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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
  OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  (BANK OF COMMERCE HOLDINGS LOGO) 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)
 Registrants telephone number, including area code: (530) 224-3333 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of
the Registrants knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. o Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $60,166,680 as of February 28, 2005 which was
calculated based on the last reported sale of the Companys Common Stock. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose. As of February 28, 2005 there were 8,549,331 total shares of the Registrants
common stock outstanding.




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Bank of Commerce Holdings Form 10-K Table of Contents Part I.Item 1 . Business
    
    
    3General
    
    
    3Primary market areas
    
    
    4Products and services
    
    
    4Government supervision and regulation
    
    
    5General
    
    
    5Dividends
    
    
    6Interstate Banking
    
    
    6Capital standards
    
    
    6Overview of The New Accord
    
    
    7State regulation and supervision
    
    
    7Changes in regulations
    
    
    8Prompt corrective action and other enforcement mechanisms
    
    
    8Safety and soundness standards
    
    
    8Community reinvestment act and fair lending developments
    
    
    9Recently enacted legislation
    
    
    9SOX 404 Compliance framework
    
    
    10Competition
    
    
    10Employees
    
    
    11Forward Looking Statements and Risk factors that may affect results
    
    
    12Overview
    
    
    12Lending risks associated with commercial banking and construction activities
    
    
    13Dependence on real estate
    
    
    13Risks specific to operations in California
    
    
    13Interest rate risk
    
    
    14Potential volatility of deposits
    
    
    14Dividends
    
    
    14Government regulation and legislation
    
    
    14Economic conditions and geographical concentration
    
    
    14Reliance on key employees and others
    
    
    15Adequacy of allowance for loan and lease losses (ALLL)
    
    
    15Certain ownership restrictions under California an5 Federal law
    
    
    15Shares eligible for future sale
    
    
    15Technology and computer systems
    
    
    16Environmental risks
    
    
    16Dilution
    
    
    16Item 2. Properties
    
    
    17Item 3. Legal proceedings
    
    
    17Item 4. Submission of matters to a vote of security holders
    
    
    17Part II.Item 5. Market for Registrants common equity and related Shareholder matters
    
    
    18Equity compensation plan information
    
    
    19Item 6. Selected consolidated financial data
    
    
    20Item 7. Managements discussion and analysis of financial condition and results of operations
    
    
    21Executive overview
    
    
    21Risk Management
    
    
    22Liquidity risk management
    
    
    23Credit risk management
    
    
    24
 1




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Market risk management
    
    
    27Operational risk management
    
    
    27Critical accounting policies
    
    
    27General
    
    
    27Allowance for loan and lease losses (ALLL)
    
    
    28Stock-based compensation
    
    
    28Revenue recognition
    
    
    28Fixed Assets
    
    
    28Income taxes
    
    
    29Financial highlights - Results of operations
    
    
    29Key Financial Ratios
    
    
    29Sources of Income
    
    
    29Year ended December 31, 2004 compared to Year ended December 31, 2003
    
    
    30Year ended December 31, 2003 compared to Year ended December 31, 2002
    
    
    30Net Interest Income and net interest margin
    
    

    31Noninterest Income
    
    
    33Noninterest Expense
    
    
    33Income taxes
    
    
    34Asset Quality
    
    
    34Nonperforming assets
    
    
    35Available-for-sale securities
    
    
    35Deposit structure
    
    
    36Capital management and adequacy
    
    
    36Transactions with related parties
    
    
    37Impact of inflation
    
    
    37Commitments
    
    
    38Item 7a. Quantitative and qualitative disclosures to market risk
    
    
    39Item 8. Financial Statements and supplementary data
    
    
    41Item 9. Changes and disagreements with accountants
    
    
    77Item 9A. Controls and procedures
    
    
    75Part III.Item 10. Directors and Executive officers of the registrant
    
    
    76Item 11. Executive compensation
    
    
    76Item 12. Security ownership of beneficial owners and management and related stockholder matters
    
    
    76Item 13. Certain relationships and related transactions
    
    
    76Part IV.Item 14. Principal Accountant fees and services
    
    
    77Item 15. Exhibits, financial statements, certifications
    
    
    78EXHIBIT 23.1EXHIBIT 23.2Exhibit 32.1
  Documents Incorporated By Reference Items numbered 10 (as to directors), 11 and 12 of Part III incorporate by reference
information from the Registrants Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the Registrants
2005 Annual Meeting of Shareholders. The 2005 Annual Meeting of Shareholders will be held
on Tuesday, May 17, 2005. 2




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PART I 
 Item 1. BUSINESS 
 General Bank of Commerce Holdings (the Holding Company) is a financial holding company (FHC) registered
under the Bank Holding Company Act of 1956, as amended, and was incorporated in California on
January 21, 1982 (under the name Redding Bancorp), for the purpose of organizing, as a wholly owned
subsidiary, Redding Bank of Commerce (the Bank). The Holding Company elected to change to a FHC
in 2000. As a financial holding company, the Holding Company is subject to the Financial Holding
Company Act and to supervision by the Board of Governors of the Federal Reserve System (FRB).
The Holding Companys principal business is to serve as a holding company for Redding Bank of
Commerce, Bank of Commerce Mortgage, a California corporation and for other banking or
banking-related subsidiaries which the Holding Company may establish or acquire (collectively the
Company). The Holding Company also has an unconsolidated subsidiary, Bank of Commerce Holdings
Trust. During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued $5.0
million of guaranteed preferred beneficial interests in Bank of Commerce Holdings junior
subordinated debentures (the Trust Notes). These debentures qualify as Tier 1 capital under
Federal Reserve Board guidelines. The proceeds from the issuance of the Trust Notes were
transferred from the grantor trust to the Holding Company and from the Holding Company to the Bank
as surplus capital. The Trust Notes accrue and pay distributions on a quarterly basis at 3 month
London Interbank Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2004 was 5.37%. The
rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the
Trust Notes is March 18, 2033, and the debt allows for prepayment after five years on the quarterly
payment date. The Company will provide free of charge upon request, or through links to publicly available
filings accessed through its Internet website, the Companys annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon
as reasonably practical after such reports have been filed with the Securities and Exchange
Commission. The Internet addresses of the Company are www.reddingbankofcommerce.com, and
www.rosevillebankofcommerce.com. Additionally, reports may be obtained through the
Securities and Exchange Commissions website at www.sec.gov. The Bank was incorporated as a California banking corporation on November 25, 1981, and received
its certificate of authority to begin banking operations on October 22, 1982. The Bank operates
four full service branch facilities. The Bank established its first full service branch at 1177
Placer Street, Redding, California, and opened for business on October 22, 1982. On November 1,
1988, the Bank received a certificate of authority to establish and maintain a loan production
office in Citrus Heights, California. On September 1, 1998, the Bank relocated the loan production
office to 2400 Professional Drive in Roseville, California. On March 1, 1994, the Bank received a certificate of authority to open a second full-service branch
at 1951 Churn Creek Road in Redding, California. On June 30, 2000, the Bank received a certificate
of authority to convert the loan production office in Roseville to a full service banking facility
under the name Roseville Bank of Commerce, a division of Redding Banking of Commerce. On June 15, 2001, the Bank acquired the deposit liabilities of FirstPlus Bank at Citrus Heights,
California and has renamed the facility Roseville Bank of Commerce at Sunrise, a division of
Redding Bank of Commerce. On February 22, 2002, the Roseville Bank of Commerce at Eureka Road, a
division of Redding Bank of Commerce, relocated to its permanent location at 1504 Eureka Road,
Suite 100, Roseville, California. On March 18, 2004, RBC Mortgage Services, a wholly-owned subsidiary of the Holding Company, changed
its name to Bank of Commerce Mortgage (the Mortgage Company), an affiliate of Redding Bank of
Commerce. The principal business of the subsidiary is mortgage brokerage services. The subsidiary
has an affiliated business arrangement with the Bank of Walnut Creek (BWC Mortgage Services).
Under the terms of the agreement, BWC Mortgage Services underwrites or brokers mortgage products,
and manage the independent contractors, supporting staff and broker relationships with various
secondary market lenders. Bank of Commerce Mortgage in turn provides office space, equipment and
marketing support for the mortgage brokerage services. Bank of Commerce Mortgage, through this
agreement, offers a full array of single-family and multi-family residential real estate mortgages
including equity lines. Bank of Commerce Mortgage pays ten percent of gross premiums earned to BWC
Mortgage Services . On July 1, 2004, Bank of Commerce Mortgage relocated to its permanent location
at 1024 Mistletoe Lane, Redding, California. 3




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On May 18, 2004, by majority shareholder vote, the Holding Company (Redding Bancorp) amended the
Articles of Incorporation to change the Companys name to Bank of Commerce Holdings. The new name
proves to be more reflective of the multiple financial holdings of the Company as well as more
geographically open to expansion opportunities. On May 24, 2004 the Company was approved to list on the NASDAQ National Market under the trading
symbol BOCH (Bank of Commerce Holdings). The listing became live on June 15, 2004. On July 21,
2004, the Board of Directors declared a three-for-one stock split on the Companys common stock.
The decision to declare the stock split was intended to make it easier for our current and future
investors to enjoy ownership in our Company. The Board of Directors passed a resolution for a $0.23
per share cash dividend effective October 1, 2004 to be paid during the fourth quarter to
stockholders of record as of October 1, 2004 payable on October 22, 2004. 
 Primary Market Areas The Bank is principally supervised and regulated by the California Department of Financial
Institutions and the Federal Deposit Insurance Corporation. The Company operates in two distinct
markets. Redding Bank of Commerce has historically been the leading independent commercial bank in
Redding, California, and Shasta County, California though community banks and national banks make
the competition more intense. This market has been expanding, but is still relatively small when
compared to the greater Sacramento market, the location of Roseville Bank of Commerce, a division
of Redding Bank of Commerce. Management believes that the two markets complement each other, with
the Redding market providing the stability and the greater Sacramento market providing growth
opportunities. At the time of this report the Bank ranked third in Shasta County for market share,
29th in Sacramento County and 18th in Placer County. 
 Products and Services Through the Bank and mortgage subsidiaries, the Company provides a wide range of financial services
and products. The services offered by the Bank include those traditionally offered by commercial
banks of similar size and character in California. Products such as checking, interest-bearing
checking (NOW) and savings accounts, money market deposit accounts, commercial, construction, and
term loans, travelers checks, safe deposit boxes, collection services and electronic banking
activities. The primary focus of the Bank is to provide services to the business and professional
community of its major market area, including Small Business Administration loans, payroll and
accounting packages, benefit administration and billing services. The Bank currently does not
offer trust services or international banking services. The services offered by the Mortgage
Company include single and multi-family residential residence new financing, refinancing and equity
lines of credit. Most of the Banks customers are small to medium sized businesses, professionals and other
individuals with medium to high net worth, and most of the Banks deposits are obtained from such
customers. The Bank emphasizes servicing the needs of local businesses and professionals and
individuals requiring specialized services. The primary business strategy of the Bank is to focus
on its lending activities. The Banks principal lines of lending are (i) commercial, (ii) real
estate construction and (iii) commercial real estate. The majority of the loans of the Bank are direct loans made to individuals and small
businesses in the major market area of the Bank. The Mortgage Company provides residential real
estate new financing, refinancing and equity lines of credit, 100% sold in the secondary market.
See -Risk Factors That May Affect Results-Dependence on Real Estate. A relatively small portion
of the loan portfolio of the Bank consists of loans to individuals for personal, family or
household purposes. The Bank accepts as collateral for loans real estate, listed and unlisted
securities, savings and time deposits, automobiles, machinery and equipment and other general
business assets such as accounts receivable and inventory. The commercial loan portfolio of the Bank consists of a mix of revolving credit facilities and
intermediate term loans. The loans are generally made for working capital, asset acquisition and
business expansion purposes and are generally secured by a lien on the borrowers assets. The Bank
also makes unsecured loans to borrowers who meet the Banks underwriting criteria for such loans.
The Bank manages its commercial loan portfolio by monitoring its borrowers payment performance and
their respective financial condition and makes periodic and appropriate adjustments, if necessary,
to the risk grade assigned to each loan in the portfolio. The primary sources of repayment of the
commercial loans of the Bank are the borrowers conversion of short-term assets to cash and
operating cash flow. The net assets of the borrower or guarantor and/or the liquidation of
collateral are usually identified as a secondary source of repayment. 4




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The principal factors affecting the Banks risk of loss from commercial lending include each
borrowers ability to manage its business affairs and cash flows, local and general economic
conditions and real estate values in the Banks service area. The Bank manages risk through its
underwriting criteria, which includes strategies to match the borrowers cash flow to loan
repayment terms, and periodic evaluations of the borrowers operations. The Banks evaluations of
its borrowers are facilitated by managements knowledge of local market conditions and periodic
reviews by a consultant of the credit administration policies of the Bank. The real estate construction loan portfolio of the Bank consists of a mix of commercial and
residential construction loans, which are principally secured by the underlying project. The real
estate construction loans of the Bank are predominately made for projects, which are intended to be
owner occupied. The Bank also makes real estate construction loans for speculative projects. The
principal sources of repayment of the Banks construction loans are sale of the underlying
collateral or permanent financing provided by the Bank or another lending source. The principal
risks associated with real estate construction lending include project cost overruns that absorb
the borrowers equity in the project and deterioration of real estate values as a result of various
factors, including competitive pressures and economic downturns. See Risk Factors That May Affect Results-Lending Risks Associated with Commercial Banking and
Construction Activities. The Bank manages its credit risk associated with real estate construction
lending by establishing maximum loan-to-value ratios on projects on an as-completed basis,
inspecting project status in advance of controlled disbursements and matching maturities with
expected completion dates. Generally, the Bank requires a loan-to-value ratio of no more than 80%
on single-family residential construction loans. The commercial and construction loan portfolio of the Bank consists of loans secured by a variety
of commercial and residential real property. The Mortgage Company makes real estate mortgage loans
for both owner-occupied properties and investor properties. The Mortgage Company underwrites and
sells the residential real estate loan directly in the secondary market, servicing included. The
Bank does not provide for warehouse funding. The specific underwriting standards of the Bank and methods for each of its principal lines of
lending include industry-accepted analysis and modeling and certain proprietary techniques. The
Banks underwriting criteria is designed to comply with applicable regulatory guidelines, including
required loan-to-value ratios. The credit administration policies of the Bank contain mandatory
lien position and debt service coverage requirements, and the Bank generally requires a guarantee
from the owners of its private corporate borrowers. 
 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 The Holding Company is a financial holding company under the Gramm-Leach-Bliley Act and subject to
the Financial Holding Company Act (FHCA). The Holding Company reports to, registers with, and
may be examined by the Board of Governors of the Federal Reserve Bank (FRB). The FRB also has
the authority to examine the Holding Companys subsidiaries. The Bank is subject to regulation,
supervision and examination by the Federal Deposit Insurance Corporation (the FDIC) and the
California Department of Financial Institutions (DFI). In addition to banking laws, regulations
and regulatory agencies, the Holding Company and its subsidiaries and affiliates are subject to
various other laws and regulations and regulation by other regulatory agencies, all of which
directly or indirectly affect the operations and management of the Holding Company and its ability
to make distributions to stockholders. A financial holding company, and the companies under its control, are permitted to engage in
activities considered to be financial in nature as defined by the Gramm-Leach-Bliley Act and the
Federal Reserve Board interpretations (including, without limitation, insurance and securities
activities), and therefore may engage in a broader range of activities than permitted for bank
holding companies and their subsidiaries. A financial holding company may engage directly or
indirectly in activities considered financial in nature, either de novo or by acquisition, provided
the financial holding company gives the Federal Reserve Board after-the-fact notice of the new
activities. 5




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Dividends The FRB generally prohibits a financial holding company from declaring or paying a cash dividend
which would impose undue pressure on the capital of subsidiary banks or would be funded only
through borrowing or other arrangements that might adversely affect a bank holding companys
financial position. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
prohibits insured depository institutions from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions, including dividends, if, after
such transaction, the institution would be undercapitalized. In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the banks net income for its last three fiscal years (less any
distributions to stockholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner in an amount not exceeding the greatest of the banks retained earnings, the banks
net income for its last fiscal year, or the banks net income for its current fiscal year. Regulators also have authority to prohibit a depository institution from engaging in business
practices which are considered to be unsafe or unsound, possibly including payment of dividends or
other payments under certain circumstances even if such payments are not expressly prohibited by
statute. The FRBs policy is that a bank holding company should not continue its existing rate of
cash dividends on its common stock unless its net income is sufficient to fully fund each dividend
and its prospective rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition. 
 Interstate Banking A financial holding company may acquire banks in states other than its home state without
regard to the permissibility of such acquisitions under state law, but subject to any state
requirement that the bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the bank holding company, prior to or following the
proposed acquisition, controls no more than 10% of the total amount of deposits of insured
depository institutions in the United States and no more than 30% of such deposits in that state
(or such lesser or greater amount set by state law). Banks may also merge across state lines,
therefore creating interstate branches. Furthermore, a bank is now able to open new branches in a
state in which it does not already have banking operations if the laws of such state permit such  de
novo  branching. 
 Capital Standards In the United States of America, banks, thrifts and bank holding companies are subject to
minimum regulatory capital requirements. Specifically, U.S. banking organizations must maintain a
minimum leverage ratio and two minimum risk-based ratios. The leverage ratio measures regulatory
capital as a percentage of total on-balance-sheet assets as reported in accordance with accounting
principles generally accepted in the United States of America (GAAP). The risk-based ratios measure
regulatory capital as a percentage of both on- and off-balance-sheet credit exposures with some
gross differentiation based on perceived credit risk. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low credit risk, such as
certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as
certain loans. The current U.S. risk-based capital requirements are based on an internationally agreed
framework for capital measurement that was developed by the Basel Committee on Banking Supervision
(BSC) in 1988. The international framework (the 1988 Accord) accomplished several important
objectives. It strengthened capital levels at large, internationally active banks and fostered
international consistency and coordination. The 1988 Accord also reduced disincentives for banks to
hold liquid, low risk assets. By requiring banks to hold capital against off-balance-sheet
exposures, the 1988 Accord represented a significant step forward for regulatory capital
measurement. The federal banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets and off-balance-sheet items of 8%, and a minimum ratio of Tier 1 capital to
adjusted average risk-adjusted assets and off-balance-sheet items of 4%. The Company exceeds the
minimum requirements. Over the past 15 years the worlds financial system has become increasingly
more complex and the BSC has been working for several years to develop a new regulatory capital
framework that recognizes new developments in financial products, incorporates advances in risk
measurement and management practices, and more precisely assesses capital charges in relation to
risk (the New Accord). The BSC expects the New Accord would have an effective date for implementation of December 31, 2006. 6




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Overview of the New Accord The New Accord encompasses three elements: minimum regulatory capital requirements,
supervisory review and market discipline. Under the first element, a banking organization must
calculate capital requirements to credit risk, operational risk and market risk .  The New Accord
 does not  change the definition of what qualifies as regulatory capital, the minimum risk-based
capital ratio, or the methodology for determining capital charges for market risk. The New Accord
 does  provide several methodologies for determining capital requirements for both credit and
operational risk. For credit risk there are two general approaches; the standardized approach
(based on the 1988 Accord) and the internal ratings-based (IRB) approach, which uses the
institutions internal estimates of key risk drivers to derive capital requirements. The New Accord provides three methodologies for determining capital requirements for
operational risk: the basic indicator approach, the standardized approach, and the advanced
measurement approaches (AMA). Under the first two methodologies, capital requirements for
operational risk are fixed percentages of specified, objective risk measures (for example, gross
income.) The AMA provides the flexibility for an institution to develop its own individualized
approach for measuring operational risk, subject to supervisory oversight. The second pillar of the New Accord, supervisory review, highlights the need for banking
organizations to assess their capital adequacy positions relative to overall risk (rather than to
the minimum capital requirement), and the need for supervisors to review and take appropriate
actions in response to those assessments. The third pillar of the New Accord imposes public
disclosure requirements on institutions that are intended to allow market participants to assess
key information about an institutions risk profile and its associated level of capital. In order for a financial holding company to qualify as well-run, both it and the insured
depository institutions that it controls must meet the well-capitalized and well-managed
criteria set forth in Regulation Y. To qualify as well-capitalized, the bank must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or greater, (ii) maintain
a Tier 1 risk-based capital ratio of 6% or greater and (iii) not be subject to any order by the FRB
to meet a specified capital level. Its lead insured depository institution must be
well-capitalized (as that term is defined in the capital adequacy regulations of the applicable
bank regulator), 80% of the total risk-weighted assets held by its insured depository institutions
must be held by institutions that are well-capitalized, and none of its insured depository
institutions may be undercapitalized. To qualify as well-managed: (i) each of its lead depository institutions and its depository
institutions holding 80% of the total risk-weighted assets of all its depository institutions at
their most recent examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory, (ii) none of the bank
holding companys depository institutions may have received one of the two lowest composite ratings
and (iii) neither the bank holding company nor any of its depository institutions during the
previous 12 months may have been subject to a formal enforcement order or action. 
 State Regulation and Supervision The Bank is a California chartered bank insured by the Federal Deposit Insurance Corporation (the
FDIC), and as such is subject to regulation, supervision and regular examination by the
California Department of Financial Institutions (DFI) and the FDIC. As a non-member of the
Federal Reserve System, the primary federal regulator of the Bank is the FRB. The regulations of
these agencies affect most aspects of the Banks business and prescribe permissible types of loans
and investments, the amount of required reserves, requirements for branch offices, the permissible
scope of the Banks activities and various other requirements. The Bank is also subject to
applicable provisions of California law, insofar as such provisions are not in conflict with or
preempted by federal banking law. In addition, the Bank is subject to certain regulations of the
FRB dealing primarily with check-clearing activities, establishment of banking reserves,
Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B). Under California law, a state chartered bank is subject to various restrictions on, and
requirements regarding, its operations and administration including the maintenance of branch
offices and automated teller machines, capital and reserve requirements, deposits and borrowings,
shareholder rights and duties, and investment and lending activities. Whenever it appears that the
contributed capital of a California bank is impaired, the Commissioner is required to order the
bank to correct such impairment. If a bank is unable to correct the impairment, the bank is
required to levy and collect an assessment upon its common shares. If such assessment becomes
delinquent, the common shares are to be sold by the bank. 7




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Changes in Regulations Proposals to change laws and regulations governing the banking industry are frequently introduced
in Congress, in the state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any proposals or legislation and the impact they might have on the Holding
Company and its subsidiaries cannot be determined at this time. 
 Prompt Corrective Action and Other Enforcement Mechanisms The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires each federal
banking agency to take prompt corrective action to resolve the problems of insured depository
institutions, including but not limited to those that fall below one or more prescribed minimum
capital ratios. The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be placed, based on
the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. As of December 31, 2004, the most recent notification from the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. Under the
prompt corrective action provisions of FDICIA, an insured depository institution generally will be
classified in the following categories based on the capital measures indicated below: Well capitalized  Bank only
    
    Adequately capitalizedTotal risk-based capital of 10%;
    
    Total risk-based capital of 8%;Tier 1 risk-based capital of 6%; and
    
    Tier 1 risk-based capital of 4%; andLeverage ratio of 5%.
    
    Leverage ratio of 4%.Undercapitalized
    
    Significantly undercapitalizedTotal risk-based capital less than 8%;
    
    Total risk-based capital less than 6%;Tier 1 risk-based capital less than 4%; or
    
    Tier 1 risk-based capital less than 3%; orLeverage ratio less than 4%.
    
