December 31, 2005 to be paid on January 6,
2006.On October 22, 2004 and 2003, a cash dividend of $0.23 and $0.22 per share, respectively,
was paid to shareholders of record as of October 1, 2004 and 2003. On April 20, 1999, the
Board of Directors authorized 2,000,000 shares of preferred stock. As of December 31, 2004,
no preferred shares had been issued.


67



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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.
    
    RETIREMENT BENEFITSProfit Sharing Plan In 1985, the Company adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the earnings of the Company. The employees contributions are
limited to the maximum amount allowable under IRS Section 402(G). The Companys
contributions include a matching contribution of 100% of the first 3% of salary deferred and
50% of the next 2% of salary deferred. Discretionary contributions are also permitted. The
Company made matching contributions aggregating $157,000, $134,570 and $120,000 for the
years ended December 31, 2005, 2004 and 2003, respectively. No discretionary contributions
were made in 2005, 2004 or 2003.Salary Continuation Plan  In April 2002, the Board of Directors approved the
implementation of the Executive Salary Continuation Plan (SCP), which is a non-qualified
executive benefit plan in which the Bank agrees to pay the executives covered by the SCP
plan additional benefits in the future in return for continued satisfactory performance by
the executives. Benefits under the salary continuation plan include a benefit generally
payable commencing upon a designated retirement date for a fixed period of twenty years;
disability or termination of employment, and a death benefit for the participants designated
beneficiaries. Key-man life insurance policies were purchased as an investment to provide
for the Banks contractual obligation to pay pre-retirement death benefits and to recover
the Banks cost of providing benefits. The executive is the insured under the policy, while
the Bank is the owner and beneficiary. The assets of the SCP, under Internal Revenue Service
Regulations, are the property of the Company and are available to the Companys general
creditors. The insured executive has no claim on the insurance policy, its cash value or the
proceeds thereof.The retirement benefit is derived from accruals to a benefit account during the
participants employment. At the end of the executives period of service, the aggregate
amount accrued should equal the then present value of the benefits expected to be paid to
the executive. Accrued compensation expense under the salary continuation plan totaled
$124,356 and $104,376 for 2005 and 2004, respectively. As of December 31, 2005 and 2004, the
vested benefit payable was $488,085 and $339,099, respectively.Directors deferred fee compensation Effective January 1, 1993, the Board of Directors
approved the implementation of the Directors Deferred Compensation Plan, which is a
non-qualified plan in which a Director may elect to defer the payment of all or any part of
the fee compensation to which such director would otherwise be entitled to as directors
fees or committee fees to be payable upon retirement of the director in a lump sum
distribution or over a period not to exceed fifteen years. Interest on Directors deferred
compensation is fixed at 10% per the plan. Deferred compensation expense totaled $321,320
and $280,671 at December 31, 2005 and 2004, respectively. As of December 31, 2005 and 2004,
the vested benefit payable was $1,818,017 and $1,571,260, respectively.16.
    
    RELATED PARTY TRANSACTIONSSome of the directors, officers and principal stockholders of the Company and their
associates were customers of and had banking transactions with the Bank in the ordinary
course of the Banks business during 2005 and the Bank expects to have such transactions in
the future. All deposits, loans and commitments to loans included in such transactions were
made in compliance with the applicable laws on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions
with other persons of similar creditworthiness, and in the opinion of the Company, did not
involve more than a normal risk of collectibility or present other unfavorable features.
 68




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,2005
    
    
    2004Balance at beginning of year
    
    $
    3,622,750
    
    
    $
    4,123,712New loan additions
    
    
    11,318
    
    
    
    541,097Principal repayments
    
    
    (1,779,317
    )
    
    
    (1,042,059
    )Balance at end of year
    
    $
    1,854,751
    
    
    $
    3,622,750
 As of December 31, 2005 and 2004 there were no related party loans, which were past due or
classified. At December 31, 2005 there was approximately $380,000 available in commitments to
related party loans.
 17.
    
