##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 Commission File Number 0-25135
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 
 BANK OF COMMERCE HOLDINGS
  California
(State or jurisdiction of incorporation or organization)
    
    94-2823865
(I.R.S. Employer Identification Number)1951 Churn Creek RoadRedding, California
(Address of principal executive offices)
    
    96002
(Zip Code)
  
   Common Stock, No Par Value per share
    
    NASDAQ National Market
 o þ
 o No þ
 þ o
 þ
  o o þ
 o þ
   Class
    
    Outstanding at February 28, 2007Common Stock, No par value per share
    
    8,849,542
 DOCUMENTS INCORPORATED BY REFERENCE
 Document
    
    Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Stockholders 
To be held May 15, 2007 (Proxy Statement)
    
    Part III




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##### Table of Contents



Bank of Commerce Holdings Form 10-K
 Table of Contents
 Part I.Item 1. Business
    
    
    4General
    
    
    4Junior Subordinated Debentures
    
    
    4Primary market areas
    
    
    5Products and services
    
    
    5Government supervision and regulation
    
    
    5General
    
    
    7Dividends
    
    
    7Interstate Banking
    
    
    7Capital standards
    
    
    7Overview of the New Accord
    
    
    8Fiscal and Monetary Policies
    
    
    8Privacy Provisions of Gramm-Leach-Bliley Act
    
    
    9Sarbanes-Oxley Act of 2002
    
    
    9Patriot Act
    
    
    9Future Legislation
    
    
    9State regulation and supervision
    
    
    10Prompt corrective action and other enforcement mechanisms
    
    
    10Safety and soundness standards
    
    
    10Community reinvestment act and fair lending developments
    
    
    12Recently enacted accounting rules
    
    
    12Competition
    
    
    12Employees
    
    
    14Item 1A) Forward Looking Statements and Risk factors that may affect results
    
    
    15Overview
    
    
    15Lending risks associated with commercial banking
and construction activities
    
    
    16Dependence on real estate
    
    
    16Risks specific to operations in California
    
    
    16Interest rate risk
    
    
    16Potential volatility of deposits
    
    
    17Dividends
    
    
    17Government regulation and legislation
    
    
    17Economic conditions and geographical concentration
    
    
    17Reliance on key employees and others
    
    
    17Adequacy of allowance for loan and
lease losses (ALLL)
    
    
    18Certain ownership restrictions under California and Federal law
    
    
    18Shares eligible for future sale
    
    
    18Technology and computer systems
    
    
    18Environmental risks
    
    
    19Item 1B) Unresolved staff comments
    
    
    19Item 2. Properties
    
    
    20Item 3. Legal proceedings
    
    
    20Item 4. Submission of matters to a vote of security holders
    
    
    20Part II.
    
    
    21Item 5. Market for Registrants common equity and related Shareholder matters
    
    
    21Equity compensation plan information
    
    
    22Stock Performance Chart
    
    
    23
 2




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##### Table of Contents



Item 6. Selected consolidated financial data
    
    
    24Item 7. Managements discussion and analysis of financial condition
and results of operations
    
    
    25Executive overview
    
    
    25Risk Management
    
    
    26Liquidity risk management
    
    
    27Credit risk management
    
    
    28Market risk management
    
    
    31Operational risk management
    
    
    31Critical accounting policies
    
    
    31General
    
    
    31Allowance for loan and lease losses (ALLL)
    
    
    32Stock-based compensation
    
    
    32Revenue recognition
    
    
    32Fixed Assets
    
    
    33Income taxes
    
    
    33Financial highlights  Results of operations
    
    
    33Key Financial Ratios
    
    
    33Sources of Income
    
    
    34Year ended December 31, 2006 compared to
Year ended December 31, 2005
    
    
    34Year ended December 31, 2005 compared to
Year ended December 31, 2004
    
    
    35Net Interest Income and net interest margin
    
    
    35Noninterest Income
    
    
    38Noninterest Expense
    
    
    38Income taxes
    
    
    39Asset Quality
    
    
    39Nonperforming assets
    
    
    40Available-for-sale securities
    
    
    40Deposit structure
    
    
    41Capital management and adequacy
    
    
    41Lending transactions with related parties
    
    
    42Impact of inflation
    
    
    43Commitments
    
    
    43Item 7a. Quantitative and qualitative disclosures to market risk
    
    
    44Item 8. Financial Statements and supplementary data
    
    
    47Item 9. Changes and disagreements with accountants
    
    
    85Item 9A. Controls and procedures
    
    
    85Item 9B. Other Information
    
    
    85Part III.
    
    
    85Item 10. Directors, Executive Officers and Corporate Governance
    
    
    86Item 11. Executive compensation
    
    
    86Item 12. Security ownership of beneficial owners and management
and related stockholder matters
    
    
    86Item 13. Certain relationships and related transactions
    
    
    86Item 14. Principal Accountant fees and services
    
    
    87Part IV.
    