    Leverage ratio less than 3%.Critically undercapitalizedTangible equity to total assets less than 2%.
 An institution that, based upon its capital levels, is classified as well capitalized,
adequately capitalized or undercapitalized may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and opportunity for
hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository institution is
subject to more restrictions. The federal banking agencies, however, may not treat an institution as critically
undercapitalized unless its capital ratio actually warrants such treatment. If an insured
depository institution is undercapitalized, it will be closely monitored by the appropriate federal
banking agency. Undercapitalized institutions must submit an acceptable capital restoration plan
with a guarantee of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are critically undercapitalized.
The most important additional measure is that the appropriate federal banking agency is required
to either appoint a receiver for the institution within 90 days, or obtain the concurrence of the
FDIC in another form of action. 
 Safety and Soundness Standards FDICIA also implemented certain specific restrictions on transactions and required federal banking
regulators to adopt overall safety and soundness standards for depository institutions related to
internal control, loan underwriting, documentation, and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of
brokered deposits, limits the aggregate extensions of credit by a depository institution to an
executive officer, director, principal shareholder or related interest, and reduces deposit
insurance coverage for deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan
as well as have the flexibility to pursue other more appropriate or effective courses of action
given the specific circumstances and severity of 8




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an institutions noncompliance with one or more
standards. 
 Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act (CRA) activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate-income neighborhoods. In
addition to substantive penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities. 
 Recently Enacted Legislation On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (SOX). This is
the most comprehensive securities reform since the securities acts of the 1930s. SOX and
associated rulemaking by the Securities and Exchange Commission (SEC) significantly changed the
public reporting corporate governance obligations of the Company and other publicly traded
companies. In accordance with SOX and associated rulemaking, the Company adopted the Audit Committee Charter
which is included in the Companys annual proxy statement as appendix A, and the Company has
undertaken numerous additional compliance actions as well. As required by SEC rules, within 90 days prior to the date of this Form 10-Q, the Company carried
out an evaluation, under the supervision and with the participation of the Companys management,
including the Companys President and Chief Executive Officer and with the Companys Chief
Financial Officer, of the effectiveness of the design and operation of the Companys disclosure
controls and procedures, pursuant to Exchange Act Rule 13a-14. As part of the evaluation of internal controls mandated under SOX and the associated rulemaking,
the Company has formed a SOX 404 Compliance Team which has established the master plan for full
documentation of the Companys internal controls. The master plan consists of seven control areas:
Finance, Commercial Lending, Real Estate Lending, Operations, Human Resources, Third Party
Services, and Information Technology. The committee has developed the following compliance
framework and nine steps to compliance. 9




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##### Table of Contents



SOX 404 Compliance Framework The purpose of this framework is to comply with the requirements of Section 404 of SOX (SOX 404).
Under SOX 404, the Company will be required to include in its SEC reporting an annual report on
the internal controls for financial reporting. The internal control report must include the
following:  
    A statement of managements responsibility for establishing and
maintaining adequate internal control over financial reporting for
the company.  
    Managements assessment of the effectiveness of the companys
internal control over financial reporting as of the end of the
companys most recent fiscal year.  
    A statement identifying the framework used by management to
evaluate the effectiveness of the companys internal control over
financial reporting.  
    A statement that the registered public accounting firm that
audited the companys financial statements included in the annual
report has issued an attestation report on managements assessment
of the companys internal control over financial reporting. Under these new rules, the Company will be required to file the registered public accounting firms
attestation report as part of its annual report on internal controls. Management has adopted and is
implementing a process to meet the requirements of SOX 404. The Company expects to complete its internal controls process by August 2005, allowing sufficient
time for testing prior to the December 31, 2005 deadline. As part of the disclosure controls and procedures, the Company has formed an SEC Disclosure
Committee. This committee reviews the quarterly filing to a disclosure checklist to ensure that all
functional areas of the Company have participated in the disclosure review. In August 2003, the SEC issued proposed disclosure guidance related to director nominations and
shareholder communications. The rules are an important first step in improving the proxy process as
it relates to the nomination and election of directors. The SEC believes that better information
about the way board nominees are identified, evaluated and selected is critical for shareholder
understanding of the proxy process regarding nomination and election of directors providing
transparency of the operations of the Board of Directors. For information concerning director
nominations and stockholder communications please refer to the Companys Nominating and Corporate
Governance Committee Charter included in the Companys annual proxy statement as appendix B. 
 Competition The commercial banking business in which the Company engages in is highly competitive. Generally,
the lines of activity and markets served involve competition with other banks, thrifts, credit
unions and other nonbank financial institutions, such as investment banking firms, investment
advisory firms, brokerage firms, investment companies and insurance entities which offer financial
services, located both domestically and through alternative deliver channels such as the Internet.
The methods of competition center around various factors, such as customer services, interest rates
on loans and deposits, lending limits and customer convenience. The mortgage brokerage business in which the Company engages in is highly competitive. The mortgage
brokerage business competes with other banks, thrifts, government agencies, mortgage brokers and
other nonbank organizations offering mortgage banking services. Among the competitive advantages,
major banks have an ability to finance wide ranging advertising campaigns and to allocate their
securities into securities of higher yield and demand. Such institutions offer certain services
such as trust services and international banking services that are not offered directly by the Bank
(but are offered indirectly through correspondent relationships). Because of their greater total
capitalization, major banks have substantially higher legal lending limits than the Bank. In order to compete with major banks and other competitors in its primary service areas, the
Company relies upon the experience of its executive and senior officers in serving business
clients, and upon its specialized services, local promotional activities and the personal contacts
made by its officers, directors and employees. For customers whose loan demand exceeds the
Companys legal lending limit, the Company may arrange for such loans on a participation basis with
correspondent banks. Competitive pressures in the banking industry significantly increase changes
in the interest rate environment, reducing net interest margins, and less than favorable economic
conditions can result in a deterioration of credit quality and an increase in the provisions for loan losses. 10




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Employees As of February 1, 2005, the Company employed 112 full-time equivalent employees. Of these
employees, 27 were employed in the Roseville market and 85 were in the Redding market. None of the
employees within the Company are subject to a collective bargaining agreement. Management considers
its employee relations to be excellent. 11




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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 As a financial holding company, our earnings are significantly affected by general business and
economic conditions. These conditions include short-term and long-term interest rates, inflation,
monetary supply, fluctuations in both debt and equity capital markets, and the strength of the
United States economy and local economies in which we operate. For example, an economic downturn,
increase in unemployment, or other events that negatively impact household and/or corporate incomes
could decrease the demand for the Companys loan and non-loan products and services and increase
the number of customers who fail to pay interest or principal on their loans. Geopolitical
conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United
States or other governments in response to acts or threats of terrorism and our military conflicts
including the aftermath of the war with Iraq could impact business conditions in the United States. The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part our cost of funds for lending and investing
and the return we earn on those loans and investments, both of which impact our net interest
margin, and can materially affect the value of financial instruments we hold. Its policies can also
affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in
Federal Reserve Board policies are beyond our control and hard to predict or anticipate. We operate in a highly competitive industry that could become even more competitive because of
legislative, regulatory and technological changes and continued consolidation. Banks, securities
firms and insurance companies can now merge creating a financial holding company that can offer
virtually any type of financial service, including banking, securities underwriting, insurance
(agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made
it possible for non-banks to offer products and services traditionally provided by banks, such as
automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and some have lower cost structures. The holding company, subsidiary bank and nonbank subsidiary are heavily regulated at the federal
and state levels. This regulation is intended to protect depositors, federal deposit insurance
funds and the banking system as a whole, not investors. Congress and state legislatures and federal
and state regulatory agencies continually review banking laws, regulations and policies for
possible changes. Changes to statutes, regulations or regulatory policies including changes in
interpretation and implementation could affect us in substantial and unpredictable ways including
limiting the types of financial services and products we may offer. Our failure to comply with the laws, regulations or policies could result in sanctions by
regulatory agencies and damage our reputation. 12




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Our success depends, in part, on our ability to adapt our products and services to evolving
industry standards. There is increasing pressure on financial services companies to provide
products and services at lower prices. This can reduce our net interest margin and revenues from
fee-based products and services. In addition, the widespread adoption of new technologies,
including internet-based services, could require us to make substantial expenditures to modify or
adapt our existing products and services. Our success depends, in large part, on our ability to
attract and retain key people. Competition for the best people can be intense. 
 Lending Risks Associated with Commercial Banking and Construction Activities The business strategy of the Company is to focus on commercial, single family and multi-family real
estate loans, construction loans and commercial business loans. Loans secured by commercial real
estate are generally larger and involve a greater degree of credit and transaction risk than
residential mortgage (one-to-four family) loans. Because payments on loans secured by commercial
and multi-family real estate properties are often dependent on successful operation or management
of the underlying properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. Moreover, real estate
construction financing is generally considered to involve a higher degree of credit risk than
long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the propertys value at
completion of construction or development compared to the estimated cost (including interest) of
construction. If the estimate of value proves to be inaccurate, the Company may be confronted with
a project which, when completed, has a value which is insufficient to assure full repayment of the
construction loan. Although the Company manages lending risks through its underwriting and credit
administration policies, no assurance can be given that such risks would not materialize, in which
event the Companys financial condition, results of operations, cash flows and business prospects
could be materially adversely affected. 
 Dependence on Real Estate At December 31, 2004, approximately 68% of the loans of the Company were secured by real estate.
The value of the Companys real estate collateral has been, and could in the future be adversely
affected by any economic recession and any resulting adverse impact on the real estate market in
California. See -Economic Conditions and Geographic Concentration . The Companys primary lending focus has historically been commercial real estate, commercial
lending and, to a lesser extent, construction lending. At December 31, 2004, commercial real
estate and construction loans comprised approximately 42% and 24%, respectively, of the total loans
in the portfolio of the Company. At December 31, 2004, all of the Companys real estate mortgage,
real estate construction loans, and commercial real estate loans, were secured fully or in part by
deeds of trust on underlying real estate. The Companys dependence on real estate increases the
risk of loss in the loan portfolio of the Company and its holdings of other real estate owned if
economic conditions in California deteriorate in the future. Deterioration of the real estate
market in California could have a material adverse effect on the Companys business, financial
condition and results of operations. See -Economic Conditions and Geographic Concentration . 
 Risks Specific to Operations in California Our operations are located entirely in California, which in recent years has experienced economic
disruptions that are unique to the state. The fiscal and political uncertainty surrounding the
state governments financial condition, for example may have a material adverse effect on our
customers businesses or on our business, financial condition and results of operations. 13




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Interest Rate Risk The income of the Company is highly dependent on interest rate differentials and the resulting
net interest margins (i.e., the difference between the interest rates earned on the Banks
interest-earning assets such as loans and securities, and the interest rates paid on the Banks
interest-bearing liabilities such as deposits and borrowings). These rates are highly sensitive to
many factors, which are beyond the Companys control, including general economic conditions,
inflation, recession and the policies of various governmental and regulatory agencies, in
particular, the FRB. Because of the Companys practice of using variable rate pricing and
noninterest bearing demand deposit accounts the Company is asset sensitive. As a result, the
Company is generally adversely affected by declining interest rates. In addition, changes in
monetary policy, including changes in interest rates, influence the origination of loans, the
purchase of investments and the generation of deposits and affect the rates received on loans and
securities and paid on deposits, which could have a material adverse effect on the Companys
business, financial condition and results of operations. See Quantitative and Qualitative
Disclosure about Market Risk. 
 Potential Volatility of Deposits At December 31, 2004, time certificates of deposit in excess of $100,000 represented approximately
24% of the dollar value of the total deposits of the Company. As such, these deposits are
considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such
deposits could adversely affect the liquidity of the Company, profitability, business prospects,
results of operations and cash flows. The Company monitors activity of volatile liability deposits
on a quarterly basis. Approximately $30.0 million of the $83.5 million in time certificates of
deposit over $100,000 act as core deposits with over five years history of rollover with the
Company. 
 Dividends Because the Company conducts no other significant activity than the management of its investment in
the Bank and Mortgage Company, the Company is dependent on these subsidiaries for income. The
ability of the Bank and Mortgage Company to pay cash dividends in the future depends on the
profitability, growth and capital needs of the Bank and Mortgage Company. In addition, the
California Financial Code restricts the ability of the Bank to pay dividends. No assurance can be
given that the Company or the Bank will pay any dividends in the future or, if paid, such dividends
will not be discontinued. 
 Government Regulation and Legislation The Company and the Bank are subject to extensive state and federal regulation, supervision and
legislation, which govern almost all aspects of the operations of the Company and the Bank. The
business of the Company is particularly susceptible to being affected by the enactment of federal
and state legislation which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities or enhancing the competitive position of other financial
institutions. Such laws are subject to change from time to time and are primarily intended for the
protection of consumers, depositors and the deposit insurance funds and not for the protection of
shareholders of the Company. The Company cannot predict what effect any presently contemplated or
future changes in the laws or regulations or their interpretations would have on the business and
prospects of the Company, but it could be material and adverse. See -Supervision and Regulation. 
 Economic Conditions and Geographic Concentration The Companys operations are located and concentrated in California, particularly the counties of
El Dorado, Placer, Shasta and Sacramento, and are likely to remain so for the foreseeable future.
At December 31, 2004, approximately 68% of the Banks loan portfolio consisted of real estate
related loans, all of which were related to collateral located in California. A change in
California economic and business conditions may adversely affect the performance of these loans.
Deterioration in economic conditions could have a material adverse effect on the quality of the
loan portfolio of the Bank and the demand for its products and services. In addition, during
periods of economic slowdown or recession, the Bank may experience a decline in collateral values
and an increase in delinquencies and defaults. A decline in collateral values and an increase in
delinquencies and defaults increase the possibility and severity of losses. California real estate
is also subject to certain natural disasters, such as earthquakes, floods and mudslides, which are
typically not covered by the standard hazard insurance policies maintained by borrowers. Uninsured
disasters may make it difficult or impossible for borrowers to repay loans made by the Company. 14




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Reliance on Key Employees and Others As of February 1, 2005, the Company employed 112 employees. The Company considers employee
relations to be excellent. A collective bargaining group represents none of the employees of the
Company or its subsidiaries. Failure of the Company to attract and retain qualified personnel could
have an adverse effect on the Companys business, financial condition and results of operations.
The Company does maintain life insurance with respect to two of its officers with regard to a
salary continuation plan. In February 2005 the founding Chairman of the Company will retire. During
2004, the founding CEO of the Company was elected to Vice-Chairman and will assume the Chairman
responsibilities as of March 2005. 
 Adequacy of Allowance for Loan and Lease Losses (ALLL) The Companys allowance for loan and lease losses was approximately $3.9 million, or 1.2% of total
loans at December 31, 2004. Material future additions to the allowance for loan losses might be
necessary if material adverse changes in economic conditions occur and the performance of the loan
portfolio of the Company deteriorates. In addition, future additions to the Companys allowance
for loan losses on other real estate owned may also be required in order to reflect changes in the
markets for real estate in which the Companys other real estate owned is located and other factors
which may result in adjustments which are necessary to ensure that the Companys foreclosed assets
are carried at the lower of cost or fair value, less estimated costs to dispose of the properties.
Moreover, the FDIC and the DFI, as an integral part of their examination process, periodically
review the Companys allowance for loan losses and the carrying value of its assets. The Bank was
most recently examined by the FDIC in this regard during the first quarter of 2004. Increases in
the provisions for loan losses and foreclosed assets could adversely affect the Banks financial
condition and results of operations. See Managements Discussion and Analysis of Financial
Condition and Results of Operations-Asset Quality and Managements Discussion and Analysis of
Financial Condition and Results of Operations-Allowance for Loan and Lease Losses (ALLL). 
 Certain Ownership Restrictions under California and Federal Law Federal law prohibits a person or group of persons acting in concert from acquiring control of
a bank holding company unless the FRB has been given 60 days prior written notice of such proposed
acquisition and within that time period the FRB has not issued a notice disapproving the proposed
acquisition or extending for up to another 30 days, the period during which such a disapproval may
be issued. An acquisition may be made before the expiration of the disapproval period if the FRB
issues written notice of its intent not to disapprove the action. Under a rebuttal presumption
established by the FRB, the acquisition of more than 10% of a class of voting stock of a bank with
a class of securities registered under Section 12 of the Exchange Act (such as the common stock),
would, under the circumstances set forth in the presumption, constitute the acquisition of control.
In addition, any company would be required to obtain the approval of the FRB under the BHCA,
before acquiring 25% (5% in the case of an acquiror that is, or is deemed to be, a bank holding
company) or more of the outstanding shares of the Companys common stock, or such lesser number of
shares as constitute control. See -Supervision and Regulation-Regulation and Supervision of Bank
Holding Companies. Under the California Financial Code, no person shall, directly or indirectly, acquire control of a
California licensed bank or a bank holding company unless the Commissioner has approved such
acquisition of control. A person would be deemed to have acquired control of the Company and the
Bank under this state law if such person, directly or indirectly, has the power (i) to vote 25% or
more of the voting power of the Company or (ii) to direct or cause the direction of the management
and policies of the Company. For purposes of this law, a person who directly or indirectly owns or
controls 10% or more of the common stock would be presumed to direct or cause the direction of the
management and policies of the Company and thereby control the Company. 
 Shares Eligible for Future Sale As of December 31, 2004, the Company had 8,502,831 shares of Common Stock outstanding, of which
5,529,642 shares are eligible for sale in the public market without restriction and 2,973,189
shares are eligible for sale in the public market pursuant to Rule 144 under the Securities Act of
1933, as amended (the Securities Act). Future sales of substantial amounts of the Companys
common stock, or the perception that such sales could occur, could have a material adverse effect
on the market price of the common stock. In addition, options to acquire 765,931 shares of the
issued and outstanding shares of common stock at exercise prices ranging from $2.75 to $10.76 have
been issued to directors and certain employees of the Company under the Companys 1998 Stock Option Plan. No prediction can be
made as to the effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price of the Companys common stock. 15




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Technology and Computer Systems Advances and changes in technology can significantly affect the business and operations of the
Company. The Company faces many challenges including the increased demand for providing computer
access to bank accounts and the systems to perform banking transactions electronically. The
Companys ability to compete depends on its ability to continue to adapt its technology on a timely
and cost-effective basis to meet these requirements. In addition, the Companys business and
operations are susceptible to negative impacts from computer system failures, communication and
energy disruption and unethical individuals with the technological ability to cause disruptions or
failures of the Companys data processing systems. 
 Environmental Risks The Company, in its ordinary course of business, acquires real property securing loans that are in
default, and there is a risk that hazardous substance or waste, contaminants or pollutants could
exist on such properties. The Company may be required to remove or remediate such substances from
the affected properties at its expense, and the cost of such removal or remediation may
substantially exceed the value of the affected properties or the loans secured by such properties.
Furthermore, the Company may not have adequate remedies against the prior owners or other
responsible parties to recover its costs. Finally, the Company may find it difficult or impossible
to sell the affected properties either before or following any such removal. In addition, the
Company may be considered liable for environmental liabilities concerning its borrowers
properties, if, among other things, it participates in the management of its borrowers operations.
The occurrence of such an event could have a material adverse effect on the Companys business,
financial condition, results of operations and cash flows. 
 Dilution The Company has issued options to purchase shares of the Companys common stock at prices equal to
85% to 100% of the fair market value of the Companys Common Stock on the date of grant. As of
December 31, 2004, the Company had outstanding options to purchase an aggregate of 765,931 shares
of Common Stock at exercise prices ranging from $2.75 to $10.76 per share, or a weighted average
exercise price per share of $4.80. To the extent such options are exercised, stockholders of the
Company will experience dilution. 16




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##### Table of Contents



Item 2. PROPERTIES The Companys principal offices and the Banks main office are housed in a two-story building
with approximately 21,000 square feet of space located at 1951 Churn Creek Road, Redding,
California, 96002. The Bank owns the building and the 1.25 acres of land on which the building is
situated. The Bank also owns the land and building located at 1177 Placer Street, Redding,
California, 96001, in which the Bank uses approximately 11,650 square feet of space for its banking
operations. The Companys Roseville Bank of Commerce at Eureka office is located on the first floor of a
three-story building with approximately 8,550 square feet of space located at 1504 Eureka Road,
Roseville, California. The Company leases the space pursuant to a triple net lease expiring in
August 1, 2011. The Companys Roseville Bank of Commerce at Sunrise office is a free standing
building with approximately 4,982 square feet of space located at 6950 Sunrise Boulevard, Citrus
Heights, California. The Company subleases the space from Wells Fargo Bank expiring on March 5,
2009. The Companys Mortgage division is located in a free standing building with approximately 2,500
square fee located at 1024 Mistletoe Lane, Redding, California 96002. The Company subleases the
space expiring July 1, 2009. 
 Item 3. LEGAL PROCEEDINGS The Company is subject to various pending and threatened legal actions arising in the ordinary
course of business. The Company maintains reserves for losses from legal actions that are both
probable and estimable. In the opinion of management the disposition of claims currently pending
will not have a material effect on the Companys consolidated financial position or results of
operations. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the quarter ended December 31, 2004 to a vote of the
Companys security holders. 17




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PART II 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS The principal market on which the Common Stock is traded is the NASDAQ National Market. The
Common stock is listed under the trading symbol BOCH. The following table sets forth the high and
low closing sales prices of the Common Stock on the NASDAQ National Market for the periods
indicated: Sales Price Per ShareQuarter Ended:
    
    High
    
    
    Low
    
    
    VolumeMarch 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
    
    
    
    108,119March 31, 2003
    
    $
    6.78
    
    
    $
    5.70
    
    
    
    30,708June 30, 2003
    
    $
    6.53
    
    
    $
    5.92
    
    
    
    82,896September 30, 2003
    
    $
    7.99
    
    
    $
    6.02
    
    
    
    187,506December 31, 2003
    
    $
    8.83
    
    
    $
    7.67
    
    
    
    174,042
 We believe there were approximately 676 stockholders of the Companys common stock as of January
30, 2005, including those held in street name, and the market price on that date was $12.35 per
share. As of January 30, 2005 there were 288 registered stockholders. On October 22, 2004 and 2003, a cash dividend of $0.23 and $0.22, respectively, per share was paid
to stockholders of record as of October 1, 2004 and 2003 respectively. The Company currently
expects to pay cash dividends at this rate in the future, but the Companys ability to pay
dividends is subject to certain regulatory requirements. The Federal Reserve Board (FRB)
generally prohibits a financial holding company from declaring or paying a cash dividend which
would impose undue pressure on the capital of subsidiary banks or would be funded only through
borrowing or other arrangements that might adversely affect a financial services holding companys
financial position. The FRBs policy is that a financial holding company should not continue its
existing rate of cash dividends on its common stock unless its net income is sufficient to fully
fund each dividend and its prospective rate of earnings retention appears consistent with its
capital needs, asset quality and overall financial condition. The power of the board of directors
of an insured depository institution to declare a cash dividend or other distribution with respect
to capital is subject to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash needs of the
institution, as well as general business conditions. In addition to the restrictions imposed under federal law, banks chartered under California law
generally may only pay cash dividends to the extent such payments do not exceed the lesser of
retained earnings of the bank or the banks net income for its last three fiscal years (less any
distributions to stockholders during such period). In the event a bank desires to pay cash
dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the
Commissioner of Financial Institutions in an amount not exceeding the greatest of the banks
retained earnings, the banks net income for its last fiscal year, or the banks net income for its
current fiscal year. One of the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 signed by
President George W. Bush, included changes in how dividends are taxed. Investors will now pay lower
tax rates on dividends received from domestic corporations and qualified foreign corporations. In
the past, dividend income was another source of ordinary income, taxed at the investors normal tax
rate. Beginning in 2003, the maximum tax rate on qualifying dividends has dropped to 5%, 10% or 15%
depending on the investors tax bracket. The lower tax rate is scheduled to expire in 2008. 18




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##### Table of Contents



Equity Compensation Plan Information The following chart sets forth information for the fiscal year ended December 31, 2004,
regarding equity based compensation plans of the Company.  Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnPlan category
    
    
    and rights
    
    
    and rights
    
    
    (a)).(a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    765,931
    
    
    
    $
    4.80
    
    
    
    
    122,190Equity compensation
plans not approved
by security holders
    
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    
    765,931
    
    
    
    $
    4.80
    
    
    
    
    122,190
 During 2004, the Company did not conduct any unregistered offerings or sales of its securities, nor
did it repurchase any of its outstanding securities. 19




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##### Table of Contents



Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the five years ended December 31,
2004, have been derived from the Companys audited consolidated financial statements and should be
read in conjunction with Managements Discussion and Analysis of Financial Condition and Results
of Operations and the Companys audited consolidated financial statements and notes thereto,
included elsewhere in this report. In Thousands (Except Ratios and Per Share Data) 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statements of IncomeTotal Interest Income
    