    COMMITMENTS AND CONTINGENCIES
 Lease Commitments The Company leases certain facilities where it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as of December
31, 2005 are below:
 (Dollars in thousands)2006
    
    $
    4792007
    
    $
    5132008
    
    $
    5502009
    
    $
    5902010
    
    $
    436Thereafter
    
    $
    572Total
    
    $
    3,140
 Rental expense for the years ended December 31, 2005, 2004 and 2003 was $466,061,
$424,205 and $449,818, respectively.
 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.
 69




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The off-balance sheet credit risk exposure of the Company is the contractual amount of
commitments to extend credit and stand-by letters of credit. The Company applies the same
credit standards to these contracts as it uses for loans recorded on the balance sheet.
 December 31,2005
    
    
    2004Off-balance sheet commitments:Commitments to extend credit
    
    $
    159,485,594
    
    
    $
    128,837,320Standby letters of credit
    
    
    9,771,080
    
    
    
    7,064,798
 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.
 Litigation The Company is subject to various pending and threatened legal actions arising
in the ordinary course of business. The Company maintains reserves for losses from legal
actions that are both probable and estimable. In the opinion of management the disposition
of claims currently pending will not have a material effect on the Companys consolidated
financial position or results of operations.
 18.
    
    REGULATORY MATTERS
 The Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that if undertaken, could have a direct material effect on the
Companys and Consolidated Financial Statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices.
 The capital amounts and the Banks prompt corrective action classifications are also
subject to qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to Bank Holding
Companies. Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets and of Tier 1 capital to average assets. Management believes as of
December 31, 2005 that the Company and the Bank met all capital adequacy requirements to
which they are subject.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 As of December 31, 2005, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, an institution must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are
no conditions or events since that notification that management believes have changed the
Banks category. The Companys and the Banks actual capital amounts and ratios as of
December 31, 2005 and 2004 are also presented in the table.
 To BeCategorized asWell CapitalizedFor Capital
    
    Under PromptActual
    
    Adequacy Purposes
    
    Corrective ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt December 31, 2005:CompanyLeverage capital (to average assets)
    
    $
    50,427,990
    
    
    
    10.19
    %
    
    $
    19,800,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    50,427,990
    
    
    
    12.05
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    54,744,369
    
    
    
    13.09
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aBankLeverage capital (to average assets)
    
    $
    50,530,699
    
    
    
    10.22
    %
    
    $
    19,783,694
    
    
    
    4.00
    %
    
    $
    24,729,617
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    50,530,699
    
    
    
    12.08
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    25,101,570
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    54,841,378
    
    
    
    13.11
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    41,835,950
    
    
    
    10.00
    %At December 31, 2004:CompanyLeverage capital (to average assets)
    
    $
    40,616,084
    
    
    
    9.27
    %
    
    $
    13,680,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    40,616,084
    
    
    
    11.34
    %
    
    
    11,818,412
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    44,482,582
    
    
    
    12.42
    %
    
    
    23,636,824
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aBankLeverage capital (to average assets)
    
    $
    38,684,893
    
    
    
    8.91
    %
    
    $
    15,575,720
    
    
    
    4.00
    %
    
    $
    19,650,000
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    38,684,893
    
    
    
    10.80
    %
    
    
    12,792,094
    
    
    
    4.00
    %
    
    
    19,188,141
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    42,551,391
    
    
    
    11.88
    %
    
    
    25,584,187
    
    
    
    8.00
    %
    
    
    31,980,234
    
    
    
    10.00
    %
 The principal sources of cash for the Holding Company are dividends from the Bank.
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. As of December 31, 2005, the maximum amount available for dividend
distribution under this restriction was approximately $9,479,551.
 The Bank is subject to certain restrictions under the Federal Reserve Act, including
restrictions on the extension of credit to affiliates. In particular, it is prohibited from
lending to an affiliated company unless the loans are secured by specific types of
collateral. Such secured loans and other advances from the subsidiaries are limited to 10
percent of the subsidiarys equity. No such loans or advances were outstanding during 2005
or 2004.
 71




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 19.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTS
 The following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
 Cash and cash equivalents The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents are a reasonable estimate of fair value.
 Securities Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted market prices of
comparable instruments. Securities available-for-sale are carried at their aggregate fair
value, while securities held-to-maturity are carried at amortized cost.
 Loans receivable For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values for fixed
rate loans are estimated using discounted cash flow analysis, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
 Commitments to extend credit and standby letters of credit The fair value of commitments
is the off-balance sheet amount of loan commitments and outstanding letters of credit.
 Federal Home Loan Bank borrowings The fair value of borrowed funds with
maturities less than one year is based on carrying amounts.
 Junior subordinated debt payable to unconsolidated
subsidiary grantor trust The fair value
of variable rate junior subordinated debt payable to subsidiary grantor trust is based on
carrying amounts.
 Deposit liabilities The fair values disclosed for demand deposits (e.g., interest and
noninterest checking, passbook savings, and money market accounts) are, by definition, equal
to the amount payable on demand at the reporting date (i.e., their carrying amounts). The
fair values for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits. The carrying amount of
accrued interest payable approximates its fair value.
 Securities purchased under agreements to resell
The fair value of securities purchased
under agreements to resell is estimated by discounting the contractual cash flows under
outstanding borrowings at rates prevailing in the marketplace today for similar borrowings,
rates and collateral.
 72