    
    88Item 15. Exhibits, financial statements, certifications
    
    
    88EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  Documents Incorporated By Reference
  3




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




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Junior Subordinated Debentures
  
 Primary Market Areas
  
 Products and Services
   5




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6




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




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




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




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Future Legislation
  
 State Regulation and Supervision
   
 Prompt Corrective Action and Other Enforcement Mechanisms
   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%.
 10




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Undercapitalized
    
    Significantly undercapitalizedTotal risk-based capital less than 8%;
    
    Total risk-based capital less than 6%;Tier 1 risk-based capital less than 4%; or
    
    Tier 1 risk-based capital less than 3%; orLeverage ratio less than 4%.
    
    Leverage ratio less than 3%.Critically undercapitalizedTangible equity to total assets less than 2%.
 11




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Safety and Soundness Standards
   
 Community Reinvestment Act and Fair Lending Developments
  
 Recently Enacted Accounting Rules
 On February 16, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Instruments
 In March 2006, the FASB issued SFAS No. 156 Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 12




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##### Table of Contents



On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation
No. 48 Accounting for Income Tax Uncertainties (FIN 48). FIN 48 supplements Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109),
 On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements ,
 On September 29, 2006, the FASB issued FAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans 
 13




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Competition
    
 Employees
  14




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ITEM 1A.
 Forward Looking Statements and Risk Factors That May Affect Results
 This report includes forward-looking statements within the meaning of the Securities Exchange Act
of 1934 (the Exchange Act) and the Private Securities Litigation Reform Act of 1995. These
statements are based on managements beliefs and assumptions, and on information available to
management as of the date of this document. Forward-looking statements include the information
concerning possible or assumed future results of operations of the Company set forth under the
heading Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking statements also include statements in which words such as expects, anticipates,
intend, plan, believes, estimate, consider or similar expressions or conditional verbs
such as will, should, would and could are intended to identify such forward looking
statements.. Forward-looking statements are not guarantees of future performance. They involve
risks, uncertainties and assumptions, including the risks discussed under the heading Risk Factors
That May Affect Results and elsewhere in this report. The Companys actual future results and
shareholder values may differ materially from those anticipated and expressed in these
forward-looking statements. Many of the factors that will determine these results and values,
including those discussed under the heading Risk Factors That May Affect Results, are beyond the
Companys ability to control or predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, the Company does not have any intention or and assumes no
obligation to update forward-looking statements after the date of the filing of this report, even
if new information, future events or other circumstances have made such statements incorrect or
misleading. Except as specifically noted herein all references to the Company refer to Bank of
Commerce Holdings, a California corporation, and its consolidated subsidiaries.
 
 Overview
      15




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Lending Risks Associated with Commercial Banking and Construction Activities
  
 Dependence on Real Estate
   
 Risks Specific to Operations in California
  
 Interest Rate Risk
  16




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Potential Volatility of Deposits
  
 Dividends
  
 Government Regulation and Legislation
  
 Economic Conditions and Geographic Concentration
  
 Reliance on Key Employees and Others
  17




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Adequacy of Allowance for Loan and Lease Losses (ALLL)
  
 Certain Ownership Restrictions under California and Federal Law
   
 Shares Eligible for Future Sale
  
 Technology and Computer Systems
  18




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Environmental Risks
  
 ITEM 1(b). UNRESOLVED STAFF COMMENTS
  19




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Item 2. PROPERTIES
     
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  20




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PART II
 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  Sales Price Per ShareQuarter Ended:
    
    High
    
    Low
    
    VolumeMarch 31, 2006
    
    $
    10.64
    
    
    $
    9.14
    
    
    
    174,479June 30, 2006
    
    $
    11.00
    
    
    $
    10.00
    
    
    
    97,655September 30, 2006
    
    $
    10.95
    
    
    $
    10.00
    
    
    
    178,380December 31, 2006
    
    $
    12.49
    
    
    $
    10.85
    
    
    
    150,795March 31, 2005
    
    $
    12.35
    
    
    $
    9.00
    
    
    
    107,051June 30, 2005
    
    $
    13.07
    
    
    $
    9.35
    
    
    
    95,929September 30, 2005
    
    $
    12.00
    
    
    $
    9.58
    
    
    
    156,528December 31, 2005
    
    $
    10.90
    
    
    $
    10.10
    
    
    
    95,224
    maximum
 21




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##### Table of Contents



Equity Compensation Plan Information
  Number of securitiesremaining available forNumber of securities to be
    