    $
    20,996
    
    
    $
    19,279
    
    
    $
    18,565
    
    
    $
    20,216
    
    
    $
    20,177Net Interest Income
    
    $
    16,887
    
    
    $
    14,694
    
    
    $
    12,517
    
    
    $
    11,190
    
    
    $
    11,455Provision for Loan Losses
    
    $
    593
    
    
    $
    515
    
    
    $
    620
    
    
    $
    255
    
    
    $
    142Total Noninterest Income
    
    $
    2,196
    
    
    $
    2,150
    
    
    $
    2,091
    
    
    $
    2,823
    
    
    $
    2,807Total Noninterest Expense
    
    $
    10,581
    
    
    $
    9,660
    
    
    $
    8,267
    
    
    $
    7,143
    
    
    $
    6,458Total Revenues
    
    $
    23,192
    
    
    $
    21,429
    
    
    $
    20,656
    
    
    $
    23,039
    
    
    $
    22,984Net Income
    
    $
    4,978
    
    
    $
    4,183
    
    
    $
    3,696
    
    
    $
    4,274
    
    
    $
    4,812Balance SheetsTotal Assets
    
    $
    438,545
    
    
    $
    401,158
    
    
    $
    367,434
    
    
    $
    318,686
    
    
    $
    255,107Total Net Loans
    
    $
    318,801
    
    
    $
    278,204
    
    
    $
    280,351
    
    
    $
    216,960
    
    
    $
    191,586Allowance for Loan Losses
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916
    
    
    $
    2,710Total Deposits
    
    $
    352,879
    
    
    $
    327,539
    
    
    $
    314,447
    
    
    $
    281,436
    
    
    $
    218,036Stockholders Equity
    
    $
    35,283
    
    
    $
    30,511
    
    
    $
    27,667
    
    
    $
    27,240
    
    
    $
    28,754Performance Ratios 1Return on Average Assets 2
    
    
    1.22
    %
    
    
    1.10
    %
    
    
    1.09
    %
    
    
    1.49
    %
    
    
    1.98
    %Return on Average Stockholders Equity 3
    
    
    15.37
    %
    
    
    15.20
    %
    
    
    13.92
    %
    
    
    15.43
    %
    
    
    17.95
    %Dividend Payout
    
    
    39.29
    %
    
    
    42.09
    %
    
    
    46.57
    %
    
    
    41.94
    %
    
    
    35.32
    %Average Equity to Average Assets
    
    
    8.16
    %
    
    
    7.21
    %
    
    
    7.83
    %
    
    
    9.67
    %
    
    
    11.02
    %Tier 1 Risk-Based Capital-Bank 4
    
    
    10.80
    %
    
    
    10.77
    %
    
    
    9.14
    %
    
    
    10.93
    %
    
    
    12.86
    %Total Risk-Based Capital-Bank
    
    
    11.88
    %
    
    
    12.02
    %
    
    
    10.19
    %
    
    
    12.18
    %
    
    
    14.11
    %Net Interest Margin 5
    
    
    4.45
    %
    
    
    4.22
    %
    
    
    4.06
    %
    
    
    4.24
    %
    
    
    5.16
    %Average Earning Assets to Total Average Assets
    
    
    92.62
    %
    
    
    91.26
    %
    
    
    90.90
    %
    
    
    92.15
    %
    
    
    91.30
    %Nonperforming Assets to Total Assets 6
    
    
    0.54
    %
    
    
    1.16
    %
    
    
    .10
    %
    
    
    .11
    %
    
    
    .31
    %Net Charge-offs to Average Loans

    
    
    .12
    %
    
    
    .13
    %
    
    
    .01
    %
    
    
    .02
    %
    
    
    .09
    %Allowance for Loan Losses to Total Loans
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %
    
    
    1.35
    %
    
    
    1.42
    %Nonperforming Loans to Allowance for Loan Losses
    
    
    61.64
    %
    
    
    126.34
    %
    
    
    0.20
    %
    
    
    11.97
    %
    
    
    29.56
    %Efficiency Ratio 7
    
    
    57.23
    %
    
    
    59.15
    %
    
    
    56.59
    %
    
    
    50.97
    %
    
    
    45.28
    %Share DataAverage Common Shares Outstanding  basic
    
    
    8,283
    
    
    
    8,033
    
    
    
    8,013
    
    
    
    8,109
    
    
    
    8,652Average Common Shares Outstanding  diluted
    
    
    8,703
    
    
    
    8,327
    
    
    
    8,604
    
    
    
    8,568
    
    
    
    9,105Book Value Per Common Share
    
    $
    4.27
    
    
    $
    3.80
    
    
    $
    3.45
    
    
    $
    3.36
    
    
    $
    3.32Basic Earnings Per Common Share
    
    $
    0.60
    
    
    $
    0.52
    
    
    $
    0.46
    
    
    $
    0.51
    
    
    $
    0.56Diluted Earnings Per Common Share
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.43
    
    
    $
    0.48
    
    
    $
    0.53Cash Dividends Per Common Share
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.20
   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 36-37.5
    
    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. 20




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##### Table of Contents



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 Our Company was established to make a profitable return while serving the financial needs of the
business and professional communities of our markets. We are in the financial services business,
and no line of financial services is beyond our charter as long as it serves the needs of
businesses and professionals in our communities. The mission of our Company is to provide its
stockholders with a safe, profitable return on their investment, over the long term. Management
will attempt to minimize risk to our stockholders by making prudent business decisions, will
maintain adequate levels of capital and reserves, and will maintain effective communications with
stockholders. Our Companys most valuable asset is its customers. We will consider their needs first when we
design our products. High-quality customer service is an important mission of our Company, and how
well we accomplish this mission will have a direct influence on our profitability. For the past two
years we have followed a disciplined organic growth strategy, pursuing growth by attracting more
customers and expanding our relationships with the customers we already have. Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to maintain our customer relationships and build new ones. Our competitors are no longer
just banks. We must compete with financial powerhouses that want our core business. The flexibility
provided by the Financial Holding Company Act will become increasingly important. We have
developed strategic plans that evaluate additional financial services and products that can be
delivered to our customers efficiently and profitably. Producing quality returns is, as always, a
top priority. The Companys long term success rests on the shoulders of the leadership team to effectively work
to enhance the performance of the Company. As a financial services company, we are in the business
of taking risk. Whether we are successful depends largely upon whether we take the right risks and
get paid appropriately for the risks we take. Our governance structure enables us to manage all
major aspects of the Companys business effectively through an integrated process that includes
financial, strategic, risk and leadership planning. We define risks to include not only credit, market and liquidity risk  the traditional concerns
for financial institutions  but also operational risks, including risks related to systems,
processes or external events, as well as legal, regulatory and reputation risks. Our management
processes, structures and policies help to ensure compliance with laws and regulations and provide
clear lines for decision-making and accountability. Results are important, but equally important is
how we achieve those results. Our core values and commitment to high ethical standards is material
to sustaining public trust and confidence in our Company. 21




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##### Table of Contents



Risk Management Overview Through our corporate governance structure, risk and return is evaluated to produce sustainable
revenues, reduce risks of earning volatility and increase stockholder value. The financial services
industry is exposed to four major risks; liquidity, credit, market and operational. Liquidity risk
is the inability to meet liability maturities and withdrawals, fund asset growth and otherwise meet
contractual obligations at reasonable market rates. Credit risk is the inability of a customer to
meet its repayment obligations. Market risk is the fluctuation in asset and liability values caused
by changes in market prices and yields and operational risk is the potential for losses resulting
from events involving people, processes, technology, legal issues, external events, regulatory or
reputation. Board Committees Our corporate governance structure begins with our Board of Directors. The Board of Directors
evaluates risk through the Chief Executive Officer (CEO) and four Board Committees:  
    Loan Committee reviews credit risks and the adequacy of the allowance for loan 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. These committees review reports from management, the Companys auditors, and other outside sources.
On the basis of materials that are available to them and on which they rely, they review the
performance of the Companys management and personnel, and establish policies, but neither the
committees nor their individual members (in their capacities as members of the Board of Directors)
are responsible for daily operations of the Company. In particular, risk management activities
relating to individual loans are undertaken by Company personnel in accordance with the policies
established by the Board committees. Senior Leadership Committees To ensure that our risk management goals and objectives are accomplished oversight of our risk
taking and risk management activities are conducted through five Senior Leadership committees.  
    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 to the Board of
Directors corporate credit practices and limits, including
industry concentration limits, approval requirements and
exceptions.  
    The Technology Steering Committee establishes technological
strategies, makes technology investment decisions and manages the
implementation process.  
    The ALCO Round Table Committee establishes and monitors liquidity
ranges, pricing, maturities, investment goals and interest spread
on balance sheet accounts.  
    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 We use various controls to manage risk exposure within the Company. Budgeting and planning
processes provide for early indication of unplanned results or risk levels. Models are used to
estimate market risk and net interest income sensitivity. Segmentation analysis is used to estimate
expected and unexpected credit losses. Compliance to regulatory guidelines plays a significant role
in risk management as well as corporate culture and the actions of management. Our code of ethics
provides the guidelines for all employees to conduct themselves with the highest integrity in the
delivery of service to our clients. 22




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##### Table of Contents



Liquidity Risk Management Liquidity Risk Liquidity risk is the inability to meet liability maturities and withdrawals, fund asset growth and
otherwise meet contractual obligations at reasonable market rates. Liquidity management involves
maintaining ample and diverse funding capacity, liquid assets and other sources of cash to
accommodate fluctuations in asset and liability levels due to business shocks or unanticipated
events. ALCO is responsible for establishing our liquidity policy and the accounting department is
responsible for planning and executing the funding activities and strategies. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans,
short-term money market investments, maturities and sales of securities from the available-for-sale
security portfolio. Increased available-for-sale security balances were responsible for the major
use of liquidity, followed by growth in the loan portfolio. The weighted-average life of the
available-for-sale security portfolio is 3.43 years. Liquidity is generated from liabilities through deposit growth and short-term borrowings. We
emphasize preserving and maximizing customer deposits and other customer-based funding sources.
Deposit marketing strategies are reviewed for consistency with liquidity policy objectives.
Internal deposit growth provided approximately $25,339,000 and borrowings provided approximately
$3,255,000 of liquidity. The Company also had available correspondent banking lines of credit through correspondent
relationships totaling approximately $15,000,000 and available secured borrowing lines of
approximately $49,437,000 with the Federal Home Loan Bank of San Francisco. While these sources are
expected to continue to provide significant amounts of liquidity in the future, their mix, as well
as the possible use of other sources, will depend on future economic and market conditions.
Liquidity is also provided or used through the results of the Companys operations. The Companys liquid assets (cash and due from banks, federal funds sold and available-for-sale
securities) totaled $101.7 million or 23.2% of total assets at December 31, 2004, $102.2 million or
25.5% of total assets at December 31, 2003 and $66.9 million or 18.2% of total assets at December
30, 2002. In 2004, the Holding Companys primary source of funding was dividends paid by the Bank
totaling $1,955,584 and was paid to stockholders. The Holding Company expects to continue to
receive dividends from the Bank in 2005. (See note 18 to the Consolidated Financial Statements for
a discussion of the restrictions on the Banks ability to pay dividends.) To accommodate future growth and business needs, the Company develops an annual capital expenditure
budget during strategic planning sessions. Gross capital expenditures for 2004 were approximately
$621,000 for replacement of furniture and equipment, technological enhancements and in progress
purchases. The Company expects that the earnings of the Company, acquisition of core deposits and
wholesale borrowing arrangements are sufficient to support liquidity needs in 2005. Short term borrowings The Company actively uses Federal Home Loan Bank (FHLB) advances as a source of wholesale
funding to provide liquidity. At December 31, 2004, all of the Companys FHLB advances were fixed
rate, fixed term borrowings without call or put option features. At December 2004, the Company had
$35 million in FHLB advances outstanding compared to $30 million at December 31, 2003. 2004
    
    
    2003
    
    
    2002Securities sold under agreements to repurchase with weighted
average interest rates of 0.15%, 0.20% and 0.41% at December 31,
2004, 2003
and 2002, respectively
    
    $
    2,003,712
    
    
    $
    3,748,797
    
    
    $
    3,704,385Federal Home Loan Bank borrowings with weighted average interest
rates of 2.56%, 1.16% and 1.78% at December 31, 2004, 2003 and
2002, respectively
    
    
    35,000,000
    
    
    
    30,000,000
    
    
    
    18,000,000Total short term borrowings
    
    $
    37,003,712
    
    
    $
    33,748,797
    
    
    $
    21,704,385
 23




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##### Table of Contents



Securities sold under agreements to repurchase:Maximum outstanding at any month end
    
    $
    10,238,525
    
    
    $
    5,497,582
    
    
    $
    11,867,244Average balance during the year
    
    
    2,164,067
    
    
    
    3,899,800
    
    
    
    6,295,292Weighted average interest rate during year
    
    
    2.44
    %
    
    
    2.45
    %
    
    
    2.59
    %Federal Home Loan Bank borrowings:Maximum outstanding at any month end
    
    $
    35,000,000
    
    
    $
    30,000,000
    
    
    $
    28,000,000Average Balance during the year
    
    
    28,715,847
    
    
    
    14,820,597
    
    
    
    11,500,000Weighted average interest rate during year
    
    
    1.53
    %
    
    
    1.49
    %
    
    
    1.78
    %
 
 Credit Risk Management Credit risk arises from the inability of a customer to meet its repayment obligations. Credit risk
exists in our outstanding loans, letters of credit and unfunded loan commitments. We manage credit
risk based on the risk profile of the borrower, repayment sources and the nature of underlying
collateral given current events and conditions. Commercial portfolio credit risk management Commercial credit risk management begins with an assessment of the credit risk profile of the
individual borrower based on an analysis of the borrowers financial position in light of current
industry, economic or geopolitical trends. As part of the overall credit risk assessment of a
borrower, each commercial credit is assigned a risk grade and is subject to approval based on
existing credit approval standards. Risk grading is a factor in determining the allowance for loan
losses. Credit decisions are determined by Credit Administration to certain limitations and
approvals from the Loan Committee above certain limitations. Credit risk is continuously monitored
by Credit Administration for possible adjustment if there has been a change in the borrowers
ability to perform under its obligations. Additionally, we manage the size of our credit exposure
through loan sales and loan participation agreements. The primary sources of repayment of the commercial loans of the Company are operating cash
flows and the borrowers conversion of short-term assets to cash. The net assets of the borrower or
guarantor are usually identified as a secondary source of repayment. The principal factors
affecting the Banks risk of loss from commercial lending include each borrowers ability to manage
its business affairs and cash flows, local and general economic conditions and real estate values
in the Companys service area. The Company manages its commercial loan portfolio by monitoring its
borrowers payment performance and their respective financial condition and makes periodic
adjustments, if necessary, to the risk grade assigned to each loan in the portfolio. The Companys
evaluations of its borrowers are facilitated by managements knowledge of local market conditions
and periodic reviews by a consultant of the credit administration policies of the Company. Real estate portfolio credit risk management The principal source of repayment of the real estate construction loans of the Company is the sale
of the underlying collateral or the availability of permanent financing from the Company or other
lending source. The principal risks associated with real estate construction lending include
project cost overruns that absorb the borrowers equity in the project and deterioration of real
estate values as a result of various factors, including competitive pressures and economic
downturns. The Company manages its credit risk associated with real estate construction lending by
establishing a loan-to-value ratio on projects on an as-completed basis, inspecting project status
in advance of disbursements and matching maturities with expected completion dates. Generally, the
Company requires a loan-to-value ratio of not more than 80% on single family residential
construction loans. The specific underwriting standards of the Company and methods for each of its principal lines of
lending include industry-accepted analysis and modeling and certain proprietary techniques. The
underwriting criteria of the Bank are designed to comply with applicable regulatory guidelines,
including required loan-to-value ratios. The credit administration policies of the Company contain
mandatory lien position and debt service coverage requirements, and the Bank generally requires a
guarantee from 20% or more of the owners of the borrowing entity. 24




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##### Table of Contents



Concentrations of credit risk Portfolio credit risk is evaluated with the goal that concentrations of credit exposure do not
result in unacceptable levels of risk. Concentrations of credit exposure can be measured in various
ways including industry, product, geography, and customer relationship. We review non-real estate
commercial loans by industry and real estate loans by geographic location and property type. Nonperforming assets The Companys practice is to place an asset on nonaccrual status when one of the following
events occurs:(i) Any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well-secured and in the process of collection), (ii) management
determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, are 90 days past due and still accruing, or have been
restructured. Allowance for loan and lease losses (ALLL) The allowance for loan and lease losses represents managements best estimate of probable losses in
the loans and leases portfolio. Within the allowance, reserves are allocated to segments of the
portfolio based on specific formula components. Changes to the allowance for credit losses are
reported in the Consolidated Statement of Income in the provision for loan losses. We perform periodic and systematic detailed evaluations of our lending portfolio to identify and
estimate the inherent risks and assess the overall collectibility. These evaluations include
general conditions such as the portfolio composition, size and maturities of various segmented
portions of the portfolio such as secured, unsecured, construction, and Small Business
Administration (SBA). Additional factors include concentrations of borrowers, industries,
geographical sectors, loan product, loan classes and collateral types, volume and trends of loan
delinquencies and non-accrual; criticized and classified assets and trends in the aggregate in
significant credits identified as watch list items. The Companys allowance for loan and lease losses is the accumulation of various components that
are calculated based upon independent methodologies. All components of the allowance for loan
losses represent an estimation performed pursuant to Statement of Financial Accounting Standards
(SFAS) Statement No. 5, Accounting for Contingenciesor SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. Managements estimate of each SFAS No. 5 component is based on certain
observable data that management believes is the most reflective of the underlying credit losses
being estimated. Changes in the amount of each component of the allowance for loan losses are
directionally consistent with changes in the observable data, taking into account the interaction
of the SFAS No. 5 components over time. An essential element of the methodology for determining the allowance for loan and lease losses is
the Companys credit risk evaluation process, which includes credit risk grading individual
commercial, construction, commercial real estate and consumer loans. Loans are assigned credit risk
grades based on the Companys assessment of conditions that affect the borrowers ability to meet
its contractual obligations under the loan agreement. That process includes reviewing borrowers
current financial information, historical payment experience, credit documentation, public
information, and other information specific to each individual borrower. Loans are reviewed on an
annual or rotational basis or as management become aware of information affecting the borrowers
ability to fulfill its obligations. Credit risk grades carry a dollar weighted risk percentage. For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to
measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, we measure
impairment based on the present value of expected future principal and interest cash flows
discounted at the loans effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loans observable market price or the fair value of collateral,
if the loan is collateral dependent. When developing the estimate of future cash flows for a loan,
we consider all available information reflecting past events and current conditions, including the
effect of existing environmental factors. In addition to the ALLL, an allowance for unfunded loan
commitments and letters of credit is determined using estimates of the probability of funding. This
reserve is carried as a liability on the consolidated balance sheet. 25




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##### Table of Contents



We make provisions to the ALLL on a regular basis through charges to operations that are reflected
in our consolidated statements of income as a provision for loan losses. When a loan is deemed
uncollectible, it is charged against the allowance. Any recoveries of previously charged-off loans
are credited back to the allowance. There is no precise method of predicting specific losses or
amounts that ultimately may be charged-off on particular categories of the loan portfolio. Various
regulatory agencies, as an integral part of their examination process, periodically review the
Companys ALLL. Such agencies may require the Company to provide additions to the allowance based
on their judgement of information available to them at the time of their examination. There is
uncertainty concerning future economic trends. Accordingly, it is not possible to predict the
effect future economic trends may have on the level of the provision for possible loan losses in
future periods. The ALLL should not be interpreted as an indication that charge-offs in future
periods will occur in the stated amounts or proportions. The following table summarizes the activity in the ALLL reserves for the periods indicated. (Dollars in thousands)
    Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Beginning Balance:
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916
    
    
    $
    2,710
    
    
    $
    2,708Provision for loan losses
    
    
    593
    
    
    
    515
    
    
    
    620
    
    
    
    255
    
    
    
    142Charge-offs:Commercial & Financial
    
    
    (367
    )
    
    
    (379
    )
    
    
    (8
    )
    
    
    (191
    )
    
    
    (200
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    (18
    )
    
    
    (345
    )
    
    
    (3
    )Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (1
    )Total Charge-offs
    
    
    (368
    )
    
    
    (380
    )
    
    
    (26
    )
    
    
    (536
    )
    
    
    (204
    )Recoveries:Commercial & Financial
    
    
    2
    
    
    
    11
    
    
    
    19
    
    
    
    35
    
    
    
    62Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    452
    
    
    
    2Other
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total Recoveries
    
    
    5
    
    
    
    11
    
    
    
    19
    
    
    
    487
    
    
    
    64Net Charge-offs
    
    
    (363
    )
    
    
    (369
    )
    
    
    (7
    )
    
    
    (49
    )
    
    
    (140
    )Allocation to off-balance sheet
liabilities
    
    
    (39
    )
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Ending Balance
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916
    
    
    $
    2,710Allowance for loan losses to
total loans
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %
    
    
    1.35
    %
    
    
    1.42
    %Net Charge-offs to average loans
    
    
    .12
    %
    
    
    .13
    %
    
    
    .01
    %
    
    
    .02
    %
    
    
    .08
    %
 The provision for loan and lease losses increased to $593,000 for 2004 versus $515,000 in 2003. Net
charge-offs were $362,586 or 0.12% of total loans during 2004. Actual and future results of the
allowance provision and charge-offs may differ materially from trends expressed in the table and
are beyond the Companys ability to predict.
Allocation of Allowance for Loan and Lease Losses by product type: (Dollars in thousands)
    
    
    Dec. 31, 2004
    
    
    
    Dec. 31, 2003
    
    
    
    Dec. 31, 2002
    
    
    
    Dec. 31, 2001
    
    
    
    Dec. 30, 2000Percent
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    
    
    of
    
    
    
    
    
    
    
    
    of
    
    
    
    
    
    
    
    
    of
    
    
    
    
    
    
    
    
    ofcategory
    
    
    
    
    
    
    
    
    category
    
    
    
    
    
    
    
    
    category
    
    
    
    
    
    
    
    
    category
    
    
    
    
    
    
    
    
    categoryto total
    
    
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    
    
    to totalAmount
    
    
    
    loans
    
    
    
    Amount
    
    
    
    loans
    
    
    
    Amount
    
    
    
    loans
    
    
    
    Amount
    
    
    
    loans
    
    
    
    Amount
    
    
    
    loansBalance at end of
period applicable to:Commercial and Financial
    
    
    $
    2,087
    
    
    
    
    32.64
    %
    
    
    $
    2,315
    
    
    
    
    37.01
    %
    
    
    $
    2,047
    
    
    
    
    34.84
    %
    
    
    $
    1,691
    
    
    
    
    34.96
    %
    
    
    $
    1,498
    
    
    
    
    31.39
    %Commercial Real Estate
    
    
    $
    1,149
    
    
    
    
    41.83
    %
    
    
    $
    878
    
    
    
    
    36.46
    %
    
    
    $
    952
    
    
    
    
    43.67
    %
    
    
    $
    787
    
    
    
    
    37.68
    %
    
    
    $
    813
    
    
    
    
    40.99
    %Construction and
Development
    
    
    $
    588
    
    
    
    
    23.95
    %
    
    
    $
    456
    
    
    
    
    23.64
    %
    
    
    $
    494
    
    
    
    
    14.29
    %
    
    
    $
    408
    
    
    
    
    20.60
    %
    
    
    $
    379
    
    
    
    
    19.29
    %Consumer Loans
    
    
    $
    23
    
    
    
    
    0.10
    %
    
    
    $
    20
    
    
    
    
    0.16
    %
    
    
    $
    20
    
    
    
    
    0.25
    %
    
    
    $
    16
    
    
    
    
    0.20
    %
    
    
    $
    15
    
    
    
    
    0.22
    %Other Loans
    
    
    $
    0
    
    
    
    
    0.11
    %
    
    
    $
    0
    
    
    
    
    0.22
    %
    
    
    $
    0
    
    
    
    
    0.23
    %
    
    
    $
    0
    
    
    
    
    0.33
    %
    
    
    $
    0
    
    
    
    
    0.72
    %Unallocated
    
    
    $
    19
    
    
    
    
    1.37
    %
    
    
    $
    6
    
    
    
    
    2.51
    %
    
    
    $
    16
    
    
    
    
    6.72
    %
    
    
    $
    14
    
    
    
    
    6.23
    %
    
    
    $
    5
    
    
    
    
    7.39
    %Total Allowance for
loan and lease losses
    
    
    $
    3,866
    
    
    
    
    100.00
    %
    
    
    $
    3,675
    
    
    
    
    100.00
    %
    
    
    $
    3,529
    
    
    
    
    100.00
    %
    
    
    $
    2,916
    
    
    