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Limitations Fair value estimates are made at a specific point in time, based on
relevant market information and other information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering for sale at
one time the Companys entire holdings of a particular financial instrument.
 Because no market exists for a significant portion of the Companys financial instruments,
fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments, and
other factors.
 These estimates are subjective in nature, involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
 Fair value estimates are based on current on and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or liabilities include
deferred tax assets and liabilities, and property, plant and equipment. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of the
estimates.
 The estimated fair values of the Companys financial instruments are approximately as
follows:
 December 31, 2005Contract
    
    Carrying
    
    FairAmount
    
    Amount
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    26,555,887
    
    
    $
    26,555,887Securities
    
    
    
    
    
    
    100,946,679
    
    
    
    100,895,199Loans, net
    
    
    
    
    
    
    363,305,161
    
    
    
    361,486,951Accrued interest on loans
    
    
    
    
    
    
    1,794,294
    
    
    
    1,794,294Accrued interest on securities
    
    
    
    
    
    
    748,225
    
    
    
    748,225Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    222,859,530
    
    
    $
    222,859,530Fixed rate certificates
    
    
    
    
    
    
    120,699,610
    
    
    
    120,659,339Variable certificates
    
    
    
    
    
    
    28,556,629
    
    
    
    28,556,629Accrued interest payable
    
    
    
    
    
    
    388,229
    
    
    
    388,229Securities sold under agreements to repurchase
    
    
    
    
    
    
    22,885,658
    
    
    
    22,885,658Federal Home Loan Borrowings
    
    
    
    
    
    
    55,000,000
    
    
    
    54,999,419Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    15,310,000
    
    
    
    15,310,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    159,485,594
    
    
    
    
    
    
    $
    159,485,594Standby letters of credit
    
    
    9,771,080
    
    
    
    
    
    
    
    9,771,080
 73




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2004Contract
    
    
    Carrying
    
    
    FairAmount
    
    
    Amount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    19,240,951
    
    
    $
    19,240,951Securities
    
    
    
    
    
    
    82,891,946
    
    
    
    82,930,285Loans, net
    
    
    
    
    
    
    318,800,587
    
    
    
    318,555,822Accrued interest on loans
    
    
    
    
    
    
    1,495,967
    
    
    
    1,495,967Accrued interest on securities
    
    
    
    
    
    
    474,450
    
    
    
    474,450Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    214,378,444
    
    
    $
    214,378,444Fixed rate certificates
    
    
    
    
    
    
    131,311,824
    
    
    
    131,291,349Variable certificates
    
    
    
    
    
    
    7,188,015
    
    
    
    7,188,015Accrued interest payable
    
    
    
    
    
    
    228,934
    
    
    
    228,934Securities sold under agreements to repurchase
    
    
    
    
    
    
    2,003,712
    
    
    
    2,033,712Federal Home Loan Borrowings
    
    
    
    
    
    
    35,000,000
    
    
    
    35,000,000Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    5,000,000
    
    
    
    5,000,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    128,837,320
    
    
    
    
    
    
    $
    128,837,320Standby letters of credit
    
    
    7,064,798
    
    
    
    
    
    
    
    7,064,798
 74




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 20.
    
    BANK OF COMMERCE HOLDINGS (PARENT COMPANY ONLY)FINANCIAL INFORMATION
 December 31,2005
    
    
    2004Condensed Balance SheetsAssets:Cash
    
    $
    361,485
    
    
    $
    613,049Time deposit with subsidiary
    
    
    2,532,885
    
    
    
    550,000Cash and cash equivalents
    
    
    2,894,370
    
    
    
    1,163,049Participation loans, net of allowance
for loan and lease losses of $5,700
    
    
    2,009,036
    
    
    
    0Investment in subsidiaries
    
    
    50,260,520
    
    
    
    39,093,279Other assets
    
    
    67,500
    
    
    
    97,500Total assets
    
    $
    55,231,426
    
    
    $
    40,353,828Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    15,310,000
    
    
    
    5,000,000Other liabilities
    
    
    783,523
    
    
    
    70,491Stockholders equity
    
    
    39,137,903
    
    
    