    Weighted average exercise
    
    future issuance underissued upon exercise of
    
    price of outstanding
    
    equity compensation plansoutstanding options,
    
    options, warrants and
    
    (excluding securitieswarrants and rights
    
    rights
    
    reflected in column (a)).Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    377,745
    
    
    $
    6.93
    
    
    
    74,165Equity compensation
plans not approved
by security holders
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    377,745
    
    
    $
    6.93
    
    
    
    74,165
  Purchase of Equity Securities by the Issuer and Affiliated Purchasers
 (c)Total
    
    (d)number of
    
    Maximumshares
    
    number ofpurchased as
    
    shares that(a)
    
    
    
    
    
    part of
    
    may yet beTotal
    
    (b)
    
    publicly
    
    purchasednumber of
    
    Average
    
    announced
    
    under theshares
    
    price paid
    
    plans or
    
    plans orPeriod
    
    purchased
    
    per share
    
    programs
    
    programsOctober 1, 2006 
October 31, 2006
    
    
    18,000
    
    
    $
    11.49
    
    
    
    18,000
    
    
    
    175,600November 1, 2006 
November 30, 2006
    
    
    41,600
    
    
    $
    11.81
    
    
    
    59,600
    
    
    
    134,000December 1, 2006 
December 31, 2006
    
    
    32,400
    
    
    $
    12.10
    
    
    
    92,000
    
    
    
    101,600Total
    
    
    92,000
    
    
    $
    11.85
    
    
    
    92,000
    
    
    
    101,600
  22




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Stock Price Performance Graph
  Bank of Commerce Holdings
Five  Year Performance Graph
 Total Return Performance
 
 Stock Performance Graph(1)
 
 SNL Securities LC ©2006
    
    (804) 977-1600
  23




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##### Table of Contents



Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
  In Thousands (Except Ratios and Per Share Data)As of and for the years ended December 31,
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Statements of IncomeTotal Interest Income
    