    
    100.00
    %
    
    
    $
    2,710
    
    
    
    
    100.00
    %
 26




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##### Table of Contents



Market Risk Management Market risk is the potential loss due to adverse changes in market prices and yields. Market risk
is inherent in the Companys operating positions and activities including customers loans, deposit
accounts, securities and long-term debt. Loans and deposits generate income and expense,
respectively, and the value of cash flows change based on general economic levels, most
importantly, the level of interest rates. The goal for managing the assets and liabilities of the Company is to maximize stockholder value
and earnings while maintaining a high quality balance sheet without exposing the Company to undue
interest rate risk. The absolute level and volatility of interest rates can have a significant
impact on the Companys profitability. Market risk arises from exposure to changes in interest
rates, exchange rates, commodity prices, and other relevant market rate or price risk. The Company
does not operate a trading account, does not hold any financial derivatives and does not hold a
position with exposure to foreign currency exchange. The Company faces market risk through interest
rate volatility. Net interest income risk is measured based on rate shocks over different time horizons versus a
current stable interest rate environment. Assumptions used in these calculations are similar to
those used in the planning and budgeting model. The overall interest rate risk position and
strategies are reviewed on an ongoing basis with ALCO. Securities Portfolio The securities portfolio is central to our asset liability management strategies. The decision to
purchase or sell securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity and regulatory requirements. The
Company classifies its securities as available-for-sale or held-to-maturity at the time of
purchase. Generally, all securities are purchased with the intent and ability to hold the security
for long-term investment, and the Company has both the ability and intent to hold
held-to-maturity investments to maturity. The Company does not engage in trading activities.
Securities held-to-maturityare carried at cost adjusted for the accretion of discounts and
amortization of premiums. Securities available-for-salemay be sold to implement the Companys
asset liability management strategies and in response to changes in interest rates, prepayment
rates and similar factors. Securities available-for-sale are recorded at market value and
unrealized gains or losses, net of income taxes, are reported as a component of accumulated other
comprehensive income(loss), in a separate component of stockholders equity. Gain or loss on sale
of securities is based on the specific identification method. Securities held-to-maturityat
December 31, 2004, 2003 and 2002 consisted of mortgage-backed securities with an amortized cost of
$448,753, $1.4 million and $2.4 million, respectively. At December 31, 2004, $448,753 or the
remaining balances having a contractual maturity of over ten years and a weighted-average yield of
7.44%. 
 Operational Risk Management Operational risk is the potential for loss resulting from events involving people, processes,
technology, legal or regulatory issues, external events, and reputation. In keeping with the
corporate governance structure, the Senior Leadership committee is responsible for operational risk
controls. Operational risks are managed through specific policies and procedures, controls and
monitoring tools. Examples of these include reconciliation processes, transaction monitoring and
analysis and system audits. Operational risks fall into two major categories, business specific and
company wide. The Senior Leadership committee works to ensure consistency in policies, processes
and assessments. With respect to company wide risks, the Senior Leadership committee works directly
with Directors to develop policies and procedures for information security, business resumption
plans, compliance and legal issues. 
 Critical Accounting Policies 
 General The Companys significant accounting principles are described in Note 2 of the consolidated
financial statements and are essential to understanding Managements Discussion and Analysis of
Results of Operations and Financial Condition. Bank of Commerce Holdings consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP). The financial information contained within our statements is, to a
significant extent, financial information that is based on measures of the financial effects of
transactions and events that have already occurred. Some of the Companys accounting principles
require significant judgement to estimate values of assets or liabilities. In addition, certain
accounting principles require significant judgment in applying the complex accounting principles to
transactions to determine the most appropriate treatment. 27




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##### Table of Contents



Allowance for Loan and Lease Losses (ALLL) The allowance for loan and lease losses is managements best estimate of the probable losses that
may be sustained in our loan portfolio. The allowance is based on two basic principles of
accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring
and estimable and (2) SFAS No. 114, which requires that losses be accrued based on the differences
between that value of collateral, present value of future cash flows or values that are observable
in the secondary market and the loan balance. The Company performs periodic and systematic detailed
evaluations of its lending portfolio to identify and estimate the inherent risks and assess the
overall collectibility. These evaluations include general conditions such as the portfolio
composition, size and maturities of various segmented portions of the portfolio such as secured,
unsecured, construction, and Small Business Administration (SBA). Additional factors include concentrations of borrowers, industries, geographical sectors, loan
product, loan classes and collateral types; volume and trends of loan delinquencies and
non-accrual; criticized and classified assets and trends in the aggregate in significant credits
identified as watch list items. There are several components to the determination of the adequacy
of the ALLL. Each of these components is determined based upon estimates that can and do change
when the actual events occur. The Company estimates the SFAS No. 5 portion of the ALLL based on the
segmentation of its portfolio. For those segments that require an ALLL, the Company estimates loan
losses on a monthly basis based upon its ongoing loan review process and analysis of loan
performance. The Company follows a systematic and consistently applied approach to select the most
appropriate loss measurement methods and support its conclusions and rationale with written
documentation. One method of estimating loan losses for groups of loans is through the application
of loss rates to the groups aggregate loan balances. Such rates typically reflect historical loss
experience for each group of loans, adjusted for relevant economic factors over a defined period of
time. The Company evaluates and modifies its loss estimation model as needed to ensure that the
resulting loss estimate is consistent with GAAP. For individually impaired loans, SFAS No. 114
provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114
states that when a loan is impaired, the Company should measure impairment based on the present
value of expected future principal and interest cash flows discounted at the loans effective
interest rate, except that as a practical expedient, a creditor may measure impairment based on a
loans observable market price or the fair value of collateral, if the loan is collateral
dependent. When developing the estimate of future cash flows for a loan, the Company considers all
available information reflecting past events and current conditions, including the effect of
existing environmental factors. 
 Stock-Based Compensation The Company uses the intrinsic value based method for measuring compensation cost related to stock
options. 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 must pay to acquire the
stock. This cost is amortized on a straight-line basis over the vesting period of the options
granted. The Company applies Accounting Principles Board Opinion (APB) No. 25 Accounting for
Stock Issued to Employeesand related interpretations in accounting for stock options. The fair
value of options granted is determined on the date of the grant using a binomial option-pricing
model with the following assumptions: a current volatility rate of 30.88% , a risk-fee interest
rate of 3.62% (based upon the five year treasury coupon rate at December 31, 2004), expected
dividends of $0.23 per share per year, an annual dividend rate of 2.00%, an assumed forfeiture rate
of zero and an expected life of seven years. 
 Revenue recognition The Companys primary source of revenue is net interest income, which is the difference between the
interest income it receives on interest-earning assets and the interest expense it pays on
interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit services,
income from SBA lending, electronic-based cash management services, mortgage brokerage fee income
and merchant credit card processing services. Interest income is recorded on an accrual basis. Note
2 to the Consolidated Financial Statements offers an explanation of the process for determining
when the accrual of interest income is discontinued on an impaired loan. 
 Fixed Assets Other estimates that the Company uses in its accounting include the expected useful lives of
depreciable assets, such as buildings, building improvements, equipment, and furniture. The useful
lives of various technological related hardware and software could be subject to change due to
advances in technology and the general adoption of new standards for
technology or interfaces among computer or telecommunication systems. 28




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##### Table of Contents



Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax rates applied to such taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. If future income should prove non-existent or less than the
amount of deferred tax assets within the tax years to which they may be applied, the asset may not
be realized and our net income will be reduced. 
 Financial Highlights  Results of Operations The following discussion and analysis provides a comparison of the results of operations for
2004 and 2003. This discussion should be read in conjunction with the consolidated financial
statements and related notes. Key Financial Ratios
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000ProfitabilityReturn on average assets
    
    
    1.22
    %
    
    
    1.10
    %
    
    
    1.09
    %
    
    
    1.49
    %
    
    
    1.98
    %Return on average equity
    
    
    15.37
    %
    
    
    15.20
    %
    
    
    13.92
    %
    
    
    15.43
    %
    
    
    17.95
    %Average earning assets to total average assets
    
    
    92.62
    %
    
    
    91.26
    %
    
    
    90.90
    %
    
    
    92.15
    %
    
    
    91.30
    %Interest MarginNet interest margin
    
    
    4.45
    %
    
    
    4.22
    %
    
    
    4.06
    %
    
    
    4.24
    %
    
    
    5.16
    %Asset QualityAllowance for loan losses to total loans
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %
    
    
    1.35
    %
    
    
    1.42
    %Nonperforming assets to total assets
    
    
    0.54
    %
    
    
    1.16
    %
    
    
    0.10
    %
    
    
    0.11
    %
    
    
    0.31
    %Net charge-offs to average loans
    
    
    0.12
    %
    
    
    0.13
    %
    
    
    0.01
    %
    
    
    0.02
    %
    
    
    0.09
    %LiquidityLoans to deposits
    
    
    90.34
    %
    
    
    84.94
    %
    
    
    89.16
    %
    
    
    77.09
    %
    
    
    87.87
    %Liquidity ratio
    
    
    23.23
    %
    
    
    25.49
    %
    
    
    18.32
    %
    
    
    25.69
    %
    
    
    18.27
    %CapitalTier 1 risk-based capital  Bank
    
    
    10.80
    %
    
    
    10.77
    %
    
    
    9.14
    %
    
    
    10.93
    %
    
    
    12.86
    %Total risk-based capital  Bank
    
    
    11.88
    %
    
    
    12.02
    %
    
    
    10.19
    %
    
    
    12.18
    %
    
    
    14.11
    %EfficiencyEfficiency ratio
    
    
    57.23
    %
    
    
    59.15
    %
    
    
    56.59
    %
    
    
    50.97
    %
    
    
    45.28
    %
 The above table represents key financial performance ratios that the Senior Leadership Team of the
Company monitor on a monthly basis in comparison with Uniform Bank Performance Report peer data.
Uniform Bank Performance Reports are available on all Federal Deposit Insurance Corporation insured
financial institutions and are used to measure quality performance to peer groupings and may be
obtained online at www.fdic.gov. Executive Management monitors the high-performing sector
of the peer group and uses this data to examine strategies of other high-performing financial
institutions and to establish the financial performance goals of the Company on an annual basis.
These goals are then communicated through budgets, strategies, planning and projections to the
Senior Leadership Team for implementation. Results are monitored both to plan and to peer at the
Board of Directors level on a monthly basis. 
 Sources of Income The Company derives its income from two principal sources: (i) net interest income, which is
the difference between the interest income it receives on interest-earning assets and the interest
expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on
deposit services, income from SBA lending, electronic-based cash management services, mortgage
brokerage fee income and merchant credit card processing services. The income of the Company
depends to a great extent on net interest income. These interest rate factors are highly sensitive
to many factors, which are beyond the Companys control, including general economic conditions,
inflation, recession, and the policies of various governmental and regulatory agencies, in
particular, the Federal Reserve Board. Because of the
Companys predisposition to variable rate pricing and non-interest bearing demand deposit accounts,
the Company is considered asset sensitive. Consequently, the Company is adversely affected by
declining interest rates. 29




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##### Table of Contents



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 The Company reported net income of $4.98 million for the year ended December 31, 2004,
representing an increase of approximately $796,000 or 19.0%, over net income of $4.18 million for
the year ended December 31, 2003. The primary factors contributing to the increase in net income
includes an increase of $2.2 million or 14.9% improvement in the net interest margin, a gain of
36.8% or $128,000 in service charges. Increases in the net interest margin are primarily attributed
to increases in the volume of earning assets coupled with reductions in the cost of funds.
Increases in service charges are a result of implementation of the overdraft privilege product. The Companys provision for loan losses increased to $593,000 in 2004 from $515,000 in 2003. Growth
in the portfolio was the principal factor for current period provisions. Return on average assets (ROA) was 1.22% and return on average common equity (ROE) was 15.37% in
2004 compared with 1.10% and 15.20% respectively in 2003, directly related to the increase in net
income. Diluted earnings per share for 2004 and 2003 were $0.58 and $0.50, respectively, an
increase of 16.0% in 2004 over 2003. The Companys average total assets increased to $409.6 million
in 2004 or 7.3% from $381.6 million in 2003. As a result of the continuing expansion of the
Companys Roseville Bank of Commerce, average deposits grew by $12.6 million or 4.4% primarily in
the business demand sector, further enhancing the cost of funds. Average net loans grew by $12.8
million or 4.5%. Average gross volume processed through the loan portfolio grew by $40.8 million or 14.5% over the
prior year. Yields on portfolio loans remained consistent with prior year performance while
earnings on federal funds sold increased by 31 basis points. Deposit costs decreased by 24 basis
points providing the increase in net interest margin of 4.45% at December 31, 2004 compared to
4.22% at December 31, 2003. 
 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 The Company reported net income of $4.18 million for the year ended December 31, 2003,
representing an increase of approximately $486,000 or 13.1%, over net income of $3.70 million for
the year ended December 31, 2002. The primary factors contributing to the increase in net income
includes an increase of $2.2 million or 17.4% improvement in the net interest margin, a gain of
55.3% or $89,000 in mortgage service fee income and a gain of 20.4% or $59,000 in service charges
over the prior period results. Increases in the net interest margin are primarily attributed to increases in the volume of
earning assets coupled with reductions in the cost of funds. Increases in mortgage service fee
income are a result of increased volumes and increases in service charges are related to the core
deposit growth of the Company. The Companys provision for loan losses decreased to $515,000 in 2003 from $620,000 in 2002. An
increased volume of adversely classified loans, including impaired loans, attributed to the current
level of provisions while growth in the portfolio was the principal factor for prior period
provisions. Return on average assets (ROA) was 1.10% and return on average common equity (ROE) was 15.20% in
2003 compared with 1.09% and 13.92% respectively in 2002, directly related to the increase in net
income. Diluted earnings per share for 2003 and 2002 were $0.50 and $0.43, respectively, an
increase of 17.1% in 2003 over 2002. The Companys average total assets increased to $381.6 million
in 2003 or 12.5% from $339.2 million in 2002. As a result of the continuing expansion of the
Companys Roseville Bank of Commerce, deposits grew by $13.1 million or 4.2% primarily in the
business demand sector, further enhancing the cost of funds. Liquidity provided by deposit growth was invested in available-for-sale securities while the loan
portfolio decreased $2.0 million to $282.0 million over $284.0 million at December 2002. Average volume processed through the loan portfolio grew by $31.4 million or 12.4% over the prior
year. Yields on portfolio loans dropped 43 basis points over the prior year due to the lingering
effects of the dramatic rate reductions in 2002 and the timing of repricing opportunities, while
federal funds sold dropped 54 basis points over the prior year. Interest-bearing liabilities
recognized a drop of 70 basis points, resulting in a net interest margin (spread) of 4.22% compared
with 4.06% in 2002. 30




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##### Table of Contents



Net Interest Income and Net Interest Margin The primary source of income for the Company is derived from net interest income. Net interest
income represents the excess of interest and fees earned on assets (loans, securities and federal
funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. Net interest income increased to $16.9 million in 2004 versus $14.7 million in 2003 and $12.5
million in 2002, representing a 15.0% increase in 2004 over 2003, and a 17.4% increase in 2003 over
2002. The average balance of total earning assets increased to $379.3 million in 2004 compared to
$348.3 million in 2003 or 8.91% over 2003. Average loan balances outstanding increased $12.8 million or 4.51% in 2004 compared with 2003,
while average balances of securities and federal funds sold increased $18.2 million or 28.7% in
2004. The average yields on loans remained flat over the prior period and securities increased by
56 basis points. The resulting yield on interest earning assets remained flat to the prior period
at 5.54%. Total interest expense decreased to $4.1 million in 2004, from $4.6 million in 2003 and
$6.0 million in 2002, representing a 10.4% decrease for 2004 over 2003, and a 23.3% decrease in
2003 over 2002. Average balances of interest-bearing liabilities increased to $299.6 million over
$282.0 million for the year ended December 31, 2004, or 6.2%. Rates paid on deposits decreased 26
basis points, to 1.37% from 1.63% in 2003. The reduction in funding costs reflects the Companys
strategy to grow core deposits and use Federal Home Loan borrowings to support growth while holding
higher cost certificate of deposit accounts to a minimum. Average demand checking accounts
increased $10.2 million or 16.2%, Average interest-bearing demand instruments increased $7.2
million or 7.61%, Average savings deposits increased $901,000 or 4.1% while average certificate of
deposit accounts decreased $7.7 million or (5.6%) over the prior year. The most significant impact on net interest income between periods is derived from the interaction
of changes in the volume of and rate earned or paid on interest-earning assets and interest-bearing
liabilities. The volume of interest-earning assets in loans and securities, compared to the volume
of interest-bearing liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods. The Companys net interest margin was
4.45% in 2004 and 4.22% in 2003. The combined effect of increasing the volume of earning assets and
repricing deposit liabilities resulted in an increase of $2.2 million or 14.9% in net interest
income for the year ended December 31, 2004 over 2003. The following table sets forth the Companys daily average balance sheet, related interest income
or expense and yield or rate paid for the periods indicated. The yield on tax-exempt securities has
not been adjusted to a tax-equivalent yield basis. Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31, (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest Earning AssetsPortfolio loans
    
    $
    297,679
    
    
    $
    18,445
    
    
    
    6.20
    %
    
    $
    284,841
    
    
    $
    17,655
    
    
    
    6.20
    %
    
    $
    253,454
    
    
    $
    16,812
    
    
    
    6.63
    %Tax-exempt securities
    
    
    6,582
    
    
    
    226
    
    
    
    3.43
    %
    
    
    3,832
    
    
    
    140
    
    
    
    3.65
    %
    
    
    3,276
    
    
    
    138
    
    
    
    4.21
    %US government securities
    
    
    28,220
    
    
    
    781
    
    
    
    2.77
    %
    
    
    21,650
    
    
    
    567
    
    
    
    2.62
    %
    
    
    21,184
    
    
    
    730
    
    
    
    3.45
    %Mortgage backed securities
    
    
    36,159
    
    
    
    1,394
    
    
    
    3.86
    %
    
    
    20,139
    
    
    
    724
    
    
    
    3.60
    %
    
    
    15,755
    
    
    
    570
    
    
    
    3.62
    %Federal funds sold
    
    
    10,304
    
    
    
    143
    
    
    
    1.39
    %
    
    
    17,833
    
    
    
    193
    
    
    
    1.08
    %
    
    
    13,978
    
    
    
    227
    
    
    
    1.62
    %Other securities
    
    
    382
    
    
    
    7
    
    
    
    1.83
    %
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %
    
    
    661
    
    
    
    88
    
    
    
    13.31
    %Average Earning Assets
    
    $
    379,326
    
    
    $
    20,996
    
    
    
    5.54
    %
    
    $
    348,295
    
    
    $
    19,279
    
    
    
    5.54
    %
    
    $
    308,308
    
    
    $
    18,565
    
    
    
    6.02
    %Cash & due from banks
    
    
    17,351
    
    
    
    
    
    
    
    
    
    
    
    21,817
    
    
    
    
    
    
    
    
    
    
    
    19,566Bank premises and fixed assets
    
    
    5,373
    
    
    
    
    
    
    
    
    
    
    
    5,538
    
    
    
    
    
    
    
    
    
    
    
    5,395Other assets
    
    
    7,519
    
    
    
    
    
    
    
    
    
    
    
    5,998
    
    
    
    
    
    
    
    
    
    
    
    5,903Average Total Assets
    
    $
    409,569
    
    
    
    
    
    
    
    
    
    
    $
    381,648
    
    
    
    
    
    
    
    
    
    
    $
    339,172Interest Bearing LiabilitiesInterest bearing demand
    
    $
    101,884
    
    
    $
    430
    
    
    
    0.42
    %
    
    $
    94,677
    
    
    $
    464
    
    
    
    0.49
    %
    
    $
    80,371
    
    
    $
    597
    
    
    
    0.74
    %Savings deposits
    
    
    23,384
    
    
    
    104
    
    
    
    0.44
    %
    
    
    22,483
    
    
    
    133
    
    
    
    0.59
    %
    
    
    19,493
    
    
    
    145
    
    
    
    0.74
    %Certificates of deposit
    
    
    138,434
    
    
    
    2,876
    
    
    
    2.08
    %
    
    
    146,152
    
    
    
    3,571
    
    
    
    2.44
    %
    
    
    145,824
    
    
    
    5,115
    
    
    
    3.51
    %Other borrowings
    
    
    35,880
    
    
    
    699
    
    
    
    1.95
    %
    
    
    18,720
    
    
    
    417
    
    
    
    2.23
    %
    
    
    13,383
    
    
    
    191
    
    
    
    1.43
    %Average Interest Liabilities
    
    
    299,582
    
    
    
    4,109
    
    
    
    1.37
    %
    
    
    282,032
    
    
    
    4,585
    
    
    
    1.63
    %
    
    
    259,071
    
    
    
    6,048
    
    
    
    2.33
    %Noninterest bearing Demand
    
    
    73,163
    
    
    
    
    
    
    
    
    
    
    
    62,957
    
    
    
    
    
    
    
    
    
    
    
    50,583
 31




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##### Table of Contents



(Dollars
in thousands)
    
    2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateOther liabilities
    
    
    4,440
    
    
    
    
    
    
    
    
    
    
    
    4,145
    
    
    
    
    
    
    
    
    
    
    
    2,974Stockholders equity
    
    
    32,384
    
    
    
    
    
    
    
    
    
    
    
    32,514
    
    
    
    
    
    
    
    
    
    
    
    26,544Average Liabilities and
Stockholders equity
    
    $
    409,569
    
    
    
    
    
    
    
    
    
    
    $
    381,648
    
    
    
    
    
    
    
    
    
    
    $
    339,172Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    16,887
    
    
    
    4.45
    %
    
    
    
    
    
    $
    14,694
    
    
    
    4.22
    %
    
    
    
    
    
    $
    12,517
    
    
    
    4.06
    %
 Interest income on loans includes fee income of approximately $687,000, $586,000 and $272,000
for the years ended December 31, 2004, 2003, and 2002 respectively. The Companys average total
assets increased to $409.6 million in 2004 to $381.6 in 2003 and $339.2 in 2002, representing a
7.3% increase 2004 over 2003, and 12.5% increase in 2003 over 2002. The following tables set forth changes in interest income and expense for each major category of
interest earning assets and interest-bearing liabilities, and the amount of change attributable to
volume and rate changes for the periods indicated. Changes not solely attributable to rate or
volume has been allocated to volume. The yield on tax-exempt securities has not been adjusted to a
tax-equivalent yield basis. Analysis of Changes in Net Interest Income
Years ended December 31, (Dollars in thousands)
    
    2004 over 2003
    
    
    2003 over 2002Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalIncrease (Decrease)In Interest Income:Portfolio loans
    
    $
    801
    
    
    $
    (11
    )
    
    $
    790
    
    
    $
    1,945
    
    
    $
    (1,102
    )
    
    $
    843Tax-exempt securities
    
    
    94
    
    
    
    (8
    )
    
    
    86
    
    
    
    20
    
    
    
    (18
    )
    
    
    2US government securities
    
    
    182
    
    
    
    32
    
    
    
    214
    
    
    
    (12
    )
    
    
    (151
    )
    
    
    (163
    )Mortgage backed securities
    
    
    619
    
    
    
    51
    
    
    
    670
    
    
    
    184
    
    
    
    (30
    )
    
    
    154Federal funds sold
    
    
    (105
    )
    
    
    55
    
    
    
    (50
    )
    
    
    42
    
    
    
    (76
    )
    
    
    (34
    )Other securities
    
    
    7
    
    
    
    0
    
    
    
    7
    
    
    
    0
    
    
    
    (88
    )
    
    
    (88
    )Total Increase (Decrease)
    
    
    1,598
    
    
    
    119
    
    
    
    1,717
    
    
    
    2,179
    
    
    
    (1,465
    )
    
    
    714(Decrease) IncreaseIn Interest Expense:Interest bearing demand
    
    
    30
    
    
    
    (64
    )
    
    
    (34
    )
    
    
    70
    
    
    
    (203
    )
    
    
    (133
    )Savings accounts
    
    
    4
    
    
    
    (33
    )
    
    
    (29
    )
    
    
    18
    
    
    
    (30
    )
    
    
    (12
    )Certificates of deposit
    
    
    (165
    )
    
    
    (530
    )
    
    
    (695
    )
    
    
    8
    
    
    
    (1,552
    )
    