    35,283,337Total liabilities and stockholders equity
    
    $
    55,231,426
    
    
    $
    40,353,828
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Condensed Statements of IncomeIncome:Interest on time deposit
    
    $
    79,931
    
    
    $
    13,852
    
    
    $
    5,497Dividend from subsidiary
    
    
    514,307
    
    
    
    1,955,584
    
    
    
    1,760,239594,238
    
    
    
    1,969,436
    
    
    
    1,765,736Expenses:
    
    
    825,549
    
    
    
    549,431
    
    
    
    394,050Income before income taxes and
equity in undistributed net income
of subsidiaries
    
    
    (231,311
    )
    
    
    1,420,005
    
    
    
    1,371,686Provision for income taxes
    
    
    800
    
    
    
    800
    
    
    
    800Income before equity in undistributed
net income of subsidiaries
    
    
    (232,111
    )
    
    
    1,419,205
    
    
    
    1,370,886Equity in undistributed net income of
subsidiaries
    
    
    6,510,481
    
    
    
    3,558,470
    
    
    
    2,811,790Net income
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    $
    4,182,676
 75




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31,Statements of Cash Flows
    
    2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net income
    
    $
    6,278,370
    
    
    $
    4,977,675
    
    
    
    4,182,676Adjustments to reconcile net income to
net cash provided by operating activities:Provision for loan losses
    
    
    5,700
    
    
    
    0
    
    
    
    0Compensation associated with stock options
    
    
    5,784
    
    
    
    3,856
    
    
    
    22,404Effect of changes in:Other Assets
    
    
    30,000
    
    
    
    197,667
    
    
    
    (250,006
    )Other Liabilities
    
    
    20,399
    
    
    
    0
    
    
    
    0Equity in undistributed net income
of subsidiaries
    
    
    (6,510,481
    )
    
    
    (3,558,470
    )
    
    
    (2,811,790
    )Net cash provided by operating activities
    
    
    (170,228
    )
    
    
    1,620,728
    
    
    
    1,143,284Cash flows from investing activities:Investment in subsidiary trust
    
    
    (310,000
    )
    
    
    0
    
    
    
    (155,000
    )Capital contribution to Bank
    
    
    (5,000,000
    )
    
    
    0
    
    
    
    (5,000,000
    )Participation loan purchased
    
    
    (2,014,736
    )
    
    
    0
    
    
    
    0Net cash used by investing activities
    
    
    (7,324,736
    )
    
    
    0
    
    
    
    (5,155,000
    )Cash flows from financing activities:Equity transactions, net
    
    
    467,000
    
    
    
    1,174,083
    
    
    
    802,582Proceeds from unconsolidated subsidiary
Grantor trust
    
    
    10,310,000
    
    
    
    0
    
    
    
    5,000,000Cash dividends
    
    
    (1,550,715
    )
    
    
    (1,955,584
    )
    
    
    (1,760,239
    )Net cash used by financing activities
    
    
    9,226,285
    
    
    
    (781,501
    )
    
    
    4,042,343Increase (decrease) in cash and cash equivalents
    
    
    1,731,321
    
    
    
    839,227
    
    
    
    30,627Cash and cash equivalents at beginning of year
    
    
    1,163,049
    
    
    
    323,822
    
    
    
    293,195Cash and cash equivalents at end of year
    
    $
    2,894,370
    
    
    $
    1,163,049
    
    
    $
    323,822
 76




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 22.
    
    UNAUDITED QUARTERLY RESULTS
 UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
 (Dollars in thousands, except per share data)
    
    For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2005
    
    
    2005
    
    
    2005Net interest income
    
    $
    4,856
    
    
    $
    4,861
    
    
    $
    5,125
    
    
    $
    5,395Provision for loan losses
    
    
    (177
    )
    
    
    (177
    )
    
    
    (88
    )
    
    
    (6
    )Noninterest income
    
    
    542
    
    
    
    548
    
    
    
    515
    
    
    
    519Noninterest expense
    
    
    (2,920
    )
    
    
    (2,887
    )
    
    
    (3,095
    )
    
    
    (2,846
    )Income before taxes
    
    
    2,301
    
    
    
    2,345
    
    
    
    2,457
    
    
    
    3,062Provision for income tax
    
    
    (925
    )
    
    
    (874
    )
    
    
    (897
    )
    
    
    (1,191
    )Net Income
    
    $
    1,376
    
    
    $
    1,471
    
    
    $
    1,560
    
    
    $
    1,871Per common share:Basic earnings per share
    
    $
    0.16
    
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.18
    
    
    $
    0.21Dividends per share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.08
 (Dollars in thousands, except per share data)
    