    $
    37,610
    
    
    $
    27,864
    
    
    $
    20,996
    
    
    $
    19,279
    
    
    $
    18,565Net Interest Income
    
    $
    22,035
    
    
    $
    20,238
    
    
    $
    16,887
    
    
    $
    14,694
    
    
    $
    12,517Provision for Loan Losses
    
    $
    226
    
    
    $
    448
    
    
    $
    554
    
    
    $
    515
    
    
    $
    620Total Noninterest Income
    
    $
    1,928
    
    
    $
    2,124
    
    
    $
    2,196
    
    
    $
    2,150
    
    
    $
    2,091Total Noninterest Expense
    
    $
    13,333
    
    
    $
    11,748
    
    
    $
    10,620
    
    
    $
    9,660
    
    
    $
    8,267Total Revenues
    
    $
    39,539
    
    
    $
    29,988
    
    
    $
    23,192
    
    
    $
    21,429
    
    
    $
    20,656Net Income
    
    $
    6,568
    
    
    $
    6,278
    
    
    $
    4,978
    
    
    $
    4,183
    
    
    $
    3,696Balance SheetsTotal Assets
    
    $
    583,442
    
    
    $
    511,644
    
    
    $
    438,545
    
    
    $
    401,158
    
    
    $
    367,434Total Net Loans
    
    $
    408,989
    
    
    $
    363,305
    
    
    $
    318,801
    
    
    $
    278,204
    
    
    $
    280,351Allowance for Loan Losses
    
    $
    4,904
    
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529Total Deposits
    
    $
    439,407
    
    
    $
    372,116
    
    
    $
    352,878
    
    
    $
    327,539
    
    
    $
    314,447Stockholders Equity
    
    $
    43,916
    
    
    $
    39,138
    
    
    $
    35,283
    
    
    $
    30,511
    
    
    $
    27,667Performance Ratios1Return on Average Assets2
    
    
    1.20
    %
    
    
    1.34
    %
    
    
    1.22
    %
    
    
    1.10
    %
    
    
    1.09
    %Return on Average Stockholders Equity3
    
    
    15.59
    %
    
    
    18.35
    %
    
    
    18.18
    %
    
    
    15.20
    %
    
    
    13.92
    %Dividend Payout
    
    
    40.36
    %
    
    
    35.74
    %
    
    
    39.29
    %
    
    
    42.09
    %
    
    
    46.57
    %Average Equity to Average Assets
    
    
    9.49
    %
    
    
    9.43
    %
    
    
    7.91
    %
    
    
    7.21
    %
    
    
    7.83
    %Tier 1 Risk-Based Capital-Bank4
    
    
    11.42
    %
    
    
    12.08
    %
    
    
    10.80
    %
    
    
    10.77
    %
    
    
    9.14
    %Total Risk-Based Capital-Bank
    
    
    12.54
    %
    
    
    13.11
    %
    
    
    11.88
    %
    
    
    12.02
    %
    
    
    10.19
    %Net Interest Margin5
    
    
    4.26
    %
    
    
    4.59
    %
    
    
    4.45
    %
    
    
    4.22
    %
    
    
    4.06
    %Average Earning Assets to Total Average Assets
    
    
    94.20
    %
    
    
    94.04
    %
    
    
    92.62
    %
    
    
    91.26
    %
    
    
    90.90
    %Nonperforming Assets to Total Assets6
    
    
    0.00
    %
    
    
    0.08
    %
    
    
    0.54
    %
    
    
    1.16
    %
    
    
    .10
    %Net Charge-offs to Average Loans
    
    
    -.09
    %
    
    
    .00
    %
    
    
    .12
    %
    
    
    .13
    %
    
    
    .01
    %Allowance for Loan Losses to Total Loans
    
    
    1.18
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %Nonperforming Loans to Allowance for Loan Losses
    
    
    0.00
    %
    
    
    9.15
    %
    
    
    61.64
    %
    
    
    126.34
    %
    
    
    0.20
    %Efficiency Ratio7
    
    
    55.64
    %
    
    
    52.54
    %
    
    
    55.65
    %
    
    
    59.15
    %
    
    
    56.59
    %Share DataAverage Common Shares Outstanding  basic
    
    
    8,760
    
    
    
    8,600
    
    
    
    8,283
    
    
    
    8,033
    
    
    
    8,013Average Common Shares Outstanding  diluted
    
    
    8,932
    
    
    
    8,845
    
    
    
    8,703
    
    
    
    8,327
    
    
    
    8,604Book Value Per Common Share
    
    $
    4.96
    
    
    $
    4.52
    
    
    $
    4.27
    
    
    $
    3.80
    
    
    $
    3.45Basic Earnings Per Common Share
    
    $
    0.75
    
    
    $
    0.73
    
    
    $
    0.60
    
    
    $
    0.52
    
    
    $
    0.46Diluted Earnings Per Common Share
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.57
    
    
    $
    0.50
    
    
    $
    0.43Cash Dividends Per Common Share8
    
    $
    0.29
    
    
    $
    0.26
    
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.22
 
 1
    
    Regulatory Capital Ratios and Asset Quality
Ratios are end of period ratios. With the exception of end of period ratios,
all ratios are based on average daily balances during the indicated period.2
    
    Return on average assets is net income divided
by average total assets.3
    
    Return on average equity is net income divided
by average stockholders equity.4
    
    Regulatory capital ratios are defined in
detail in the table on pages 39-40.5
    
    Net interest margin equals net interest income
as a percent of average interest-earning assets.6
    
    Non-performing assets includes all
nonperforming loans (nonaccrual loans, loans 90 days past due and still
accruing interest and restructured loans) and real estate acquired by
foreclosure.7
    
    The efficiency ratio is calculated by dividing
non-interest expense by the sum of net interest income and noninterest income.
The efficiency ratio measures how the Company spends in order to generate each
dollar of net revenue.8
    
    Cash dividends declared during the current
fiscal year 24




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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
 The following discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and related notes thereto appearing elsewhere in this report. This report
includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the
Exchange Act) and the Private Securities Litigation Reform Act of 1995. These statements are not
guarantees of future performance and involve certain risks. These statements are based on
managements beliefs and assumptions, and on information available to management as of the date of
this document. Forward-looking statements include the information concerning possible or assumed
future results of operations of the Company set forth under the heading Managements Discussion
and Analysis of Financial Condition and Results of Operations. Forward-looking statements also
include statements in which words such as expects, anticipates, intend, plan, believes,
estimate, consider or similar expressions or conditional verbs such as will should would
and could are intended to identify such forward looking statements. The Companys actual future
results and stockholder values may differ materially from those anticipated and expressed in these
forward-looking statements. Many of the factors that will determine these results and values,
including those discussed under the heading Risk Factors That May Affect Results, are beyond the
Companys ability to control or predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. In addition, the Company does not have any intention to and assumes no
obligation to update forward-looking statements after the date of the filing of this report, even
if new information, future events or other circumstances have made such statements incorrect or
misleading. Except as specifically noted herein all referenced to the Company refer to Bank of
Commerce Holdings, a California corporation, and its consolidated subsidiaries.
 
 Executive Overview
      25




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##### Table of Contents



Risk Management
 Overview
  Board Committees
  
    
    Loan Committee reviews credit risks and the adequacy of the allowance for loan losses.
    
    Asset/Liability Management Committee (ALCO) reviews liquidity and market risks.
    
    Audit Committee reviews the scope and coverage of internal and external audit activities.
    