    
    (1,544
    )Other borrowings
    
    
    335
    
    
    
    (53
    )
    
    
    282
    
    
    
    119
    
    
    
    107
    
    
    
    226Total (Decrease) Increase
    
    
    204
    
    
    
    (680
    )
    
    
    (476
    )
    
    
    215
    
    
    
    (1,678
    )
    
    
    (1,463
    )Net (Decrease) Increase
    
    $
    1,394
    
    
    $
    799
    
    
    $
    2,193
    
    
    $
    1,964
    
    
    $
    213
    
    
    $
    2,177
 32




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##### Table of Contents



Noninterest Income The following table sets forth a summary of noninterest income for the periods
indicated. (Dollars in thousands)
    
    Years Ended December 31,2004
    
    
    2003
    
    
    2002Noninterest income:Service charges on deposit accounts
    
    $
    476
    
    
    $
    348
    
    
    $
    289Payroll and benefit processing fees
    
    
    343
    
    
    
    331
    
    
    
    302Earnings on cash surrender-Bank owned life insurance
    
    
    259
    
    
    
    233
    
    
    
    247Net realized gain on sale of
securities available-for-sale
    
    
    0
    
    
    
    88
    
    
    
    275Net gain on sale of loans
    
    
    95
    
    
    
    101
    
    
    
    60Merchant credit card service income, net
    
    
    434
    
    
    
    408
    
    
    
    425Mortgage brokerage fee income
    
    
    186
    
    
    
    251
    
    
    
    161Other income
    
    
    403
    
    
    
    390
    
    
    
    332Total Noninterest income
    
    $
    2,196
    
    
    $
    2,150
    
    
    $
    2,091
 The Companys noninterest income consists of payroll and benefit processing fees, processing fees
for merchants who accept credit card payments for goods and services, service charge on deposit
accounts, mortgage servicing fees and other service fees. For the year ended December 31, 2004,
non-interest income represented 9.5% of the Companys revenues (interest income plus noninterest
income) versus 10.0% in 2003 and 10.1% in 2002. Service charges on deposit accounts increased $128,000 or 36.8% over 2003 reflective of the
implementation of an overdraft privilege product and the related service fees. Mortgage brokerage
fee income dropped $65,000 or 25.9% in 2004 compared to 2003 due to the reduction in refinancing
activity in the mortgage markets. There were no sales of securities available-for-sale during the
year. Total noninterest income in 2004 was $2.2 million compared to $2.2 million in 2003 and up
from $2.1 million in 2002. 
 Noninterest Expense The following table sets forth a summary of noninterest expense for the periods indicated. (Dollars in thousands)
    
    Years Ended December 31,2004
    
    
    2003
    
    
    2002Salaries & related benefits
    
    $
    5,938
    
    
    $
    5,451
    
    
    $
    4,709Occupancy & equipment expense
    
    
    1,534
    
    
    
    1,471
    
    
    
    1,463FDIC insurance premium
    
    
    48
    
    
    
    49
    
    
    
    48Data processing fees
    
    
    254
    
    
    
    217
    
    
    
    89Professional service fees
    
    
    803
    
    
    
    654
    
    
    
    441Deferred compensation expense
    
    
    281
    
    
    
    256
    
    
    
    239Stationery & supplies
    
    
    208
    
    
    
    219
    
    
    
    235Postage
    
    
    97
    
    
    
    103
    
    
    
    106Directors expenses
    
    
    267
    
    
    
    241
    
    
    
    257Other expenses
    
    
    1,151
    
    
    
    999
    
    
    
    680Total Noninterest expense
    
    $
    10,581
    
    
    $
    9,660
    
    
    $
    8,267
 Noninterest expense consists of salaries and related employee benefits, occupancy and equipment
expenses, data processing fees, professional fees, directors fees and other operating expenses.
The increase in operating expenses in 2004 over 2003 are primarily due to salaries and benefits and
occupancy expenses reflective of the growth in assets in both the Redding and Sacramento markets,
and the addition of the leased mortgage facility. Professional service fees increased $149,000 or
22.8% in 2004 over 2003 due to increased audit coverage. Noninterest expense for 2004 increased to
$10.6 million compared to $9.7 million for 2003 and $8.3 million in 2002, representing an increase
of
$921,000 or 9.5% in 2004, and $1,393,000 or 16.9% in 2003. 33




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##### Table of Contents



Income Taxes The Companys provision for income taxes includes both federal and state income taxes and
reflects the application of federal and state statutory rates to the Companys income before income
taxes. The principal difference between statutory tax rates and the Companys effective tax rate
is the benefit derived from investing in tax-exempt securities and preferential state tax treatment
for qualified enterprise zone loans. Increases and decreases in the provision for taxes reflect
changes in the Companys income before income taxes. The following table reflects the Companys tax provision and the related effective tax rate
for the periods indicated. (Dollars in thousands)
    
    Years Ended December 31,2004
    
    
    2003
    
    
    2002Income tax provision
    
    $
    2,931
    
    
    $
    2,487
    
    
    $
    2,025Effective tax rate
    
    
    37.1
    %
    
    
    37.3
    %
    
    
    35.4
    %
 
 Asset Quality The Company concentrates its lending activities primarily within El Dorado, Placer, Sacramento
and Shasta counties, California, and the location of the Banks four full services branches,
specifically identified as Upstate California. The Company manages its credit risk through
diversification of its loan portfolio and the application of underwriting policies and procedures
and credit monitoring practices. Although The Company has a diversified loan portfolio, a
significant portion of its borrowers ability to repay the loans is dependent upon the professional
services and residential real estate development industry sectors. Generally, the loans are secured
by real estate or other assets located in California and are expected to be repaid from cash flows
of the borrower or proceeds from the sale of collateral. The following table sets forth the amounts of loans outstanding by category as of the dates
indicated: As of December 31, (Dollars in thousands)2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %
    
    
    2001
    
    
    %
    
    
    2000
    
    
    %Commercial & financial
    
    $
    105,545
    
    
    
    32.64
    %
    
    $
    104,509
    
    
    
    37.01
    %
    
    $
    99,084
    
    
    
    34.84
    %
    
    $
    76,913
    
    
    
    34.96
    %
    
    $
    61,069
    
    
    
    31.39
    %Real Estate-construction
    
    
    77,439
    
    
    
    23.95
    %
    
    
    66,741
    
    
    
    23.64
    %
    
    
    40,662
    
    
    
    14.29
    %
    
    
    45,331
    
    
    
    20.60
    %
    
    
    37,531
    
    
    
    19.29
    %Real Estate-commercial
    
    
    135,260
    
    
    
    41.83
    %
    
    
    102,953
    
    
    
    36.46
    %
    
    
    124,210
    
    
    
    43.67
    %
    
    
    82,892
    
    
    
    37.68
    %
    
    
    79,748
    
    
    
    40.99
    %Real Estate- mortgage
    
    
    4,423
    
    
    
    1.37
    %
    
    
    7,086
    
    
    
    2.51
    %
    
    
    19,126
    
    
    
    6.72
    %
    
    
    13,725
    
    
    
    6.23
    %
    
    
    14,363
    
    
    
    7.39
    %Installment
    
    
    300
    
    
    
    0.10
    %
    
    
    451
    
    
    
    0.16
    %
    
    
    720
    
    
    
    0.25
    %
    
    
    440
    
    
    
    0.20
    %
    
    
    430
    
    
    
    0.22
    %Other loans
    
    
    353
    
    
    
    0.11
    %
    
    
    632
    
    
    
    0.22
    %
    
    
    662
    
    
    
    0.23
    %
    
    
    709
    
    
    
    0.33
    %
    
    
    1,396
    
    
    
    0.72
    %Gross Loans
    
    
    323,320
    
    
    
    100.00
    %
    
    
    282,372
    
    
    
    100.00
    %
    
    
    284,464
    
    
    
    100.00
    %
    
    
    220,010
    
    
    
    100.00
    %
    
    
    194,537
    
    
    
    100.00
    %Less:Deferred loan fees and
costs
    
    
    653
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    584
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    241Allowance for Loan losses
    
    
    3,866
    
    
    
    
    
    
    
    3,675
    
    
    
    
    
    
    
    3,529
    
    
    
    
    
    
    
    2,916
    
    
    
    
    
    
    
    2,710Net Loans
    
    $
    318,801
    
    
    
    
    
    
    $
    278,203
    
    
    
    
    
    
    $
    280,351
    
    
    
    
    
    
    $
    216,960
    
    
    
    
    
    
    $
    191,586
 Net portfolio loans increased $40.6 million or 14.6%, to $318.8 million at December 31, 2004
over $278.2 million at December 31, 2003 primarily due to increased activity in the commercial real
estate sector. During 2004, commercial and financial loans increased $1.0 million or 1.0% while the
real estate related portfolio increased $40.3 million or 22.8%. The portfolio mix shifted towards
commercial real estate in comparison to 2003, with real estate construction of 24.3%, commercial
real estate at 42.4% and commercial and financial loans of approximately 33.1%. The Companys practice is to place an asset on nonaccrual status when one of the following events
occurs:(i) Any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well-secured and in the process of collection), (ii) management
determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans may be on nonaccrual, are 90 days past due and still accruing, or have been
restructured. 34




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##### Table of Contents



Nonperforming Assets The following table sets forth a summary of the Companys nonperforming loans and other
assets as of the dates indicated: (Dollars in thousands)
    
    
    
    
    
    As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Nonaccrual loans
    
    $
    2,383
    
    
    $
    3,931
    
    
    $
    0
    
    
    $
    59
    
    
    $
    80190 days past due and
still accruing interest
    
    
    0
    
    
    
    712
    
    
    
    7
    
    
    
    290
    
    
    
    0Total nonperforming loans
    
    
    2,383
    
    
    
    4,643
    
    
    
    7
    
    
    
    349
    
    
    
    801Other real estate owned
    
    
    0
    
    
    
    0
    
    
    
    338
    
    
    
    0
    
    
    
    0Total nonperforming assets
    
    $
    2,383
    
    
    $
    4,643
    
    
    $
    345
    
    
    $
    349
    
    
    $
    801
 Management believes that the Companys loan portfolio is sound and performing well. Nonaccrual
loans decreased by $1.5 million or 39% during the year. Impairment reviews were completed on three
relationships during the year. Impairment was found to exist on one credit. Management reviewed the
credit and determined that the impaired amount was fully funded in the allowance for loan and lease
losses. Although the loan was paid current, it was placed into nonaccrual status. The Companys
OREO remained at $0 during 2004 and 2003. Loan Maturity Schedule The following table sets forth the maturity distribution of the Companys commercial and real
estate construction loans outstanding as of December 31, 2004, which, based on remaining scheduled
repayments of principal, were due within the periods indicated. After One(Dollars in thousands)
    
    Within One Year
    
    
    through Five Years
    
    
    After Five Years
    
    
    TotalCommercial & financial
    
    $
    50,634
    
    
    $
    45,021
    
    
    $
    9,890
    
    
    $
    105,545Real Estate   construction
    
    
    77,061
    
    
    
    378
    
    
    
    0
    
    
    
    77,439Real Estate  commercial
    
    
    110,381
    
    
    
    4,934
    
    
    
    19,945
    
    
    
    135,260Other loans
    
    
    556
    
    
    
    2,260
    
    
    
    2,260
    
    
    
    5,076Total gross loans
    
    $
    238,632
    
    
    $
    52,593
    
    
    $
    32,095
    
    
    $
    323,320Loans due after one year
with:Fixed Rates
    
    
    
    
    
    $
    16,528
    
    
    $
    23,680
    
    
    $
    40,208Variable Rates
    
    
    
    
    
    
    36,065
    
    
    
    8,415
    
    
    
    44,480Total
    
    
    
    
    
    $
    52,593
    
    
    $
    32,095
    
    
    $
    84,688
 
 Available-for-sale securities The following table summarizes the contractual maturities of the Companys securities held as
available-for-sale at their amortized cost basis and their weighted-average yields at December 31,
2004. The yield on tax-exempt securities has not been adjusted to a tax-equivalent yield basis. 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
    
    $
    6,014
    
    
    
    2.02
    %
    
    $
    25,001
    
    
    
    3.04
    %
    
    $
    2,997
    
    
    
    4.02
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    34,012
    
    
    
    2.97
    %Obligations of state and
political subdivisions
    
    
    15
    
    
    
    1.15
    %
    
    
    1,293
    
    
    
    2.25
    %
    
    
    2,315
    
    
    
    3.73
    %
    
    
    2,893
    
    
    
    3.56
    %
    
    
    6,516
    
    
    
    3.41
    %Mortgage backed securities
    
    
    0
    
    
    
    0.00
    %
    
    
    1,871
    
    
    
    3.13
    %
    
    
    19,608
    
    
    
    3.96
    %
    
    
    21,001
    
    
    
    3.73
    %
    
    
    42,480
    
    
    
    3.82
    %Corporate and other bonds
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Bankers Acceptances
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Total
    
    $
    6,029
    
    
    
    2.02
    %
    
    $
    28,165
    
    
    
    3.07
    %
    
    $
    24,920
    
    
    
    3.95
    %
    
    $
    23,894
    
    
    
    3.72
    %
    
    $
    83,008
    
    
    
    3.42
    %
 35




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##### Table of Contents



Deposit Structure The Company primarily obtains deposits from local businesses and professionals as well as
through certificates of deposits, savings and checking accounts. The following table sets forth the
distribution of the Companys average daily balances for the periods indicated. Years Ended December 31,(Dollars in thousands)
    
    2004
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldNOW accounts
    
    $
    75,154
    
    
    
    0.30
    %
    
    $
    52,508
    
    
    
    0.31
    %
    
    $
    43,261
    
    
    
    0.45
    %Savings
    
    
    23,384
    
    
    
    0.44
    %
    
    
    22,483
    
    
    
    0.59
    %
    
    
    19,493
    
    
    
    0.74
    %Money market accounts
    
    
    26,730
    
    
    
    0.76
    %
    
    
    42,169
    
    
    
    0.74
    %
    
    
    37,110
    
    
    
    1.09
    %Certificates of deposit
    
    
    138,434
    
    
    
    2.08
    %
    
    
    146,152
    
    
    
    2.44
    %
    
    
    145,824
    
    
    
    3.51
    %Other borrowings
    
    
    35,880
    
    
    
    1.95
    %
    
    
    18,720
    
    
    
    2.23
    %
    
    
    13,383
    
    
    
    1.43
    %Interest bearing deposits
    
    
    299,582
    
    
    
    
    
    
    
    282,032
    
    
    
    
    
    
    
    259,071Noninterest bearing deposits
    
    
    73,163
    
    
    
    
    
    
    
    62,957
    
    
    
    
    
    
    
    50,583Total
    
    $
    372,745
    
    
    
    
    
    
    $
    344,989
    
    
    
    
    
    
    $
    309,654
   The following table sets forth the remaining maturities of certificates of deposit in amounts of
$100,000 or more as of December 31, 2004: Deposit Maturity Schedule (Dollars in thousands)2004Three months or less
    
    $
    31,856Three through six months
    
    
    18,542Six through twelve months
    
    
    18,542Over twelve months
    
    
    14,575Total
    
    $
    83,515
   
 Capital Management and Adequacy The Company uses capital to fund organic growth, pay dividends and repurchase its
shares. The objective of effective capital management is to produce above market long-term returns
by using capital when returns are perceived to be high and issuing capital when costs are perceived
to be low. The Companys potential sources of capital include retained earnings, common and
preferred stock issuance, and issuance of subordinated debt and trust preferred securities. Overall capital adequacy is monitored on a day-to-day basis by the Companys management and
reported to the Companys Board of Directors on a monthly basis. The regulators of the Bank
measure capital adequacy by using a risk-based capital framework and by monitoring compliance with
minimum leverage ratio guidelines. Under the risk-based capital standard, assets reported on the
Companys balance sheet and certain off-balance sheet items are assigned to risk categories, each
of which is assigned a risk weight. This standard characterizes an institutions capital as being Tier 1 capital (defined as
principally comprising stockholders equity) and Tier 2 capital (defined as principally
comprising the qualifying portion of the ALLL). The minimum ratio of total risk-based capital to
risk-adjusted assets, including certain off-balance sheet items, is 8%. At least one-half (4%) of
the total risk-based capital is to be comprised of common equity; the balance may consist of debt
securities and a limited portion of the ALLL. Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to 36




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##### Table of Contents



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,
2004 and 2003, that the Company and the Bank met all capital adequacy requirements to which they
are subject.
As of December 31, 2004, the most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an institution must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since the notification that management believes have changed the
Banks category. The Companys and the Banks actual capital amounts and ratios as of December 31,
2004 are presented in the table. Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalCapital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    40,616,084
    
    
    
    9.27
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    40,616,084
    
    
    
    11.34
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    44,482,582
    
    
    
    12.42
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of
CommerceLeverage
    
    $
    38,684,893
    
    
    
    8.91
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    38,684,893
    
    
    
    10.80
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    42,551,391
    
    
    
    11.88
    %
    
    
    10.00
    %
    
    
    8.0
    %
 The Company paid a cash dividend of $0.23 cents per share on the Companys common stock paid to
shareholders of record as of October 1, 2004 and paid on October 22, 2004. 
 Transactions with Related Parties The Companys conduct of business with Directors, Officers, significant stockholders and
other related parties (collectively, Related Parties) is restricted and governed by various laws
and regulations, including Regulation O as promulgated and enforced by the Federal Reserve.
Furthermore, it is the Companys policy to conduct business with Related Parties on an arms length
basis at current market prices with terms and conditions no more favorable than the Company
provides in its normal course of business. Some 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 2004 and the Bank expects to have such transactions in the future. All loans and
commitments to loans included in such transactions were made in compliance with the applicable laws
on substantially the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons of similar creditworthiness, and in the
opinion of the Company, did not involve more than a normal risk of collectibility or present other
unfavorable features. An analysis of the activity in related party loans consists of the following: December 31,2004
    
    
    2003Balance at beginning of year
    
    $
    4,123,712
    
    
    $
    5,150,404New loan additions
    
    
    541,097
    
    
    
    2,559,874Other additions
    
    
    0
    
    
    
    0Principal repayments
    
    
    (1,042,059
    )
    
    
    (3,586,566
    )Balance at end of year
    
    $
    3,622,750
    
    
    $
    4,123,712
 
 Impact of Inflation Inflation affects the Companys financial position as well as its operating results. It is
managements opinion that the effects of inflation for the three years ended December 31, 2004 on
the financial statements have not been material. 37




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##### Table of Contents



Commitments 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 stand-by letters of credit, which
are not reflected in the consolidated balance sheets. These transactions may involve, to varying
degrees, credit and interest rate risk more than the amount, if any recognized in the consolidated
balance sheets. 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 31,2004
    
    
    2003Off-balance sheet commitments:Commitments to extend credit
    
    $
    128,837,320
    
    
    $
    90,768,902Standby letters of credit
    
    
    7,064,798
    
    
    
    4,594,010
 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 Company 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 Company 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. Commitments and contingent liabilities Lease Commitments -The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as of December 31, 2004
are below: (Dollars in thousands) Less than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    One Year
    
    
    1 -3 Years
    
    
    3  5 Years
    
    
    5 yearsTrust Preferred obligation
    
    $
    5,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,000FHLB Borrowings
    
    $
    35,000
    
    
    $
    35,000
    
    
    
    
    
    
    
    
    
    
    
    Operating lease obligations
    
    $
    3,171
    
    
    $
    462
    
    
    $
    748
    
    
    $
    723
    
    
    $
    1,238Repurchase Agreements
    
    $
    2,004
    
    
    $
    2,004
    
    
    
    
    
    
    
    
    
    
    
    Time Certificates of Deposit
    
    $
    138,500
    
    
    $
    115,831
    
    
    $
    22,669
    
    
    
    
    
    
    
    Total
    
    $
    183,675
    
    
    $
    153,297
    
    
    $
    23,417
    
    
    $
    723
    
    
    $
    6,238
 Minimum rental income due in the future under non-cancelable leases
    
    $ 103
 38




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##### Table of Contents



ITEM 7-A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The goal for managing the assets and liabilities of the Company is to maximize stockholder
value and earnings while maintaining a high quality balance sheet without exposing the Company to
undue interest rate risk. The absolute level and volatility of interest rates can have a
significant impact on the Companys profitability. Market risk arises from exposure to changes in
interest rates, exchange rates, commodity prices, and other relevant market rate or price risk. The
Company does not operate a trading account, does not hold any financial derivatives and does not
hold a position with exposure to foreign currency exchange or commodities. The Company faces market
risk through interest rate volatility. The Board of Directors has overall responsibility for the Companys interest rate risk management
policies. The Company has an Asset/Liability Management Committee (ALCO) which establishes and
monitors guidelines to control the sensitivity of earnings to changes in interest rates. Based on
economic conditions, asset quality and other considerations, the ALCO establishes tolerance ranges
for interest rate sensitivity. Simulation of net interest margin, net income and market value of
equity under various interest rate scenarios is the primary tool used to measure interest rate
risk. The simulation model used includes measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-related products (demand deposit
accounts, other assets and other liabilities). These measures recognize the relative sensitivity of
these accounts to changes in market interest rates, as demonstrated through current and historical
experience, recognizing the timing differences of rate changes. In simulation of net interest
margin and net income the forecast balance sheet is processed against five rate scenarios. These
five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in
the future and four additional rate ramp scenarios ranging for + 200 to - 200 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero. The formal policies and practices adopted by the Company to monitor and manage interest rate risk
exposure measure risk in two ways: (i) repricing opportunities for earning assets and
interest-bearing liabilities and (ii) changes in net interest income for declining interest rate
shocks of 100 to 200 basis points. Because of the Companys predisposition to variable rate,
pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a
result, management anticipates that, in a declining interest rate environment, the Companys net
interest income and margin would be expected to decline, and, in an increasing interest rate
environment, the Companys net interest income and margin would be expected to increase. However,
no assurance can be given that under such circumstances the Company would experience the described
relationships to declining or increasing interest rates. Because the Company is asset sensitive,
the Company is adversely affected by declining rates rather than rising rates. To estimate the effect of interest rate shocks on the Companys net interest income,
management uses a model to prepare an analysis of interest rate risk exposure. Such analysis
calculates the change in net interest income given a change in the federal funds rate of 100 or 200
basis points up or down. All changes are measured in dollars and are compared to projected net
interest income. At December 31, 2004, the estimated annualized reduction in net interest income
attributable to a 100 or 200 basis point decline in the federal funds rate was $1,379,244 and
$2,638,008, respectively, with a similar and opposite result attributable to a 100 or 200 basis
point increase in the federal fund rate. The ALCO has established a policy limitation to interest
rate risk of -14% of net interest margin. The following table sets forth, as of December 31, 2004, the distribution of repricing
opportunities for the Companys earning assets and interest-bearing liabilities. It also reports
the GAP (different volumes of rate sensitive assets and liabilities) repricing interest earning
assets and interest-bearing liabilities at different time intervals, the cumulative GAP, the ratio
of rate sensitive assets to rate sensitive liabilities for each repricing interval, and the
cumulative GAP to total assets. 39




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##### Table of Contents



(Dollars in thousands)
    
    At December 31, 2004Within 3
    
    
    3 Months to
    
    
    One Year toMonths
    
    
    One Year
    
    
    Five Years
    
    
    Over Five Years
    
    
    TotalInterest-Earning AssetsHeld-to-maturity securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    449
    
    
    $
    449Available-for-sale securities
    
    
    5,012
    
    
    
    1,011
    
    
    
    27,905
    
    
    
    48,515
    
    
    
    82,443Federal funds sold
    
    
    6,120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,120Loans, net
    
    
    198,962
    
    
    
    39,671
    
    
    
    50,333
    
    
    
    29,835
    
    
    
    318,801Total Interest-earning Assets
    
    $
    210,094
    
    
    $
    40,682
    
    
    $
    78,238
    
    
    $
    78,799
    
    
    $
    407,813Interest-Bearing LiabilitiesDemand
    
    $
    190,907
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    190,907Savings Accounts
    
    
    23,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,471Certificates of deposit
    
    
    54,479
    
    
    
    61,352
    
    
    
    22,669
    
    
    
    
    
    
    
    138,500Other borrowings
    
    
    22,004
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    37,004Total Interest-bearing Liabilities
    
    $
    290,861
    
    
    $
    76,352
    
    
    $
    22,669
    
    
    $
    
    
    