    For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004
    
    
    2004
    
    
    2004
    
    
    2004Net interest income
    
    $
    3,915
    
    
    $
    4,087
    
    
    $
    4,269
    
    
    $
    4,606Provision for loan losses
    
    
    (192
    )
    
    
    (97
    )
    
    
    (131
    )
    
    
    (134
    )Noninterest income
    
    
    466
    
    
    
    494
    
    
    
    573
    
    
    
    634Noninterest expense
    
    
    (2,425
    )
    
    
    (2,640
    )
    
    
    (2,641
    )
    
    
    (2,875
    )Income before taxes
    
    
    1,764
    
    
    
    1,844
    
    
    
    2,070
    
    
    
    2,231Provision for income tax
    
    
    (652
    )
    
    
    (683
    )
    
    
    (803
    )
    
    
    (793
    )Net Income
    
    $
    1,112
    
    
    $
    1,161
    
    
    $
    1,267
    
    
    $
    1,438Per common share:Basic earnings per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.17Dividends per share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.23
 (Dollars in thousands, except per share data)
    
    For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2003
    
    
    2003
    
    
    2003
    
    
    2003Net interest income
    
    $
    3,506
    
    
    $
    3,559
    
    
    $
    3,734
    
    
    $
    3,918Provision for loan losses
    
    
    (175
    )
    
    
    (200
    )
    
    
    (40
    )
    
    
    (100
    )Noninterest income
    
    
    471
    
    
    
    609
    
    
    
    584
    
    
    
    462Noninterest expense
    
    
    (2,316
    )
    
    
    (2,487
    )
    
    
    (2,459
    )
    
    
    (2,396
    )Income before taxes
    
    
    1,486
    
    
    
    1,481
    
    
    
    1,819
    
    
    
    1,884Provision for income tax
    
    
    (560
    )
    
    
    (596
    )
    
    
    (565
    )
    
    
    (766
    )Net Income
    
    $
    926
    
    
    $
    885
    
    
    $
    1,254
    
    
    $
    1,118Per common share:Basic earnings per share
    
    $
    0.12
    
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.14Diluted earnings per share
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.13Dividends per share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.22
    
    
    $
    0.00
 77




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 PART III
  78




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##### Table of Contents



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 Executive Officers of the Registrant
  Name
    
    Age
    
    Position(s)Michael C. Mayer
    
    
    49
    
    
    President and Chief Executive Officer Redding
Bank of Commerce and DirectorLinda J. Miles
    
    
    52
    
    
    Executive Vice President, Chief Financial
Officer and Assistant Secretary
 Michael C. Mayer
 Linda J. Miles
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  79




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
    80




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 (a)
    
    The following documents are filed as a part of this Form 10-K:
 (1)
    
    Financial Statements:
  (2)
    
    Financial Statement Schedules:
  (3)
    
    Exhibits:
 ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended.*3.2
    
    Bylaws, as amended.*4.1
    
    Specimen Common Stock Certificate.*10.1
    
    Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998.*10.2
    
    Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998.*10.3
    
    1998 Stock Option Plan.*10.4
    
    Form of Incentive Stock Option Agreement used in connection
with 1998 Stock Option Plan.*10.5
    
    Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan.*10.7
    
    Directors Deferred Compensation Plan.*10.8
    
    Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan.*10.9
    
    Merchant Services Agreement dated as of April 1, 1993, between
Cardservice International, Inc. and Redding Bank of Commerce, as amended.*10.10
    
    Employment contracts dated April 2001*10.11
    
    Affiliated Business Arrangement Agreement *10.12
    
    Office building lease by and between Mr. David Lanza and Redding
Bank of Commerce dated 9/13/2005.*10.13
    
    Amendment to Employment contracts dated April 2001, filed
December 2005*10.14
    
    Change in Control Agreements*11.1
    
    Statement re: Computation of Earnings Per Share (see page54).14.0
    
    RBC Code of Ethics*16.1
    
    Letter on Change in Certifying Accountants. *21.1
    
    Subsidiaries of the Company. *23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of Deloitte & Touche LLP24.1
    
    Power of Attorney (see page82)32.1
    
    Certification pursuant to
Section 906 of the Sarbannes-Oxley Act of 2002
 
 *
    
    Previously filed with the Companys Registration Statement on Form 10 and by the Companys
filing of reports on Form 8-K. 81