    Nominating and Corporate Governance Committee evaluates corporate governance structure, charters, committee performance
and acts in best interests of the corporation and its stockholders with regard to the appointment of director nominees.
  Senior Leadership Committees
  
    
    The Senior Leadership Committee establishes short and long-term
strategies and operating plans. The committee establishes
performance measures and reviews performance to plan on a monthly
basis.
 
    
    The Credit Round Table Committee recommends corporate credit
practices and limits, including industry concentration limits and
approval requirements and exceptions.
 
    
    The Technology Steering Committee establishes technological
strategies, makes technology investment decisions, and manages the
implementation process.
 
    
    The ALCO Round Table Committee establishes and monitors liquidity
ranges, pricing, maturities, investment goals, and interest spread
on balance sheet accounts.
 
    
    The SOX 404 Compliance Team has established the master plan for
full documentation of the Companies internal controls and
compliance with the Sarbanes-Oxley Act, Section 404.
 Risk Management Controls
  26




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##### Table of Contents



Liquidity Risk Management
 Liquidity Risk
       Short term borrowings
  2006
    
    
    2005
    
    
    2004Securities sold under agreements to repurchase with weighted
average interest rates of 4.00%, 3.19% and 0.15% at December 31,
2006, 2005
and 2004, respectively
    
    $
    37,116,610
    
    
    $
    22,885,658
    
    
    $
    2,003,712Federal Home Loan Bank borrowings with weighted average interest
rates of 5.64%, 4.17% and 2.56% at December 31, 2006, 2005 and
2004, respectively
    
    
    40,000,000
    
    
    
    55,000,000
    
    
    
    35,000,000Total short-term borrowings
    
    $
    77,116,610
    
    
    $
    77,885,658
    
    
    $
    37,003,712
 27




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Securities sold under agreements to repurchase:Maximum outstanding at any month end
    
    $
    37,116,610
    
    
    $
    24,308,869
    
    
    $
    10,238,525Average balance during the year
    
    
    29,667,820
    
    
    
    17,812,885
    
    
    
    2,164,067Weighted average interest rate during year
    
    
    3.84
    %
    
    
    2.42
    %
    
    
    2.44
    %Federal Home Loan Bank borrowings:Maximum outstanding at any month end
    
    $
    80,000,000
    
    
    $
    55,000,000
    
    
    $
    35,000,000Average Balance during the year
    
    
    59,059,300
    
    
    
    34,032,738
    
    
    
    28,715,847Weighted average interest rate during year
    
    
    5.21
    %
    
    
    3.37
    %
    
    
    1.53
    %
 
 Credit Risk Management
  Commercial portfolio credit risk management
   Real estate portfolio credit risk management
    28




---



##### Table of Contents



Concentrations of credit risk
  Nonperforming assets
  Allowance for loan and lease losses (ALLL)
   Accounting for Contingencies Accounting by Creditors for
Impairment of a Loan
   29




---



##### Table of Contents



Years Ended December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Beginning Balance:
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529
    
    
    $
    2,916Provision for loan losses
    
    
    226
    
    
    
    448
    
    
    
    554
    
    
    
    515
    
    
    
    620Charge-offs:Commercial & Financial
    
    
    (274
    )
    
    
    (83
    )
    
    
    (367
    )
    
    
    (379
    )
    
    
    (8
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (18
    )Other
    
    
    (25
    )
    
    
    (10
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (0
    )Total Charge-offs
    
    
    (299
    )
    
    
    (93
    )
    
    
    (368
    )
    
    
    (380
    )
    
    
    (26
    )Recoveries:Commercial & Financial
    
    
    655
    
    
    
    93
    
    
    
    2
    
    
    
    11
    
    
    
    19Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    6
    
    
    
    2
    
    
    
    3
    
    
    
    0
    
    
    
    0Total Recoveries
    
    
    661
    
    
    
    95
    
    
    
    5
    
    
    
    11
    
    
    
    19Net Charge-offs
    
    
    362
    
    
    
    2
    
    
    
    (363
    )
    
    
    (369
    )
    
    
    (7
    )Ending Balance
    
    $
    4,904
    
    
    $
    4,316
    
    
    $
    3,866
    
    
    $
    3,675
    
    
    $
    3,529Allowance for loan losses to
total loans
    
    
    1.18
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %Net Charge-offs to average loans
    
    
    -.09
    %
    
    
    .00
    %
    
    
    .12
    %
    
    
    .13
    %
    
    
    .01
    %
   Dec. 31, 2006
    
    
    Dec. 31, 2005
    
    
    Dec. 31, 2004
    
    

Dec. 31, 2003
    
    
    Dec. 30, 2002Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    ofcategory
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    categoryto total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total(Dollars in thousands)
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loansBalance at end of
period applicable to:Commercial and Financial
    
    $
    2,033
    
    
    
    30.36
    %
    
    $
    1,900
    
    
    