    $
    389,882Interest Sensitivity GAP
    
    ($
    80,767
    )
    
    ($
    35,670
    )
    
    $
    55,569
    
    
    $
    78,799
    
    
    $
    17,931Cumulative Sensitivity GAP
    
    
    
    
    
    ($
    116,437
    )
    
    ($
    60,868
    )
    
    $
    17,931As a percentage of earning assets:Interest Sensitivity GAP
    
    
    0.72
    
    
    
    0.53
    
    
    
    3.45
    
    
    
    100.0
    
    
    
    1.05Cumulative Sensitivity GAP
    
    
    (0.38
    )
    
    
    (0.88
    )
    
    
    0.71
    
    
    
    1.00
 The model utilized by management to create the analysis described in the preceding paragraph
uses balance sheet simulation to estimate the impact of changing rates on the projected annual net
interest income of the Company. The model considers a number of factors, including (i) change in
customer and management behavior in response to the assumed rate shock, (ii) the ratio of the
amount of rate change for each interest-bearing asset or liability to assumed changes in the
federal funds rate based on local market conditions for loans and core deposits and national market
conditions for other assets and liabilities and (iii) timing factors related to the lag between the
rate shock and its effect on other interest-bearing assets and liabilities. Actual results will
differ from simulated results due to timing, magnitude, and frequency of interest rate changes as
well as changes in market conditions and management strategies. Management believes that the short
duration of its rate-sensitive assets and liabilities contributes to its ability to reprice a
significant amount of its rate-sensitive assets and liabilities and mitigate the impact of rate
changes in excess of 100 or 200 basis points. The models primary benefit to management is its
assistance in evaluating the impact that future strategies with respect to the Companys mix and
level of rate-sensitive assets and liabilities will have on the Companys net interest income. 40




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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
    
    
    42Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    44Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    
    45Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002
    
    
    46Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    48Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002
    
    
    50
 41




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Directors of
Bank of Commerce Holdings We have audited the accompanying consolidated balance sheet of Bank of Commerce Holdings and
subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of
income, stockholders equity, and cash flows for the year ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Bank of Commerce Holdings and subsidiaries as of December 31,
2004, and the results of their operations and their cash flows for the year ended December 31,
2004, in conformity with accounting principles generally accepted in the United States of America. (MOSS ADAMS SIGNATURE HERE) Stockton, California
January 14, 2005 42




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Directors of
Bank of Commerce Holdings: We have audited the consolidated balance sheet of Bank of Commerce Holdings (formerly Redding
Bancorp) and subsidiaries (the Company) as of December 31, 2003, and the related consolidated
statements of income, stockholders equity, and cash flows for each of the two years in the period
ended December 31, 2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Bank of Commerce Holdings and subsidiaries as of December 31, 2003, and
the results of their operations and their cash flows for each of the two years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted in the United States
of America. (-s- Deloitte & Touche LLP) San Francisco, California
February 24, 2004
(February 24, 2005 as to the effects of the stock split described in Note 2) 43




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
   2004
    
    
    2003ASSETSCash and due from banks
    
    $
    13,120,951
    
    
    $
    23,843,864Federal funds sold and securities purchased under agreements to resell
    
    
    6,120,000
    
    
    
    8,195,000Cash and cash equivalents
    
    
    19,240,951
    
    
    
    32,038,864Securities available-for-sale (including pledged collateral of
$35,345,000 at December 31, 2004 and $10,589,000 at December 31, 2003)
    
    
    82,443,193
    
    
    
    70,034,442Securities held-to-maturity, at cost
(estimated fair value of $487,092 at December 31 2004
and $1,460,052 at December 31 2003)
    
    
    448,753
    
    
    
    1,390,851Loans, net of the allowance for loan losses of $3,866,498
at December 31, 2004 and $3,675,084 at December 31, 2003
    
    
    318,800,587
    
    
    
    278,203,553Bank premises and equipment, net
    
    
    5,484,196
    
    
    
    5,812,789Other assets
    
    
    12,127,127
    
    
    
    13,677,153TOTAL ASSETS
    
    $
    438,544,807
    
    
    $
    401,157,652LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Demand - noninterest bearing
    
    $
    82,262,500
    
    
    $
    71,221,552Demand - interest bearing
    
    
    108,644,844
    
    
    
    94,051,087Savings accounts
    
    
    23,471,100
    
    
    
    22,196,598Certificates of deposit
    
    
    138,499,839
    
    
    
    140,069,406Total Deposits
    
    
    352,878,283
    
    
    
    327,538,643Securities sold under agreements to repurchase
    
    
    2,003,712
    
    
    
    3,748,797Federal Home Loan Bank borrowings
    
    
    35,000,000
    
    
    
    30,000,000Other liabilities
    
    
    8,379,475
    
    
    
    4,359,019Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    5,000,000
    
    
    
    5,000,000Total liabilities
    
    
    403,261,470
    
    
    
    370,646,459Commitments and contingencies (Note 17)Stockholders equity:Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued and outstanding in 2004 and 2003
    
    
    
    
    
    
    Common stock, no par value; 10,000,000 shares
authorized; 8,502,831 shares issued and outstanding in 2004
and 8,130,174 shares issued and outstanding in 2003
    
    
    10,717,691
    
    
    
    9,539,752Retained earnings
    
    
    24,898,393
    
    
    
    21,236,140Accumulated other comprehensive (loss) income, net of tax
    
    
    (332,747
    )
    
    
    (264,699
    )Total stockholders equity
    
    
    35,283,337
    
    
    
    30,511,193TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    438,544,807
    
    
    $
    401,157,652
 See accompanying notes to consolidated financial statements. 44




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
   2004
    
    
    2003
    
    
    2002Interest income:Interest and fees on loans
    
    $
    18,444,703
    
    
    $
    17,655,479
    
    
    $
    16,812,119Interest on tax-exempt securities
    
    
    225,976
    
    
    
    139,895
    
    
    
    138,573Interest on U.S. government securities
    
    
    2,175,274
    
    
    
    1,290,481
    
    
    
    1,299,956Interest on federal funds sold and securities purchased
under agreement to resell
    
    
    143,449
    
    
    
    193,089
    
    
    
    226,854Interest on other securities
    
    
    6,788
    
    
    
    0
    
    
    
    87,691Total interest income
    
    
    20,996,190
    
    
    
    19,278,944
    
    
    
    18,565,193Interest expense:Interest on demand deposits
    
    
    429,699
    
    
    
    463,708
    
    
    
    596,646Interest on savings deposits
    
    
    103,670
    
    
    
    132,758
    
    
    
    144,845Interest on certificates of deposit
    
    
    2,876,236
    
    
    
    3,570,686
    
    
    
    5,115,243Interest on FHLB and other borrowings
    
    
    449,432
    
    
    
    233,649
    
    
    
    191,194Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trust
    
    
    250,495
    
    
    
    183,805
    
    
    
    0Total interest expense
    
    
    4,109,532
    
    
    
    4,584,606
    
    
    
    6,047,928Net interest income
    
    
    16,886,658
    
    
    
    14,694,338
    
    
    
    12,517,265Provision for loan and lease losses
    
    
    593,000
    
    
    
    515,000
    
    
    
    620,000Net interest income after provision for loan and lease losses
    
    
    16,293,658
    
    
    
    14,179,338
    
    
    
    11,897,265Noninterest income:Service charges on deposit accounts
    
    
    475,971
    
    
    
    348,086
    
    
    
    289,042Payroll and benefit processing fees
    
    
    343,086
    
    
    
    331,492
    
    
    
    301,983Earnings on cash surrender value -
Bank owned life insurance
    
    
    258,539
    
    
    
    233,094
    
    
    
    246,796Net gain on sale of securities available-for-sale
    
    
    0
    
    
    
    88,395
    
    
    
    275,425Net gain on sale of loans
    
    
    94,878
    
    
    
    101,005
    
    
    
    59,604Merchant credit card service income, net
    
    
    433,822
    
    
    
    407,945
    
    
    
    424,557Mortgage brokerage fee income
    
    
    186,188
    
    
    
    250,451
    
    
    
    161,439Other income
    
    
    403,437
    
    
    
    389,698
    
    
    
    332,108Total noninterest income
    
    
    2,195,921
    
    
    
    2,150,166
    
    
    
    2,090,954Noninterest expense:Salaries and related benefits
    
    
    5,938,672
    
    
    
    5,450,874
    
    
    
    4,709,133Occupancy and equipment expense
    
    
    1,534,490
    
    
    
    1,470,722
    
    
    
    1,463,252FDIC insurance premium
    
    
    47,843
    
    
    
    49,431
    
    
    
    47,852Data processing fees
    
    
    253,895
    
    
    
    217,169
    
    
    
    88,589Professional service fees
    
    
    802,742
    
    
    
    653,698
    
    
    
    440,985Deferred compensation expense
    
    
    280,771
    
    
    
    255,612
    
    
    
    239,128Stationery and supplies
    
    
    208,102
    
    
    
    219,473
    
    
    
    234,991Postage
    
    
    96,780
    
    
    
    102,650
    
    
    
    105,597Directors expenses
    
    
    266,911
    
    
    
    241,384
    
    
    
    256,672Other expenses
    
    
    1,150,790
    
    
    
    999,157
    
    
    
    680,416Total noninterest expense
    
    
    10,580,996
    
    
    
    9,660,170
    
    
    
    8,266,615Income before income taxes
    
    
    7,908,583
    
    
    
    6,669,334
    
    
    
    5,721,604Provision for income taxes
    
    
    2,930,908
    
    
    
    2,486,658
    
    
    
    2,025,144Net Income
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    $
    3,696,460Basic earnings per share
    
    $
    0.60
    
    
    $
    0.52
    
    
    $
    0.46Weighted average shares - basic
    
    
    8,282,588
    
    
    
    8,033,484
    
    
    
    8,012,667Diluted earnings per share
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.43Weighted average shares - diluted
    
    
    8,702,611
    
    
    
    8,326,908
    
    
    
    8,604,219
 See accompanying notes to consolidated financial statements. 45




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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 1, 2002
    
    
    
    
    
    
    8,110,371
    
    
    $
    8,850,826
    
    
    
    18,397,061
    
    
    
    (8,038
    )
    
    
    27,239,849Comprehensive Income:Net Income
    
    $
    3,696,460
    
    
    
    
    
    
    
    
    
    
    
    3,696,460
    
    
    
    
    
    
    
    3,696,460Other Comprehensive Income:Unrealized holding gains arising
during period, net of tax
    
    
    324,623Less: reclassification adjustment
for gains included in net
    
    
    (177,925
    )Other Comprehensive Income
    
    
    146,698
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,698
    
    
    
    146,698Total Comprehensive Income
    
    $
    3,843,158Cash dividends ($0.22 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,721,279
    )
    
    
    
    
    
    
    (1,721,279
    )Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    67,200
    
    
    
    
    
    
    
    
    
    
    
    67,200Stock options exercised
    
    
    
    
    
    
    93,180
    
    
    
    102,141
    
    
    
    197,566
    
    
    
    
    
    
    
    299,707Purchase and retirement of common stock
    
    
    
    
    
    
    (278,943
    )
    
    
    (305,400
    )
    
    
    (1,782,102
    )
    
    
    
    
    
    
    (2,087,502
    )Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,997
    
    
    
    
    
    
    
    25,997Balance at December 31, 2002
    
    
    
    
    
    
    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:Unrealized holding losses arising
during period, net of tax
    
    
    (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
    
    
    $
    9,539,752
    
    
    $
    21,236,140
    
    
    ($
    264,699
    )
    
    $
    30,511,193
 (Continues) See accompanying notes to the consolidated financial statements. 46




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 AccumulatedOtherComprehensiveComprehensive
    
    
    Common
    
    
    Stock
    
    
    Retained
    
    
    Income(Loss),Income
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    net of tax
    
    
    TotalBalance at December 31, 2003
    
    
    
    
    
    
    8,130,174
    
    
    $
    9,539,752
    
    
    $
    21,236,140
    
    
    ($
    264.699
    )
    
    $
    30,511,193Comprehensive Income:Net Income
    
    
    4,977,675
    
    
    
    
    
    
    
    
    
    
    
    4,977,675
    
    
    
    
    
    
    
    4,977,675Other Comprehensive Income:Unrealized holding losses arising
during period, net of tax
    
    
    (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
    
    
    $
    10,717,691
    
    
    $
    24,898,393
    
    
    ($
    332,747
    )
    
    $
    35,283,337
 47




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    $
    3,696,460Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan losses
    
    
    593,000
    
    
    
    515,000
    
    
    
    620,000Provision for depreciation and amortization
    
    
    610,997
    
    
    
    691,859
    
    
    
    737,020Compensation expense associated with stock options
    
    
    3,856
    
    
    
    22,404
    
    
    
    67,200Gain on sale of securities available-for-sale
    
    
    0
    
    
    
    (88,395
    )
    
    
    (275,425
    )Amortization of securities premiums and accretion
of discounts, net
    
    
    272,479
    
    
    
    325,112
    
    
    
    534,180Gain on sale of loans
    
    
    (94,878
    )
    
    
    (101,005
    )
    
    
    (59,604
    )Gain on sale of fixed assets
    
    
    (50
    )
    
    
    (2,036
    )
    
    
    (18,806
    )Proceeds from sale of loans
    
    
    1,664,878
    
    
    
    1,193,689
    
    
    
    1,326,629Loans originated for sale
    
    
    (1,570,000
    )
    
    
    (1,092,684
    )
    
    
    (1,386,233
    )Deferred income taxes
    
    
    314,555
    
    
    
    (514,197
    )
    
    
    (319,820
    )Effect of changes in:Other assets
    
    
    1,283,062
    
    
    
    (364,438
    )
    
    
    (2,115,248
    )Deferred loan fees
    
    
    158,604
    
    
    
    (89,540
    )
    
    
    448,944Other liabilities
    
    
    4,660,608
    
    
    
    479,422
    
    
    
    317,047Net cash provided by operating activities
    
    
    12,874,786
    
    
    
    5,157,867
    
    
    
    3,572,344Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    32,797,174
    
    
    
    20,115,204
    
    
    
    18,539,071Proceeds from sale of available-for-sale securities
    
    
    0
    
    
    
    15,244,634
    
    
    
    42,062,130Purchases of available-for-sale securities
    
    
    (45,599,957
    )
    
    
    (73,979,119
    )
    
    
    (52,074,912
    )Maturities of held-to-maturity securities
    
    
    948,022
    
    
    
    1,025,791
    
    
    
    1,711,823Loan originations, net of principal repayments
    
    
    (41,348,638
    )
    
    
    1,721,867
    
    
    
    (64,002,564
    )Purchase of Bank premises and equipment, net
    
    
    (282,354
    )
    
    
    (1,017,857
    )
    
    
    (626,255
    )Net cash used in investing activities
    
    
    (53,485,753
    )
    
    
    (36,889,480
    )
    
    
    (54,390,707
    )Cash flows from financing activities:Net increase in demand deposits and savings accounts
    
    
    26,909,207
    
    
    
    23,252,044
    
    
    
    32,765,223Net (decrease) increase in certificates of deposit
    
    
    (1,569,567
    )
    
    
    (10,160,051
    )
    
    
    245,883Increase (decrease) in securities sold under
agreements to repurchase
    
    
    (1,745,085
    )
    
    
    44,412
    
    
    
    (3,075,847
    )Proceeds from Federal Home Loan Bank advances
    
    
    95,000,000
    
    
    
    55,000,000
    
    
    
    28,000,000Repayments of Federal Home Loan Bank advances
    
    
    (90,000,000
    )
    
    
    (43,000,000
    )
    
    
    (10,000,000
    )Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    0
    
    
    
    5,000,000
    
    
    
    0Cash dividends
    
    
    (1,955,584
    )
    
    
    (1,760,239
    )
    
    
    (1,721,279
    )Equity transactions, net
    
    
    1,174,083
    
    
    
    802,582
    
    
    
    (1,761,798
    )Net cash provided by financing activities
    
    
    27,813,054
    
    
    
    29,178,748
    
    
    
    44,452,182Net increase (decrease) in cash and cash equivalents
    
    
    (12,797,913
    )
    
    
    (2,552,865
    )
    
    
    (6,366,181
    )Cash and cash equivalents at beginning of year
    
    
    32,038,864
    
    
    
    34,591,729
    
    
    
    40,957,910Cash and cash equivalents at end of year
    
    $
    19,240,951
    
    
    $
    32,038,864
    
    
    $
    34,591,729
 48




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (Continued) 2004
    
    
    2003
    
    
    2002Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    1,959,700
    
    
    $
    2,258,200
    
    
    $
    1,915,800Interest
    
    $
    4,083,048
    
    
    $
    4,655,112
    
    
    $
    6,161,458Supplemental Schedule of Non cash Investing and Financing ActivitiesTransfer from loans to other real estate owned
    
    $
    0
    
    
    $
    0
    
    
    $
    337,977
 See accompanying notes to consolidated financial statements. 49




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  1.
    THE BUSINESS OF THE COMPANYOn May 18, 2004 the Holding Company (Redding Bancorp) amended the
Articles of Incorporation to change the Companys name to Bank of Commerce Holdings. Bank of
Commerce Holdings (the Holding Company), is a financial holding company (FHC) with its
principal offices in Redding, California. A financial holding company may engage in
commercial banking, insurance, securities business and offer other financial products to
customers. The Company received notification from the Federal Reserve Board approving the
election to change to a financial holding company on April 22, 2001. The election to change
to a financial holding company has had no impact to date on the operations of the Company.
As a financial holding company, Bank of Commerce Holdings is subject to the Financial
Holding Company Act and to supervision by the Board of Governors of the Federal Reserve
System (the FRB). The Holding Companys wholly-owned subsidiaries are Redding Bank of
Commerce (the Bank) and Bank of Commerce Mortgage, (formerly RBC Mortgage Services)
(collectively the Company). The Company has an unconsolidated subsidiary in Bank of
Commerce Holdings Trust (formerly Redding Bancorp Trust). On January 2, 2003, Redding
Service Corporation changed names to RBC Mortgage Services and on March 18, 2004, RBC
Mortgage Services changed its name to Bank of Commerce Mortgage. The subsidiary offers
mortgage brokerage services through an affiliate agreement with BWC Mortgage Services, an
affiliate of Bank of Walnut Creek. The Bank is principally supervised and regulated by the
California Department of Financial Institutions (DFI) and the Federal Deposit Insurance
Corporation (FDIC). Substantially all of the Companys activities are carried out through
the Bank. The Bank was incorporated as a California banking corporation on November 25,
1981. The Bank operates four full service branches in Redding and Roseville, California, a
suburb of the greater Sacramento metro area.The Bank conducts a general commercial banking business in the counties of El Dorado,
Placer, Shasta, and Sacramento, California. The Company considers California to be the major
market area of the Bank. The services offered by the Bank include those traditionally
offered by commercial banks of similar size and character in California, including checking,
interest-bearing (NOW) and savings accounts, money market deposit accounts; commercial,
real estate, and construction loans; travelers checks, safe deposit boxes, collection
services and electronic banking activities. The primary focus of the Bank is to provide
services to the business and professional community of its major market area, including
Small Business Administration loans, payroll and accounting packages, benefit administration
and billing programs. The Bank does not offer trust services or international banking
services and does not plan to do so in the near future. Most of the customers of the Bank
are small to medium sized businesses and individuals with medium to high net worth.2.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe accounting and reporting policies of the Company conform with accounting principles
generally accepted in the United States of America and general practices within the banking
industry. In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Certain amounts for prior periods
have been reclassified to conform to the current financial statement presentation. All
references to share and per share information have been adjusted to reflect the July 21,
2004 three-for-one stock split on a retroactive basis. The more significant accounting and
reporting policies and estimates applied in the preparation of the accompanying consolidated
financial statements are discussed below.Principles of Consolidation- The consolidated financial statements include the accounts of
the Holding Company, the Bank and Bank of Commerce Mortgage. All significant intercompany
balances and transactions have been eliminated in consolidation. 50




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  Cash and Cash Equivalents- For purposes of reporting cash flows, cash and cash
equivalents include amounts due from banks, federal funds sold and securities purchased
under agreements to resell. Generally, federal funds sold are for a one-day period and
securities purchased under agreements to resell are for no more than a 90-day period.Securities purchased under agreements to resell-The Company enters into purchases of
securities under agreements to resell substantially identical securities. Securities
purchased under agreements to resell consist primarily of U.S. Treasury and Agency
securities. The amounts advanced under these agreements are reflected as assets in the
consolidated balance sheet. It is the Companys policy to take possession of securities
purchased under agreements to resell. Agreements with third parties specify the Companys
rights to request additional collateral, based on its monitoring of the fair value of the
underlying securities on a daily basis. The securities are delivered by appropriate entry
into the Companys account maintained at the Federal Reserve Bank or into a third-party
custodians account designated by the Company under a written custodial agreement that
explicitly recognizes the Companys interest in the securities. In general, these
agreements matured within 90 days and no material amount of agreements to resell securities
purchased is outstanding with any individual dealer.Securities- At the time of purchase, the Company designates the security as
held-to-maturity or available-for-sale, based on its investment objectives, operational
needs and intent to hold. The Company does not engage in trading activity. Securities
designated as held-to-maturity are carried at cost adjusted for the accretion of discounts
and amortization of premiums. The Company has the ability and intent to hold these
securities to maturity. Securities designated as available-for-sale may be sold to implement
the Companys asset/liability management strategies and in response to changes in interest
rates, prepayment rates and similar factors. Securities designated as available-for-sale are
recorded at fair value and unrealized gains or losses, net of income taxes, are reported as
part of accumulated other comprehensive income(loss), a separate component of stockholders
equity. Gains or losses on sale of securities are based on the specific identification
method. The market value and underlying rating of the security is monitored for quality.
Securities may be adjusted to reflect changes in valuation as a result of
other-than-temporary declines in value.Loans Loans are stated at the principal amounts outstanding less deferred loan fees and
costs and the allowance for loan losses. Interest on commercial, installment and real
estate loans is accrued daily based on the principal outstanding. Loan origination and
commitment fees and certain origination costs are deferred and the net amount is amortized
over the contractual life of the loans as an adjustment of their yield. A loan is impaired
when, based on current information and events, management believes it is probable that the
Company will not be able to collect all amounts due according to the contractual terms of
the loan agreement. Impairment is measured based upon the present value of future cash flows
discounted at the loans effective rate, the loans observable market price, or the fair
value of collateral if the loan is collateral dependent. Interest on impaired loans is
recognized on a cash basis, and only when the principal is not considered impaired. The
Companys practice is to place an asset on nonaccrual status when one of the following
events occurs: (i) Any installment of principal or interest is 90 days or more past due
(unless in managements opinion the loan is well-secured and in the process of collection),
(ii) management determines the ultimate collection of principal or interest to be unlikely
or (iii) the terms of the loan have been renegotiated due to a serious weakening of the
borrowers financial condition. Nonperforming loans may be on nonaccrual, are 90 days past
due and still accruing, or have been restructured. Accruals are resumed on loans only when
they are brought fully current with respect to interest and principal and when the loan is
estimated to be fully collectible. Restructured loans are those loans on which concessions
in terms have been granted because of the borrowers financial or legal difficulties.
Interest is generally accrued on such loans in accordance with the new terms. 51