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##### Table of Contents



(b)
    
    Reports on Form 8-K:
 February 10, 2006 
    
    Financial presentation at Americas Community Bankers Investor conferenceJanuary 31, 2006 
    
    Press announcement 2005 operating resultsDecember 23,
2005 
    
    Announcement Randy Eslick, Regional President Roseville Bank of CommerceDecember 22, 2005 
    
    Announcement Patrick J. Moty Executive Vice PresidentDecember 21, 2005 
    
    Change in Control AgreementsDecember 21, 2005 
    
    Amendment to Employment Agreements for Michael C. Mayer and Linda J. MilesDecember 21, 2005 
    
    Fourth Quarter Dividend Announcement.December 21, 2005 
    
    Acceleration of Stock Option VestingDecember 19, 2005 
    
    Temporary Suspension of Trading under Registrants Employee Benefit PlansOctober 28, 2005 
    
    Third Quarter Earnings ReleaseOctober 27, 2005 
    
    Creation of a Direct Financial Obligation  Gifford Construction Contract
 
 SIGNATURES
  BANK OF COMMERCE HOLDINGSBy
    
    /s/ Michael C. MayerMichael C. MayerPresident, Chief ExecutiveOfficer and Director
 POWER OF ATTORNEY
  82




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##### Table of Contents



Name
    
    Title
    
    Date/s/Michael C. Mayer
    
    President, Chief Executive Officer
    
    March 6, 2006Michael C. Mayer
    
    Redding
Bank of
Commerce and Director/s/Linda J. Miles
    
    Executive Vice President and
    
    March 6, 2006Linda J. Miles
    
    Chief
Financial Officer and
Assistant Secretary (Principal
Financial and Accounting Officer)/s/Harry L. Grashoff, Jr.
    
    Chairman of the Board
    
    March 6, 2006Harry L. Grashoff, Jr./s/Welton L. CarrelWelton L. Carrel
    
    Director
    
    March 6, 2006/s/Russell L. DuclosRussell L. Duclos
    
    Director
    
    March 6, 2006/s/John C. FitzpatrickJohn C. Fitzpatrick
    
    Director
    
    March 6, 2006/s/Kenneth R. Gifford, Jr.Kenneth R. Gifford, Jr.
    
    Director
    
    March 6, 2006/s/Eugene L. Nichols
    
    Director
    
    March 6, 2006Eugene L. Nichols/s/David H. Scott
    
    Director
    
    March 6, 2006David H. Scott/s/Lyle L. Tullis
    
    Director
    
    March 6, 2006Lyle L. Tullis/s/ Jon Halfhide
    
    Director
    
    March 6, 2006Jon Halfhide/s/ Orin Bennett
    
    Director
    
    March 6, 2006Orin Bennett
 83




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended.*3.2
    
    Bylaws, as amended.*4.1
    
    Specimen Common Stock Certificate.*10.1
    
    Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998.*10.2
    
    Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998.*10.3
    
    1998 Stock Option Plan.*10.4
    
    Form of Incentive Stock Option Agreement used in connection
with 1998 Stock Option Plan.*10.5
    
    Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan.*10.6
    
    Employment Agreement between the Company and Russell L. Duclos
dated June 17, 1997.*10.7
    
    Directors Deferred Compensation Plan.*10.8
    
    Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan.*10.9
    
    Merchant Services Agreement dated as of April 1, 1993, between
Cardservice International, Inc. and Redding Bank of Commerce, as amended.*10.10
    
    Employment contracts dated April 2001.*10.11
    
    Affiliated Business Arrangement Agreement.*10.12
    
    Office building lease by and between Mr. David Lanza and
Redding Bank of Commerce dated 9/13/05 *10.13
    
    Amendment to Employment contracts dated April 2001, filed
December 2005*10.14
    
    Change in Control Agreements*15.1
    
    Statement re: Computation of Earnings Per Share (see page 54).14.0
    
    RBC Code of Ethics*16.1
    
    Letter on Change in Certifying Accountants.*21.1
    
    Subsidiaries of the Company.*23.1
    
    Consent of Moss Adams LLP23.2
    
    Consent of Deloitte & Touche LLP24.1
    
    Power of Attorney (see page 82).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of the Companys
Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a)
Certification of the Companys Chief Financial Officer.32.1
    
    Section 906 Certifications by Chief Executive Officer and Chief
Financial Officer.
 
 *
    
    Previously filed with the Companys Registration Statement on Form 10, SEC Form 10-K and
SEC Form 8-K.