    30.76
    %
    
    $
    2,087
    
    
    
    32.64
    %
    
    $
    2,315
    
    
    
    37.01
    %
    
    $
    2,047
    
    
    
    34.84
    %Commercial Real Estate
    
    $
    1,364
    
    
    
    41.62
    %
    
    $
    1,375
    
    
    
    41.11
    %
    
    $
    1,149
    
    
    
    41.83
    %
    
    $
    878
    
    
    
    36.46
    %
    
    $
    952
    
    
    
    43.67
    %Construction and
Development
    
    $
    1,244
    
    
    
    26.73
    %
    
    $
    936
    
    
    
    27.57
    %
    
    $
    588
    
    
    
    23.95
    %
    
    $
    456
    
    
    
    23.64
    %
    
    $
    494
    
    
    
    14.29
    %Consumer Loans
    
    $
    28
    
    
    
    0.23
    %
    
    $
    28
    
    
    
    0.53
    %
    
    $
    23
    
    
    
    0.21
    %
    
    $
    20
    
    
    
    0.16
    %
    
    $
    20
    
    
    
    0.25
    %Other Loans
    
    $
    41
    
    
    
    0.05
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    0
    
    
    
    0.22
    %
    
    $
    0
    
    
    
    0.23
    %Unallocated
    
    $
    194
    
    
    
    1.01
    %
    
    $
    77
    
    
    
    0.03
    %
    
    $
    19
    
    
    
    1.37
    %
    
    $
    6
    
    
    
    2.51
    %
    
    $
    16
    
    
    
    6.72
    %Total Allowance for
loan and lease losses
    
    $
    4,904
    
    
    
    100.00
    %
    
    $
    4,316
    
    
    
    100.00
    %
    
    $
    3,866
    
    
    
    100.00
    %
    
    $
    3,675
    
    
    
    100.00
    %
    
    $
    3,529
    
    
    
    100.00
    %
 30




---



##### Table of Contents



Market Risk Management
   Securities Portfolio
 available-for-sale held-to-maturity held-to-maturity available-for-sale held-to-maturity
 
 Operational Risk Management
  
 Critical Accounting Policies
 
 General
  31




---



##### Table of Contents



Allowance for Loan and Lease Losses (ALLL)
   
 Stock-Based Compensation
 Accounting for Stock Based
Compensation
 Accounting for Stock Issued to Employees
 
 Revenue recognition
  32




---



##### Table of Contents



Fixed Assets
  
 Income Taxes
  
 Financial Highlights  Results of Operations
  
 Key Financial Ratios
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002ProfitabilityReturn on average assets
    
    
    1.20
    %
    
    
    1.34
    %
    
    
    1.22
    %
    
    
    1.10
    %
    
    
    1.09
    %Return on average equity
    
    
    15.59
    %
    
    
    18.35
    %
    
    
    18.18
    %
    
    
    15.20
    %
    
    
    13.92
    %Average earning assets to total average assets
    
    
    94.20
    %
    
    
    94.04
    %
    
    
    92.62
    %
    
    
    91.26
    %
    
    
    90.90
    %Interest MarginNet interest margin
    
    
    4.26
    %
    
    
    4.59
    %
    
    
    4.45
    %
    
    
    4.22
    %
    
    
    4.06
    %Asset QualityAllowance for loan losses to total loans
    
    
    1.18
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    1.30
    %
    
    
    1.26
    %Nonperforming assets to total assets
    
    
    0.00
    %
    
    
    0.08
    %
    
    
    0.54
    %
    
    
    1.16
    %
    
    
    0.10
    %Net charge-offs to average loans
    
    
    -0.09
    %
    
    
    0.00
    %
    
    
    0.12
    %
    
    
    0.13
    %
    
    
    0.01
    %LiquidityLoans to deposits
    
    
    93.08
    %
    
    
    97.63
    %
    
    
    90.34
    %
    
    
    84.94
    %
    
    
    89.16
    %Liquidity ratio
    
    
    27.96
    %
    
    
    23.57
    %
    
    
    23.23
    %
    
    
    25.49
    %
    
    
    18.32
    %CapitalTier 1 risk-based capital  Bank
    
    
    11.42
    %
    
    
    12.08
    %
    
    
    10.80
    %
    
    
    10.77
    %
    
    
    9.14
    %Total risk-based capital  Bank
    
    
    12.54
    %
    
    
    13.11
    %
    
    
    11.88
    %
    
    
    12.02
    %
    
    
    10.19
    %EfficiencyEfficiency ratio
    
    
    55.64
    %
    
    
    52.54
    %
    
    
    55.65
    %
    
    
    59.15
    %
    
    
    56.59
    %
 www.fdic.gov
 33




---



##### Table of Contents



Sources of Income
       
 Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
   34




---



##### Table of Contents



Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
      
 Net Interest Income and Net Interest Margin
    35




---



##### Table of Contents



Average Balances, Interest Income/Expense and Yields/Rates Paid
Years Ended December 31,
 2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollars in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest Earning AssetsPortfolio loans
    