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  Allowance for Loan and Lease Losses The allowance for loan and lease losses are
established through a provision charged to expense. Loans are charged off against the
allowance for loan losses when management believes that the collectibility of the principal
is unlikely.The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans, overdrafts and
commitments to extend credit (off-balance sheet liabilities) based
on evaluations of collectibility and prior loss experience. The
evaluations take into consideration such factors as changes in the
nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current economic
conditions that may affect the borrowers ability to pay. Material
estimates relating to the determination of the allowance for loan
losses are particularly susceptible to significant change in the
near term. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, the FDIC and
DFI, as an integral part of their examination process, periodically
review the Banks allowance for loan losses. The FDIC may require
the Bank to recognize additions to the allowance based on their
judgment about information available to them at the time of their
examination.
Bank Premises and Equipment Bank premises and equipment are stated
at cost less accumulated depreciation. Depreciation included in
occupancy and equipment expenses is computed on the straight-line
method over the estimated useful lives of the related assets.
Expenditures for major renewals and improvements are capitalized and
those for maintenance and repairs are charged to expense as
incurred.
Securities Sold under Agreements to Repurchase At December 31,
2004 and 2003, securities sold under agreements to repurchase
consist of commercial repurchase agreements, where the Company has
an agreement with the depositor to sell and repurchase, on a daily
basis, a proportionate interest in US Government and Agency
securities. These securities are held as collateral for non-FDIC
insured deposits.Federal Home Loan Bank Borrowings As part of its asset/liability management strategy the
Company has obtained advances from the Federal Home Loan Bank. The Company has pledged
collateral of commercial real estate loans and specific securities to support the
borrowings.Core Deposit Intangibles- In June 2001, the Company purchased a bank branch office.
Because of this acquisition, the Company recorded core deposit intangibles, which are being
amortized over seven years by the straight-line method. Amortization expense for the year
ended December 31, 2004, 2003 and 2002 was $108,800, $118,800 and $118,800, respectively.
Estimated amortization expense for 2005, 2006, 2007 and 2008 is approximately $109,000 per
year. Deposit retention, growth and activities are evaluated for impairment on an annual
basis.Earnings Per Share- Basic earnings per share (EPS) excludes dilution and is computed by
dividing net income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the dilutive effect
that could occur if the Companys outstanding stock options were exercised and converted
into common stock, net of estimated shares that could be reacquired with proceeds from the
exercise of such options. Stock options are considered to be common stock equivalents. The
following table reconciles the numerator and denominator used in computing both basic
earnings per share and diluted earnings per share for the years ended December 31. All
references to issued and outstanding per share information have been adjusted to reflect the
stock split on a retroactive basis. 52




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 2004
    
    
    2003
    
    
    2002Basic EPS CalculationNumerator (net income)
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    $
    3,696,460Denominator (weighted average common shares
outstanding)
    
    
    8,282,588
    
    
    
    8,033,484
    
    
    
    8,012,667Basic EPS
    
    $
    0.60
    
    
    $
    0.52
    
    
    $
    0.46Diluted EPS CalculationNumerator (net income)
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    $
    3,696,460Denominator:Weighted average common shares outstanding
    
    
    8,282,588
    
    
    
    8,033,484
    
    
    
    8,012,667Diluted effect of stock options
    
    
    420,023
    
    
    
    293,424
    
    
    
    591,552Adjusted weighted average common shares
outstanding
    
    
    8,702,611
    
    
    
    8,326,908
    
    
    
    8,604,219Diluted EPS
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.43
  Other Real Estate Owned Real estate acquired by foreclosure, is carried at the lower
of the recorded investment in the property or its fair value less estimated selling costs.
Prior to foreclosure, the value of the underlying loan is written down to the fair value of
the real estate to be acquired, less costs to sell, by a charge to the allowance for loan
losses, if necessary. Fair value of other real estate is generally determined based on an
appraisal of the property. Any subsequent write-downs are charged against noninterest
expenses. Operating expenses of such properties, net of related income, and gains and
losses on their disposition are included in other expenses.Gain recognition on the disposition of real estate is dependent upon the transaction meeting
certain criteria relating to the nature of the property sold and the terms of the sale. This
includes the buyers initial and continuing investment, the degree of continuing involvement
by the Company with the property after the sale, and other matters. Under certain
circumstances, revenue recognition may be deferred until these criteria are met.Income Taxes The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using currently enacted tax rates applied
to such taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.Stock Option Plan- The Company accounts for its stock option plan under the
intrinsic value method in accordance with the provisions of Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. As required by the
Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for Stock-Based
Compensation,as amended, by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosurethe Company provides pro forma net income and pro forma earnings
per share disclosures for employee stock option grants. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS Statement No. 123, to stock-based employee compensation. All
references to share and per share information have been adjusted to reflect the July 21,
2004 three-for-one stock split on a retroactive basis. 53




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  Net income before option expense less compensation
expense associated with stock options Year Ended December 312004
    
    
    2003
    
    
    2002Net income before option expense less
compensation expense associated with stock options
    
    $
    4,981,531
    
    
    $
    4,205,080
    
    
    $
    3,763,660(3,856
    )
    
    
    (22,404
    )
    
    
    (67,200
    )Net income as reported
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    $
    3,696,460Deduct:Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    (149,639
    )
    
    
    (77,803
    )
    
    
    (168,352
    )Pro forma net income
    
    $
    4,828,036
    
    
    $
    4,104,873
    
    
    $
    3,528,108Earnings per share:Basic  as reported
    
    $
    0.60
    
    
    $
    0.52
    
    
    $
    0.46Basic  pro forma
    
    $
    0.58
    
    
    $
    0.51
    
    
    $
    0.44Diluted  as reported
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.43Diluted  pro forma
    
    $
    0.55
    
    
    $
    0.49
    
    
    $
    0.41
  In 2004, 2003 and 2002 there were no shares that could potentially dilute basis EPS in
the future that were excluded from the calculation of diluted EPS because their effect would
be anti-dilutive.Comprehensive Income- Comprehensive income includes net income and other comprehensive
income (loss). The Companys only source of other comprehensive income (loss) is unrealized
gains and losses on securities available-for-sale. Reclassification adjustments result from
gains or losses on securities that were realized and included in net income of the current
period that also had been included in other comprehensive income (loss) as unrealized
holding gains or losses in the period in which they arose. They are excluded from
comprehensive income of the current period to avoid double counting.Segment Reporting-Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose operating results
are regularly reviewed by the organizations management and whose revenue is 10 percent or
more of total revenue. Under this definition the Company does not have reportable segments.
In prior reporting periods, The Company has two reportable segments: commercial banking and
credit card services. Commercial banking includes all services to the Companys customers
except credit card services. Credit card services are limited to those revenues, net of
related data processing costs, associated with the Banks agreement to provide credit and
debit card processing services for merchants solicited by an ISO or the Bank who accept
credit and debit cards as payments for goods and services. In the years 2004 and 2003, the
Company accounted for its operations as one operating segment. 54




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Income before income taxes:
    
    
    2004
    
    
    
    2003
    
    
    
    2002Commercial Banking
    
    
    $
    7,908,583
    
    
    
    $
    6,669,334
    
    
    
    $
    5,297,047Merchant credit card
service income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    424,557$
    7,908,583
    
    
    
    $
    6,669,334
    
    
    
    $
    5,721,604
  Derivative Instruments and Hedging Activities The Company did not enter into any
freestanding derivative contracts or identify any embedded derivatives requiring bifurcation
and separate valuation during 2004 or 2003.The meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments-In March 2004, the Financial Accounting Standards Board (FASB) ratified the
consensuses reached by the Emerging Issues Task Force (EITF) regarding Issue 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.
Issue 03-1 provides guidance in the recognition and measurement of other-than-temporary
impairment for certain securities, including:  
    All debt securities and equity securities that are subject to the scope of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities; and
    Equity securities that are not subject to the scope of SFAS No. 115 and that are
accounted for under the cost method of accounting, or cost method investments.  Issue 03-1 also provides guidance on disclosure requirements for other-than-temporary
impairment for cost method investments. The guidance in these areas is effective for fiscal
years ending after June 15, 2004. The implementation of these areas of Issue 03-1 did not
have a material impact to our financial statements. The Company has previously adopted the
disclosure provisions of Issue 03-1 for debt and equity investments that are accounted for
under SFAS No.115. Those requirements were effective for fiscal years ending after December
15, 2003.On September 30, 2004, the FASB issued a proposed Board-directed Staff Position, FSP
EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF issue
No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.The proposed FSP would provide implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads and analyzed
for other-than-temporary impairment under paragraph 16 of Issue 03-1. The accounting standard
setters have decided to delay the effective date of and provide further implementation
guidance for the rule that would require financial institutions to recognize unrealized
losses of debt securities from rising interest rates as an expense item. This delay does not
suspend the requirement to recognize other-than-temporary impairments as required by existing
authoritative literature. The delay of the effective date for paragraphs 10-20 of Issue 03-1
will be superseded concurrent with the final issuance of FSB EITF Issue 03-1-a.Application of Accounting Principles to Loan Commitments (SAB105) On March 9, 2004, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 Application of
Accounting Principles to Loan Commitments(SAB 105), which specifies that servicing assets
embedded in commitments for loans to be held for sale should be recognized only when the
servicing asset has been contractually separated from the associated loans by sale or
securitization. SAB 105 is effective for commitments entered into after March 31, 2004. SAB
105 has had no effect on the Companys results of operations or financial condition. 55




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  Statement of Financial Accounting Standards No. 123 (revised 2004) In
December 2004 the FASB revised SFAS No. 123, Accounting for Stock Based Compensation.This
statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,and its
related implementation guidance. The Statement establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods and services. It
also addresses transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entitys equity instruments or that may be
settled by the issuance of those equity instruments. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in share-based
payment transactions. This Statement does not change the accounting guidance for share-based
payment transactions with parties other than employees provided in Statement No. 123 as
originally issued and EITF Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.The Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award.
The cost will be recognized over the period during which an employee is required to provide
service in exchange for the award  the requisite service period (usually the vesting
period). No compensation cost is recognized for equity instruments for which employees do
not render the requisite service. A public entity will initially measure the cost of
employee services received in exchange for an award of liability instruments based on its
current fair value; the fair value of that award will be remeasured subsequently at each
reporting date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period.The grant-date fair value of employee share options and similar instruments will be
estimated using option-pricing models adjusted for the unique characteristics of those
instruments. If an equity award is modified after the grant date, incremental compensation
cost will be recognized in amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the modification. The
notes to financial statements of both public and nonpublic entities will disclose
information to assist users of financial information to understand the nature of share-based
payment transactions and the effects of those transactions on the financial statements.This Statement is effective for public entities that do not file as small business issuers
as of the beginning of the first interim or annual reporting period that begins after June
15, 2005. The Statement applies to all awards granted after the required effective date and
to awards modified, repurchased or cancelled after that date. The cumulative effect of
initially applying this Statement, if any, will be recognized as of the required effective
date. Under the transition method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards, for which the requisite service has
not yet been rendered, based on the grant-date fair value of those awards calculated under
Statement No. 123 for either recognition or pro forma disclosures. The Company will adopt
the value based method of accounting for stock based employee compensation effective for
financial statements after July 1, 2005. Management believes that the adoption of this rule
will not have a material impact on the Companys results of operations or financial
condition. 56




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  3.
    RESTRICTIONS ON CASH AND DUE FROM BANKS During 2004 the Bank implemented a deposit reclassification program which reduced required
average reserve balances at the Federal Reserve Bank to zero. Previously the Bank was
required to maintain average reserve balances with the Federal Reserve Bank. The average
amount of these reserve balances for the years ended December 31, 2004 and 2003 was
approximately $0 and $7,760,000 respectively. The Bank maintains compensating balances with
its primary correspondent, which totaled $2,500,000 at December 31, 2004 and 2003.  4.
    SECURITIES The amortized cost and estimated fair value of securities available-for-sale are
summarized as follows: December 31, 2004EstimatedAmortized
    
    
    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, 2004EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    21,767,536
    
    
    $
    60,402
    
    
    $
    (464,721
    )
    
    $
    21,363,217Obligations of state and political
subdivisions
    
    
    6,442,310
    
    
    
    68,697
    
    
    
    (125,878
    )
    
    
    6,385,129Bankers acceptances
    
    
    9,993,211
    
    
    
    0
    
    
    
    0
    
    
    
    9,993,211Mortgage-backed securities
    
    
    32,281,173
    
    
    
    115,202
    
    
    
    (103,490
    )
    
    
    32,292,885$
    70,484,230
    
    
    $
    244,301
    
    
    $
    (694,089
    )
    
    $
    70,034,442
 The amortized cost and estimated fair value of securities held-to-maturity at
December 31, 2004 and 2003 consist of the following: December 31, 2004EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    448,753
    
    
    $
    38,339
    
    
    $
    0
    
    
    $
    487,092
 December 31, 2004EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    1,390,851
    
    
    $
    69,201
    
    
    $
    0
    
    
    $
    1,460,052
 57




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 The amortized cost and estimated fair value of securities at
December 31, 2004 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities
because borrowers may have the right to call or repay
obligations with or without call or prepayment penalties. Available-for-Sale
    
    
    Held-to-MaturityEstimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    6,029,795
    
    
    $
    6,023,153
    
    
    $
    0
    
    
    $
    0Due after one year through five years
    
    
    28,165,152
    
    
    
    27,905,031
    
    
    
    0
    
    
    
    0Due after five years through ten years
    
    
    24,920,024
    
    
    
    24,715,891
    
    
    
    0
    
    
    
    0Due after ten years
    
    
    23,893,638
    
    
    
    23,799,118
    
    
    
    448,753
    
    
    
    487,092$
    83,008,609
    
    
    $
    82,443,193
    
    
    $
    448,753
    
    
    $
    487,092
 At December 31, 2004, the Companys securities available-for-sale shown below have been in a
continuous loss position for periods less than 12 months as shown below: Less than 12 months
    
    12 months or more
    
    Total
 Fair
    
    
    
    Unrealized
    
    
    
    Fair
    
    
    
    Unrealized
    
    
    
    Fair
    
    
    
    UnrealizedValue
    
    
    
    Losses
    
    
    
    Value
    
    
    
    Losses
    
    
    
    Value
    
    
    
    LossesU.S. Treasury
securities and
Obligations of U.
S. Agencies
    
    
    $
    18,018,818
    
    
    
    $
    (54,815
    )
    
    
    $
    9,000,546
    
    
    
    $
    (381,595
    )
    
    
    $
    27,019,364
    
    
    
    $
    (436,410
    )Obligations of
state and political
subdivisions
    
    
    $
    617,632
    
    
    
    $
    (1,918
    )
    
    
    $
    3,775,579
    
    
    
    $
    (99,674
    )
    
    
    $
    4,393,211
    
    
    
    $
    (101,592
    )Mortgage-backed
securities
    
    
    $
    16,739,302
    
    
    
    $
    (87,202
    )
    
    
    $
    6,624,003
    
    
    
    $
    (56,307
    )
    
    
    $
    23,363,305
    
    
    
    $
    (143,509
    )Total temporarily
impaired securities
    
    
    $
    35,375,752
    
    
    
    $
    (143,935
    )
    
    
    $
    19,400,128
    
    
    
    $
    (537,576
    )
    
    
    $
    54,775,880
    
    
    
    $
    (681,511
    )
 Economic factors may affect market pricing over the stated maturity of the security.
The Company recognizes an impairment charge when the decline in the fair value of its
investments below the cost basis is judged to be other than temporary. As of December 31,
2004, thirty-three securities were in a loss position. The Company has determined the loss
position to be temporary and no impairment charges have occurred. Security income is accrued
when earned and included in interest income. The Company requires a credit rating of A or
higher on its initial acquisition of investments and maintains an average rating of AAA on
the overall portfolio. The Company believes it has the ability to hold available-for-sale
securities to maturity. 58




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 At December 31, 2004, the Company has pledged book values of $1,000,000 in securities
for treasury, tax and loan accounts, $7,341,000 for deposits of public funds, $2,004,000 for
collateralized repurchase agreements, and $25,000,000 for Federal Home Loan borrowings. Gross realized gains and gross realized losses, respectively, on available-for-sale
securities were $0 and $0 in 2004 and $93,528 and $5,133 in 2003. Gross unrealized gains and
gross unrealized losses, respectively, on available-for-sale securities were $116,095 and
$681,511 in 2004 and $244,301 and $694,089 in 2003. There were no gains or losses recognized
in securities held-to-maturity in 2004, 2003 and 2002.  5.
    LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES Outstanding loan balances consist of the following: December 31,2004
    
    
    2003Commercial and financial loans
    
    $
    105,544,794
    
    
    $
    104,508,704Real estate  construction loans
    
    
    77,438,755
    
    
    
    66,741,598Real estate  commercial
    
    
    135,260,186
    
    
    
    102,952,921Real estate  mortgage
    
    
    4,423,104
    
    
    
    7,085,683Installment loans
    
    
    300,337
    
    
    
    451,567Other
    
    
    352,879
    
    
    
    632,529323,320,055
    
    
    
    282,373,002Less:Deferred loan fees, net
    
    
    652,970
    
    
    
    494,365Allowance for loan and lease losses
    
    
    3,866,498
    
    
    
    3,675,084$
    318,800,587
    
    
    $
    278,203,553
 Included in total loans are nonaccrual loans of $2,382,886 and $3,930,810 at December 31,
2004 and 2003, respectively. If interest on nonaccrual loans at December 31, 2004 and 2003
had been accrued, such interest income would be $146,276 and $184,785 during the years ended
December 31, 2004 and 2003, respectively. A loan is impaired when, based on current
information and events, management believes it is probable that the Bank will not be able to
collect all amounts due according to the contractual terms of the loan agreement. The Bank
had outstanding balances of $3,214,492 and $4,028,004 in impaired loans that had impairment
allowances of $867,590 and $837,000 as of December 31, 2004 and 2003, respectively. The average outstanding balances of impaired loans were $3,601,274, $2,235,293 and $14,277,
for the years ended December 31, 2004, 2003 and 2002 respectively. There was interest of
$57,058, $0 and $0 recognized on impaired loans during the year ended December 31, 2004,
2003 and 2002, respectively. The Company services, for others, loans and participation of
loans that are sold of $4,550,992 and $5,971,387 as of December 31, 2004 and 2003,
respectively. The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer
and Sacramento counties, in California, and the location of the four full service offices of
the Bank. Although the Company has a diversified loan portfolio, a significant portion of
its customers ability to repay the loans is dependent upon the professional services and
residential real estate development industry sectors. Generally, the loans are secured by
real estate or other assets and are expected to be
repaid from cash flows of the borrower or proceeds from the sale of the collateral. 59




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 The Companys exposure to credit loss, if any, is the difference between the fair value of the
collateral, and the outstanding balance of the loan. At December 31, 2004 and 2003, the Company had
pledged $44,982,725 and $35,689,544, respectively, in loans as available collateral for Federal
Home Loan Bank borrowings. In the ordinary course of business, the Company enters various
types of transactions, which involve financial instruments with off-balance sheet risk. These
instruments include commitments to extend credit and stand-by letters of credit, which are not
reflected in the consolidated balance sheets. These transactions may involve, to varying degrees,
credit and interest rate risk more than the amount, if any recognized in the consolidated balance
sheets. Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans. An allowance for unfunded loan commitments and letters of
credit is determined using estimates of the probability of funding. This reserve is carried as a
liability on the consolidated balance sheet. Changes in the allowance for loan losses consist of the following: Years Ended December 31,2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    3,675,084
    
    
    $
    3,528,968
    
    
    $
    2,915,906Provision for loan losses
    
    
    593,000
    
    
    
    515,000
    
    
    
    620,000Loans charged off
    
    
    (368,300
    )
    
    
    (379,717
    )
    
    
    (25,839
    )Recoveries of loans previously charged off
    
    
    5,714
    
    
    
    10,833
    
    
    
    18,901Transfer to off-balance sheet liabilities
    
    
    (39,000
    )
    
    
    
    
    
    
    Balance at end of year
    
    $
    3,866,498
    
    
    $
    3,675,084
    
    
    $
    3,528,968
  6.
    BANK PREMISES AND EQUIPMENT Bank premises and equipment consist of the following: Estimated
    
    
    December 31,Lives
    
    
    2004
    
    
    2003Land
    
    
    
    
    
    $
    1,507,628
    
    
    $
    1,507,628Bank buildings
    
    31.5 years
    
    
    3,723,075
    
    
    
    4,049,397Furniture, fixtures and equipment
    
    3 - 7 years
    
    
    5,255,257
    
    
    
    4,440,83410,485,960
    
    
    
    9,997,859Less accumulated depreciation
    
    
    
    
    
    
    (5,056,342
    )
    
    
    (4,485,843
    )5,429,618
    
    
    
    5,512,016Construction in progress
    
    
    
    
    
    
    54,578
    
    
    
    300,773$
    5,484,196
    
    
    $
    5,812,789
 Depreciation expense, included in net occupancy and equipment expense, is $610,997,
$691,859, and $737,020 for the years ended December 31, 2004, 2003 and 2002, respectively. 60




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  7.
    OTHER ASSETS Other assets consist of the following: December 31,2004
    
    
    2003Cash surrender value of bank owned life insurance
policies
    
    $
    4,810,851
    
    
    $
    4,593,005Deferred tax asset, net
    
    
    2,683,763
    
    
    
    2,369,208Accrued interest on loans
    
    
    1,495,967
    
    
    
    1,135,786Accrued interest on investment securities
    
    
    474,451
    
    
    
    288,590Goldman Sachs Sweep account receivable
    
    
    176,172
    
    
    
    2,607,284Federal Home Loan Bank Stock
    
    
    1,678,300
    
    
    
    1,500,000Core Deposit Intangible, net of accumulated
amortization of $401,336 and $292,536
    
    
    367,809
    
    
    
    476,609Other
    
    
    439,814
    
    
    
    706,671$
    12,127,127
    
    
    $
    13,677,153
  8.
    DEPOSITS Time certificates of deposit of $100,000 or more totaled $83,514,897 and $79,931,791 at
December 31, 2004 and 2003, respectively. Interest expense on such deposits was $1,760,780,
$1,937,164 and $2,260,692 during 2004, 2003 and 2002, respectively. At December 31,
2004, the scheduled maturities for all time deposits are as follows: Time Deposit Maturity Schedule 2005
    
    $
    115,830,0862006
    
    
    16,848,6482007
    
    
    5,616,2152008
    
    
    204,8902009
    
    
    0Thereafter
    
    
    0Total
    
    $
    138,499,839
  9.
    OTHER LIABILITIES Other liabilities consist of the following: December 31,2004
    
    
    2003Deferred compensation
    
    $
    3,161,765
    
    
    $
    2,830,193Employee incentive payable
    
    
    518,852
    
    
    
    401,026Accrued 401(k) match payable
    
    
    35,000
    
    
    
    136,166Accrued interest payable
    
    
    228,934
    
    
    
    202,450Reserve for off-balance sheet commitments
    
    
    302,876
    
    
    
    263,876Investment purchase payable
    
    
    3,320,384
    
    
    
    0Taxes payable
    
    
    572,623
    
    
    
    352,363Other
    
    
    239,041
    
    
    
    172,945$
    8,379,475
    
    
    $
    4,359,019
 61




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  10.
    FEDERAL HOME LOAN BANK ADVANCES Included in other borrowings are advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $35,000,000 as of December 31, 2004 and $30,000,000 as of December 31,
2003. The FHLB advances bear fixed rates of interest ranging from 1.39% to 2.87%. Interest is
payable on a monthly basis. FHLB advances due as follows: $10,000,000 maturing January 24,
2005 at 1.92%, $10,000,000 maturing February 4, 2005 at 1.39% and $5,000,000 maturing May 9,
2005 at 2.47% and $10,000,000 maturing on November 25, 2005 at 2.87% . These borrowings are
secured by an investment in FHLB stock and certain real estate mortgage loans which have been
specifically pledged to the FHLB pursuant to their collateral requirements. Based upon the
level of FHLB advances, the Company was required to hold a minimum investment in FHLB stock
of $1,678,300 at December 31, 2004 and to pledge $44,982,725 and $35,689,544 of its real
estate mortgage loans to the FHLB as collateral as of December 31, 2004 and 2003. At December
31, 2004 the Bank had available borrowing lines at the FHLB of $49,437,000 and additional
federal fund borrowing lines at two correspondent banks totaling $15,000,000.  11.
    JUNIOR SUBORDINATED DEBT PAYABLE TO UNCONSOLIDATED SUBSIDIARY GRANTOR TRUST During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued
$5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings
junior subordinated debentures (the trust notes) to the public and $155,000 common
securities to the Company. These debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. The proceeds from the issuance of the trust notes were transferred from the
grantor trust to the Holding Company and from the Holding Company to the Bank as surplus
capital. The trust notes accrue and pay distributions on a quarterly basis at 3 month London
Interbank Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2004 was 5.37%. The
rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity
on the trust notes is March 18, 2033, and the debt allows for prepayment after five years on
the quarterly payment date.  12.
    INCOME TAXES Provision for income taxes consists of the following: Years Ended December 31,2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    2,571,071
    
    
    $
    2,171,432
    
    
    $
    1,966,162State
    
    
    674,392
    
    
    
    568,351
    
    
    
    459,196Total currently payable
    
    
    3,245,463
    
    
    
    2,739,783
    
    
    
    2,425,358Deferred:Federal
    
    
    (224,682
    )
    
    
    (153,895
    )
    
    
    (305,390
    )State
    
    
    (89,873
    )
    