    $
    394,152
    
    
    $
    32,394
    
    
    
    8.22
    %
    
    $
    337,284
    
    
    $
    24,070
    
    
    
    7.14
    %
    
    $
    297,679
    
    
    $
    18,445
    
    
    
    6.20
    %Tax-exempt securities
    
    
    21,112
    
    
    
    787
    
    
    
    3.73
    %
    
    
    9,966
    
    
    
    332
    
    
    
    3.33
    %
    
    
    6,582
    
    
    
    226
    
    
    
    3.43
    %US government securities
    
    
    39,576
    
    
    
    1,593
    
    
    
    4.03
    %
    
    
    35,779
    
    
    
    1,272
    
    
    
    3.56
    %
    
    
    28,220
    
    
    
    781
    
    
    
    2.77
    %Mortgage backed securities
    
    
    42,476
    
    
    
    1,828
    
    
    
    4.30
    %
    
    
    41,181
    
    
    
    1,639
    
    
    
    3.98
    %
    
    
    36,159
    
    
    
    1,394
    
    
    
    3.86
    %Federal funds sold
    
    
    17,124
    
    
    
    872
    
    
    
    5.09
    %
    
    
    15,225
    
    
    
    491
    
    
    
    3.22
    %
    
    
    10,304
    
    
    
    143
    
    
    
    1.39
    %Other securities
    
    
    3,075
    
    
    
    136
    
    
    
    4.42
    %
    
    
    1,384
    
    
    
    60
    
    
    
    4.34
    %
    
    
    382
    
    
    
    7
    
    
    
    1.83
    %Average Earning Assets
    
    $
    517,515
    
    
    $
    37,610
    
    
    
    7.27
    %
    
    $
    440,819
    
    
    $
    27,864
    
    
    
    6.32
    %
    
    $
    379,326
    
    
    $
    20,996
    
    
    
    5.54
    %Cash & due from banks
    
    
    14,113
    
    
    
    
    
    
    
    
    
    
    
    15,208
    
    
    
    
    
    
    
    
    
    
    
    17,351Bank premises and fixed assets
    
    
    6,878
    
    
    
    
    
    
    
    
    
    
    
    5,563
    
    
    
    
    
    
    
    
    
    
    
    5,373Other assets
    
    
    11,022
    
    
    
    
    
    
    
    
    
    
    
    7,172
    
    
    
    
    
    
    
    
    
    
    
    7,519Average Total Assets
    
    $
    549,528
    
    
    
    
    
    
    
    
    
    
    $
    468,762
    
    
    
    
    
    
    
    
    
    
    $
    409,569Interest Bearing LiabilitiesInterest bearing demand
    
    $
    108,066
    
    
    $
    1,504
    
    
    
    1.39
    %
    
    $
    112,236
    
    
    $
    939
    
    
    
    0.84
    %
    
    $
    101,884
    
    
    $
    430
    
    
    
    0.42
    %Savings deposits
    
    
    24,633
    
    
    
    289
    
    
    
    1.17
    %
    
    
    26,542
    
    
    
    183
    
    
    
    0.69
    %
    
    
    23,384
    
    
    
    104
    
    
    
    0.44
    %Certificates of deposit
    
    
    190,568
    
    
    
    8,486
    
    
    
    4.45
    %
    
    
    149,204
    
    
    
    4,331
    
    
    
    2.90
    %
    
    
    138,434
    
    
    
    2,876
    
    
    
    2.08
    %Repurchase Agreements
    
    
    29,708
    
    
    
    1,138
    
    
    
    3.83
    %
    
    
    17,892
    
    
    
    63
    
    
    
    0.36
    %
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %Other borrowings
    
    
    69,014
    
    
    
    4,158
    
    
    
    6.02
    %
    
    
    34,042
    
    
    
    2,110
    
    
    
    6.20
    %
    
    
    35,880
    
    
    
    699
    
    
    
    1.95
    %Average Interest Liabilities
    
    $
    421,989
    
    
    
    15,575
    
    
    
    3.69
    %
    
    $
    339,916
    
    
    
    7,626
    
    
    
    2.24
    %
    
    
    299,582
    
    
    
    4,109
    
    
    
    1.37
    %Noninterest bearing Demand
    
    
    79,245
    
    
    
    
    
    
    
    
    
    
    
    80,219
    
    
    
    
    
    
    
    
    
    
    
    73,163Other liabilities
    
    
    6,154
    
    
    
    
    
    
    
    
    