    
    (99,230
    )
    
    
    (94,824
    )Total deferred provision
    
    
    (314,555
    )
    
    
    (253,125
    )
    
    
    (400,214
    )Total provision for income taxes
    
    $
    2,930,908
    
    
    $
    2,486,658
    
    
    $
    2,025,144
 62




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 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 Income2004
    
    
    2003
    
    
    2002Income tax at the Federal statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State franchise tax, net of Federal tax benefit
    
    
    4.85
    
    
    
    4.64
    
    
    
    4.20Tax-exempt interest
    
    
    (0.91
    )
    
    
    (0.67
    )
    
    
    (0.76
    )Other
    
    
    (0.88
    )
    
    
    (0.69
    )
    
    
    (2.05
    )37.06
    %
    
    
    37.28
    %
    
    
    35.39
    %
 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2004 and 2003 consist of the following: 2004
    
    
    2003Deferred tax assets:State franchise taxes
    
    $
    174,456
    
    
    $
    173,511Deferred compensation
    
    
    1,417,735
    
    
    
    1,269,059Loan loss reserves
    
    
    1,475,084
    
    
    
    1,296,097Net unrealized losses on securities available-for-sale
    
    
    232,669
    
    
    
    185,088Other
    
    
    227,384
    
    
    
    184,189Total deferred tax assets
    
    
    3,527,328
    
    
    
    3,107,944Deferred tax liabilities:Depreciation
    
    
    (318,439
    )
    
    
    (264,068
    )Deferred loan origination costs
    
    
    (333,658
    )
    
    
    (310,942
    )Deferred state taxes
    
    
    (191,468
    )
    
    
    (163,726
    )Total deferred tax liabilities
    
    
    (843,565
    )
    
    
    (738,736
    )Net deferred tax asset
    
    $
    2,683,763
    
    
    $
    2,369,208
  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. 63




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 All references to share and per share information have been adjusted to reflect the
July 21, 2004 three-for-one stock split on a retroactive basis. 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: WeightedNumber
    
    
    Averageof
    
    
    ExerciseShares
    
    
    PriceOptions outstanding, December 31, 2001
    
    
    1,283,550
    
    
    $
    3.29Granted
    
    
    66,900
    
    
    $
    6.67Exercised
    
    
    (93,180
    )
    
    $
    3.22Forfeited
    
    
    (19,938
    )
    
    $
    5.12Options 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
    
    
    $
    4.80
 At December 31, 2004, 122,190 shares were available for future grants under the Plan. As of
December 31, 2004, 2003 and 2002, respectively, 572,488, 916,536 and 859,101 shares
respectively were available to be exercised . 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, 2004, 2003 and 2002 was
$3,856, $22,404 and $67,200 respectively. 64




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Additional information regarding options outstanding as of December 31, 2004 is as
follows: Weighted Avg.Exercise
    
    
    
    
    
    Remaining ContractualPrices
    
    Options Outstanding
    
    
    Life (Years)
    
    
    Options Exercisable$2.75
    
    
    381,740
    
    
    
    3.3
    
    
    
    381,740$3.23
    
    
    109,536
    
    
    
    3.3
    
    
    
    109,536$5.42
    
    
    29,250
    
    
    
    6.4
    
    
    
    17,550$6.67
    
    
    63,000
    
    
    
    6.6
    
    
    
    37,800$7.30
    
    
    57,905
    
    
    
    6.4
    
    
    
    23,162$6.75
    
    
    13,500
    
    
    
    8.0
    
    
    
    2,700$10.72
    
    
    25,500
    
    
    
    9.4
    
    
    
    0$10.60
    
    
    82,500
    
    
    
    9.5
    
    
    
    0$10.76
    
    
    3,000
    
    
    
    9.5
    
    
    
    0765,931
    
    
    
    
    
    
    
    572,488
 The fair value of the options granted during 2004, 2003 and 2002, is estimated as $364,769,
$28,142 and $95,061, respectively, on the date of grant using a binomial option-pricing
model with the following assumptions: volatility of 30.88%, 22.75% and 29.55%, respectively,
risk-free interest rate of 3.62%, 3.27% and 2.71%, respectively, expected dividends of $0.23
per share per year for 2004 and $0.22 per share in 2003, annual dividend rate of 2.00%,
3.55% and 3.06%, assumed forfeiture rate of zero and an expected life of seven years. There were 111,000 options granted in 2004, 13,500 options granted in 2003 and 66,900
options granted in 2002. The fair value per share of the 2004, 2003 and 2002 awards was
$3.29, $2.22 and $1.55, 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 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. 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. 65




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  15.
    RETIREMENT BENEFITS Profit
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 $134,570, $120,000 and $122,716 for the
years ended December 31, 2004, 2003 and 2002, respectively. No discretionary contributions
were made in 2004, 2003 or 2002. 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 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
$104,376 and $84,840 for 2004 and 2003, respectively. As of December 31, 2004 and 2003, the
vested benefit payable was $339,099 and $228,087, 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 $280,771
and $255,612 at December 31, 2004 and 2003, respectively. As of December 31, 2004 and 2003,
the vested benefit payable was $1,571,260 and $1,279,974, respectively.  16.
    RELATED PARTY TRANSACTIONS Some 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 2004 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. 66




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 An analysis of the activity in related party loans consists of the following: December 31,2004
    
    
    2003Balance at beginning of year
    
    $
    4,123,712
    
    
    $
    5,150,404New loan additions
    
    
    541,097
    
    
    
    2,559,874Principal repayments
    
    
    (1,042,059
    )
    
    
    (3,586,566
    )Balance at end of year
    
    $
    3,622,750
    
    
    $
    4,123,712
 As of December 31, 2004 and 2003 there were no related party loans, which were past due or
classified. At December 31, 2004 there was approximately $4,200,000 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, 2004 are below: (Dollars in thousands)2005
    
    $
    4622006
    
    $
    3712007
    
    $
    3772008
    
    $
    3832009
    
    $
    340Thereafter
    
    $
    1,238Total
    
    $
    3,171Minimum rental due in the future
under noncancellable subleases
    
    $
    103
 Rental expense for the years ended December 31, 2004, 2003 and 2002 was $424,205,
$449,818 and $326,521, 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. 67




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 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 31,2004
    
    
    2003Off-balance sheet commitments:Commitments to extend credit
    
    $
    128,837,320
    
    
    $
    90,768,902Standby letters of credit
    
    
    7,064,798
    
    
    
    4,594,010
 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, 2004 that the Company and the Bank met all capital adequacy requirements to
which they are subject. 68




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 As of December 31, 2004, 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, 2004 and 2003 are also presented in the table. To BeCategorized asWell CapitalizedFor Capital
    
    
    Under PromptActual
    
    
    Adequacy Purposes
    
    
    Corrective ActionAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAt 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
    %At December 31, 2003:CompanyLeverage capital (to average assets)
    
    $
    35,775,892
    
    
    
    9.10
    %
    
    $
    13,680,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    35,775,892
    
    
    
    11.19
    %
    
    
    11,818,412
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    39,773,421
    
    
    
    12.44
    %
    
    
    23,636,824
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/     aBankLeverage capital (to average assets)
    
    $
    34,430,147
    
    
    
    8.84
    %
    
    $
    15,575,720
    
    
    
    4.00
    %
    
    $
    19,650,000
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    34,430,147
    
    
    
    10.77
    %
    
    
    12,792,094
    
    
    
    4.00
    %
    
    
    19,188,141
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    38,427,676
    
    
    
    12.02
    %
    
    
    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, 2004, the maximum amount available for dividend
distribution under this restriction was approximately $7,419,709. 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 2004
or 2003. 69




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002  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. 70




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 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, 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
    
    
    
    1,495,967Financial 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
 71




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 December 31, 2003Contract
    
    
    Carrying
    
    
    FairAmount
    
    
    Amount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    32,038,864
    
    
    $
    32,038,864Securities
    
    
    
    
    
    
    71,425,293
    
    
    
    71,494,494Loans, net
    
    
    
    
    
    
    278,203,553
    
    
    
    282,580,019Accrued interest on loans
    
    
    
    
    
    
    1,135,786
    
    
    
    1,135,786Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    187,469,237
    
    
    $
    187,469,237Fixed rate certificates
    
    
    
    
    
    
    137,567,137
    
    
    
    138,334,185Variable certificates
    
    
    
    
    
    
    2,502,269
    
    
    
    2,502,269Accrued interest payable
    
    
    
    
    
    
    202,450
    
    
    
    202,450Securities sold under agreements to repurchase
    
    
    
    
    
    
    3,748,797
    
    
    
    3,748,797Federal Home Loan Borrowings
    
    
    
    
    
    
    30,000,000
    
    
    
    30,000,000Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    5,000,000
    
    
    
    5,000,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    90,768,902
    
    
    
    
    
    
    $
    90,768,902Standby letters of credit
    
    
    4,594,010
    
    
    
    
    
    
    
    4,594,010
 20. BANK OF COMMERCE HOLDINGS (PARENT COMPANY ONLY) FINANCIAL INFORMATION December 31,2004
    
    
    2003Condensed Balance SheetsAssets:Cash
    
    $
    613,049
    
    
    $
    23,822Time deposit with subsidiary
    
    
    550,000
    
    
    
    300,000Cash and cash equivalents
    
    
    1,163,049
    
    
    
    323,822Investment in subsidiaries
    
    
    39,093,279
    
    
    
    34,937,365Other assets
    
    
    97,500
    
    
    
    308,630Total assets
    
    $
    40,353,828
    
    
    $
    35,569,817Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    5,000,000
    
    
    
    5,000,000Other liabilities
    
    
    70,491
    
    
    
    58,624Stockholders equity
    
    
    35,283,337
    
    
    
    30,511,193Total liabilities and stockholders equity
    
    $
    40,353,828
    
    
    $
    35,569,817
 72




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 Years Ended December 31,2004
    
    
    2003
    
    
    2002Condensed Statements of IncomeIncome:Interest on time deposit
    
    $
    13,852
    
    
    $
    5,497
    
    
    $
    2,261Dividend from subsidiary
    
    
    1,955,584
    
    
    
    1,760,239
    
    
    
    3,721,2791,969,436
    
    
    
    1,765,736
    
    
    
    3,723,540Expenses
    
    
    549,431
    
    
    
    394,050
    
    
    
    153,901Income before income taxes and
equity in undistributed net income
of subsidiaries
    
    
    1,420,005
    
    
    
    1,371,686
    
    
    
    3,569,639Provision for income taxes
    
    
    800
    
    
    
    800
    
    
    
    800Income before equity in undistributed
net income of subsidiaries
    
    
    1,419,205
    
    
    
    1,370,886
    
    
    
    3,568,839Equity in undistributed net income of
subsidiaries
    
    
    3,558,470
    
    
    
    2,811,790
    
    
    
    127,621Net income
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    $
    3,696,460
 Years Ended December 31,2004
    
    
    2003
    
    
    2002Statements of Cash FlowsCash flows from operating activities:Net income
    
    $
    4,977,675
    
    
    $
    4,182,676
    
    
    
    3,696,460Adjustments to reconcile net income to
net cash provided by operating activities:Compensation associated with stock options
    
    
    3,856
    
    
    
    22,404
    
    
    
    67,200Equity in undistributed net income of
subsidiaries
    
    
    (3,558,470
    )
    
    
    (2,811,790
    )
    
    
    (127,621
    )Other assets, net
    
    
    197,667
    
    
    
    (250,006
    )
    
    
    0Net cash provided by operating activities
    
    
    1,620,728
    
    
    
    1,143,284
    
    
    
    3,636,039Cash flows from investing activities:Investment in subsidiary trust
    
    
    0
    
    
    
    (155,000
    )
    
    
    0Capital contribution to Bank
    
    
    0
    
    
    
    (5,000,000
    )
    
    
    0Net cash used by investing activities
    
    
    0
    
    
    
    (5,155,000
    )
    
    
    0Cash flows from financing activities:Equity transactions, net
    
    
    1,174,083
    
    
    
    802,582
    
    
    
    (1,787,794
    )Proceeds from unconsolidated subsidiaryGrantor trust
    
    
    0
    

    
    
    5,000,000
    
    
    
    0Cash dividends
    
    
    (1,955,584
    )
    
    
    (1,760,239
    )
    
    
    (1,721,279
    )Net cash used by financing activities
    
    
    (781,501
    )
    
    
    4,042,343
    
    
    
    (3,509,073
    )Increase (decrease) in cash and cash equivalents
    
    
    839,227
    
    
    
    30,627
    
    
    
    126,966Cash and cash equivalents at beginning of year
    
    
    323,822
    
    
    
    293,195
    
    
    
    166,229Cash and cash equivalents at end of year
    
    $
    1,163,049
    
    
    $
    323,822
    
    
    $
    293,195
 73




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 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 31,2004
    
    
    2004
    
    
    2004
    
    
    2004Net interest income
    
    $
    3,915
    
    
    $
    4,087
    
    
    $
    4,269
    
    
    $
    4,606Provision for loan losses
    
    
    (192
    )
    
    
    (97
    )
    
    
    (131
    )
    
    
    (173
    )Noninterest income
    
    
    466
    
    
    
    494
    
    
    
    573
    
    
    
    634Noninterest expense
    
    
    (2,425
    )
    
    
    (2,640
    )
    
    
    (2,641
    )
    
    
    (2,836
    )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
 (Dollars in thousands, except per share data)
    
    For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2002
    
    
    2002
    
    
    2002
    
    
    2002Net interest income
    
    $
    2,616
    
    
    $
    3,044
    
    
    $
    3,364
    
    
    $
    3,493Provision for loan losses
    
    
    (65
    )
    
    
    (125
    )
    
    
    (105
    )
    
    
    (325
    )Noninterest income
    
    
    443
    
    
    
    458
    
    
    
    565
    
    
    
    625Noninterest expense
    
    
    (1,885
    )
    
    
    (2,007
    )
    
    
    (2,228
    )
    
    
    (2,147
    )Income before taxes
    
    
    1,109
    
    
    
    1,370
    
    
    
    1,596
    
    
    
    1,646Provision for income tax
    
    
    (368
    )
    
    
    (523
    )
    
    
    (483
    )
    
    
    (651
    )Net Income
    
    $
    741
    
    
    $
    847
    
    
    $
    1,113
    
    
    $
    995Per common share:Basic earnings per share
    
    $
    0.09
    
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.13Diluted earnings per share
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    0.13
    
    
    $
    0.12Dividends per share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.22
 74




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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE On March 15, 2004 Bank of Commerce Holdings determined not to renew the engagement of its
independent accountants, Deloitte & Touche LLP and appointed Moss Adams LLP as its new independent
accountants effective immediately. The decision not to renew the engagement of Deloitte & Touche
LLP and to retain Moss Adams LLP was approved by Bank of Commerce Holdings Board of Directors upon
the recommendation of its Audit Committee. The relationship with Deloitte & Touche LLP was
dismissed by Bank of Commerce Holdings. Deloitte & Touche LLPs report on Bank of Commerce
Holdings 2003 financial statements was issued in February 2004, in conjunction with the filing of
Bank of Commerce Holdings Annual Report on Form 10-K for the year ended December 31, 2003. During Bank of Commerce Holdings two most recent fiscal years through March 15, 2004, there were no
disagreements between Bank of Commerce Holdings and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to Deloitte & Touche LLPs satisfaction, would have caused
Deloitte & Touche LLP to make reference to the subject matter of the disagreement in connection
with its reports. The audit reports of Deloitte & Touche LLP on the consolidated financial statements of Bank of
Commerce Holdings & Subsidiaries as of and for the fiscal years ended December 31, 2003 and 2002
did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope, or accounting principles. A letter from Deloitte & Touche LLP is
attached as Exhibit 16.1. During Bank of Commerce Holdings most recent fiscal year ended December 31, 2003, Bank of Commerce
Holdings did not consult with Moss Adams LLP regarding any of the matters or events set forth in
Item 304(a)(2)(i) and (ii) of Regulation S-K. 
 ITEM 9A. CONTROLS AND PROCEDURES Within the 90- day period prior to the filing of this Annual Report on Form 10-K, an
evaluation was carried out under the supervision and with the participation of the Companys
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of
the effectiveness of the design and operation of our disclosure controls and procedures. Based on
that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and
procedures are designed to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities and Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in SEC rules and forms and
are operating in an effective manner. There were no significant changes in the Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of their most recent evaluation. 
 PART III Certain information required by Part III is incorporated by reference to the Companys
definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection
with the solicitation of proxies for the Companys 2005 Annual Meeting of Shareholders (the Proxy
Statement). 75




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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Executive Officers of the Registrant The executive officers of the Company and their ages as of December 31, 2004, are as follows: Name
    
    Age
    
    Position(s)Michael C. Mayer
    
    
    48
    
    
    President and Chief Executive Officer
Redding Bank of Commerce and DirectorLinda J. Miles
    
    
    51
    
    
    Executive Vice President, Chief Financial
Officer and Assistant Secretary
 Michael C. Mayer joined the Company in April 1997 and has served as Executive Vice President and
Chief Credit Officer of the Company from May 1997 to May 2000. From May 2000 until January 2001,
Mr. Mayer has served as Executive Vice President and Chief Operating Officer. As of January 1,
2001, Mr. Mayer was promoted to President and Chief Executive Officer of Redding Bank of Commerce
and serves on the loan, executive, long range planning and asset/liability committees of the Board
of Directors. Linda J. Miles has served as Executive Vice President, Chief Financial Officer and Assistant
Secretary of the Company since October 1989. With over 25 years of professional banking
experience, before joining the Company, Ms. Miles served as Senior Vice President and Chief
Financial Officer for another independent bank. Ms. Miles serves on the Asset/Liability committee
and attends audit, executive and long range planning committee meetings of the Board of Directors. The remainder of the information required by this section is incorporated by reference to the
information in the section entitled Election of Directors  and Executive Compensation in the
Proxy Statement. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this section is incorporated by reference to the information in
the sections entitled Election of DirectorsDirectors Compensation and Executive Compensation
in the Proxy Statement. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this section is incorporated by reference to the information in
the section entitled Security Ownership of Certain Beneficial Owners and Management in the
Companys Proxy Statement. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Some of the directors, officers and principal stockholders of the Company and their associates
were customers of and had banking transactions with the Company in the ordinary course of the
Companys business during 2004 and the Company expects to have such transactions in the future.
All loans and commitments 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. 76




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PART IV 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees
The aggregate fees billed by Moss Adams LLP., and Deloitte & Touche LLP, respectively, for
professional services rendered for the audit of the Companys annual financial statements for the
fiscal years ended December 31, 2004 and 2003 and for the reviews of the financial statements
included in the Companys Quarterly Reports on Form 10-Q for those fiscal years were $105,000 and
$166,125, respectively. Audit-Related Fees
Moss Adams LLP., and Deloitte & Touche LLP did not render any professional services for information
technology services relating to financial information systems design and implementation for the
fiscal years ended December 31, 2004 and December 31, 2003. Tax Fees
Moss Adams LLP., and Deloitte & Touche LLP did not render any professional services for tax
compliance, tax advice, or tax planning during 2004. All Other Fees
The aggregate fees billed by Moss Adams LLP. and Deloitte & Touche LLP for services rendered to the
Company, other that the services described under Audit Fees and Audit-Related Fees and tax fees
amount to $0 and $0 for the fiscal years December 31, 2004 and 2003, respectively. During 2004, the Audit Committee of the Board of Directors has contracted with Moss Adams LLP to
provide guidance in the Companys Sarbanes-Oxley Section 404 compliance efforts. As of December 31,
2004 no services related to this project had been provided. In discharging its oversight responsibility with respect to the audit process, the Audit Committee
of the Board of Directors obtained from the independent auditors a formal written statement
describing all relationships between the auditors and the Company that might bear on the auditors
independence consistent with Independence Standards Board Standard No.1, Independence Discussions
with Audit Committees, discussed with the auditors any relationships that may impact their
objectivity and independence and satisfied itself as to the auditors independence. The Committee
also discussed with management and the independent auditors the quality and adequacy of Bank of
Commerce Holdings internal controls and the outsourced audit functions, responsibilities,
budgeting and staffing. The Committee reviewed with the independent auditors their audit plans,
audit scope and identification of audit risks. The Committee discussed and reviewed with the independent auditors all communications required by
auditing standards generally accepted in the United States of America, including those described in
Statement on Auditing Standards No. 61, as amended, Communication with Audit Committees, and
discussed and reviewed the results of the independent auditors audit of the financial statements.
The Committee also discussed the results of the internal audit examinations. 77




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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: Reference is made to the Index to Consolidated Financial Statements under Item 8 in
Part II of this Form 10-K. (2) Financial Statement Schedules: All schedules are omitted because they are not applicable or the required information
is shown in the financial statements or notes thereto. (3) Exhibits: ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended.*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
    
    RBC Code of Ethics*11.1
    
    Statement re: Computation of Earnings Per Share (see page __53_).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 ___79__)99.1
    
    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. 78




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(b) Reports on Form 8-K: On November 2, 2004 the Company filed a Form 8-K announcing third quarter operating results. On December 22, 2004 the Company filed a Form 8-K announcing the written notification of the
termination of the Merchant Services Agreement between Cardservice International (CSI) and
Redding Bank of Commerce (Redding) dated April 1, 1993, as amended and the Transaction Settlement
Agreement between CSI and Redding dated August 1, 2000 as amended (the Settlement Agreement). 
 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 4, 2005. BANK OF COMMERCE
HOLDINGSBy
    
    /s/ Michael C. MayerMichael C. Mayer
President, Chief Executive
Officer and Director
 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Michael C. Mayer and Linda J. Miles, and each of them, his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities,
to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact or their substitute or substitutes
may do or cause to be done by virtue hereof. 79




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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the capacities and on the
dates indicated: Name
    
    Title
    
    Date/s/Michael C. MayerPresident, Chief Executive Officer
    
    March 4, 2005Michael C. Mayer
    
    Redding Bank of Commerce and
Director/s/Linda J. Miles
    
    Executive Vice President and Chief
    
    March 4, 2005Financial Officer and AssistantLinda J. Miles
    
    Secretary (Principal Financial and
Accounting Officer)/s/Harry L. Grashoff, Jr.
    
    Chairman of the
    
    March 4, 2005BoardHarry L. Grashoff, Jr./s/Welton L. CarrelDirector
    
    March 4, 2005Welton L. Carrel/s/Russell L. DuclosDirector
    
    March 4, 2005Russell L. Duclos/s/John C. FitzpatrickDirector
    
    March 4, 2005John C. Fitzpatrick/s/Kenneth R. Gifford, Jr.Director
    
    March 4, 2005Kenneth R. Gifford, Jr./s/Eugene L. NicholsEugene L. Nichols
    
    Director
    
    March 4, 2005/s/David H. ScottDirector
    
    March 4, 2005David H. Scott/s/Lyle L. TullisDirector
    
    March 4, 2005Lyle L. Tullis
 80




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CERTIFICATIONS I, Michael C. Mayer, certify that:  1)
    I have reviewed this annual report on Form 10-K of Bank of Commerce Holdings (the
registrant);  2)
    Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;  3)
    Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
annual report;  4)
    The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-a-14 and
15d-14) for the registrant and we have:  (a)
    Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;  (b)
    Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and  (c)
    Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.  5)
    The registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of the registrants board of
directors;  (a)
    All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified for
the registrants auditors any material weaknesses in internal controls: and  (b)
    Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and  6)
    The registrants other certifying officer and I have indicated in this annual report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses. /s/MICHAEL C. MAYER Michael C. Mayer
President & Chief Executive Officer
(Principal Executive Officer) Dated March 4, 2005 81




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CERTIFICATIONS I, Linda J. Miles, certify that:  1)
    I have reviewed this annual report on Form 10-K of Bank of Commerce Holdings (the
registrant);  2)
    Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;  3)
    Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
annual report;  4)
    The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13-a-14 and
15d-14) for the registrant and we have:  (a)
    Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;  (b)
    Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and  (c)
    Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;  5)
    The registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of the registrants board of
directors:  (a)
    All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified for
the registrants auditors any material weaknesses in internal controls: and  (b)
    Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and  6)
    The registrants other certifying officer and I have indicated in this annual report whether
or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses. /s/LINDA J. MILES Linda J. Miles
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer) Dated March 4, 2005 82




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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.*15.1
    
    Statement re: Computation of Earnings Per Share (see page _53__).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 _79__).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. 83