    
    
    4,417
    
    
    
    
    
    
    
    
    
    
    
    4,440Stockholders equity
    
    
    42,140
    
    
    
    
    
    
    
    
    
    
    
    44,210
    
    
    
    
    
    
    
    
    
    
    
    32,384Average Liabilities and
Stockholders equity
    
    $
    549,528
    
    
    
    
    
    
    
    
    
    
    $
    468,762
    
    
    
    
    
    
    
    
    
    
    $
    409,569Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    22,035
    
    
    
    4.26
    %
    
    
    
    
    
    $
    20,238
    
    
    
    4.59
    %
    
    
    
    
    
    $
    16,887
    
    
    
    4.45
    %
  36




---



##### Table of Contents



Analysis of Changes in Net Interest Income
Years ended December 31,
 2006 over 2005
    
    
    
    
    
    
    2005 over 2004Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average(Dollars in thousands)
    
    Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalIncrease (Decrease)
In Interest Income:Portfolio loans
    
    $
    4,674
    
    
    $
    3,651
    
    
    $
    8,325
    
    
    $
    2,826
    
    
    $
    2,799
    
    
    $
    5,625Tax-exempt securities
    
    
    415
    
    
    
    40
    
    
    
    455
    
    
    
    113
    
    
    
    (7
    )
    
    
    106US government securities
    
    
    153
    
    
    
    168
    
    
    
    321
    
    
    
    269
    
    
    
    222
    
    
    
    491Mortgage backed securities
    
    
    56
    
    
    
    133
    
    
    
    189
    
    
    
    200
    
    
    
    45
    
    
    
    245Federal funds sold
    
    
    97
    
    
    
    284
    
    
    
    381
    
    
    
    159
    
    
    
    189
    
    
    
    348Other securities
    
    
    75
    
    
    
    1
    
    
    
    76
    
    
    
    43
    
    
    
    10
    
    
    
    53Total Increase (Decrease)
    
    
    5,470
    
    
    
    4,277
    
    
    
    9,747
    
    
    
    3,610
    
    
    
    3,258
    
    
    
    6,868(Decrease) Increase
In Interest Expense:Interest bearing demand
    
    
    (58
    )
    
    
    624
    
    
    
    566
    
    
    
    87
    
    
    
    422
    
    
    
    509Savings accounts
    
    
    (22
    )
    
    
    128
    
    
    
    106
    
    
    
    22
    
    
    
    57
    
    
    
    79Certificates of deposit
    
    
    1,842
    
    
    
    2,313
    
    
    
    4,155
    
    
    
    313
    
    
    
    1,142
    
    
    
    1,455Other borrowings
    
    
    2,560
    
    
    
    562
    
    
    
    3,122
    
    
    
    672
    
    
    
    803
    
    
    
    1,475Total (Decrease) Increase
    
    
    4,322
    
    
    
    3,627
    
    
    
    7,949
    
    
    
    1,094
    
    
    
    2,424
    
    
    
    3,518Net (Decrease) Increase
    
    $
    1,148
    
    
    $
    650
    
    
    $
    1,798
    
    
    $
    2,516
    
    
    $
    834
    
    
    $
    3,350
 37




---



##### Table of Contents



Noninterest Income
  Years Ended December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004Noninterest income:Service charges on deposit accounts
    
    $
    346
    
    
    $
    394
    
    
    $
    476Payroll and benefit processing fees
    
    
    386
    
    
    
    357
    
    
    
    343Earnings on
cash surrender 
Bank owned life insurance
    
    
    329
    
    
    
    209
    
    
    
    259Net realized loss on sale of
securities available-for-sale
    
    
    (171
    )
    
    
    (2
    )
    
    
    0Net gain on sale of loans
    
    
    90
    
    
    
    146
    
    
    
    95Merchant credit card service income, net
    
    
    380
    
    
    
    346
    
    
    
    434Mortgage brokerage fee income
    
    
    71
    
    
    
    249
    
    
    
    186Other income
    
    
    497
    
    
    
    425
    
    
    
    403Total Noninterest income
    
    $
    1,928
    
    
    $
    2,124
    
    
    $
    2,196
    
 Noninterest Expense
  Years Ended December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004Salaries & related benefits
    
    $
    8,020
    
    
    $
    6,884
    
    
    $
    5,938Occupancy & equipment expense
    
    
    1,846
    
    
    
    1,572
    
    
    
    1,534FDIC insurance premium
    
    
    48
    
    
    
    49
    
    
    
    48Data processing fees
    
    
    216
    
    
    
    303
    
    
    
    254Professional service fees
    
    
    684
    
    
    
    649
    
    
    
    803Payroll processing fees
    
    
    104
    
    
    
    111
    
    
    
    0Deferred compensation expense
    
    
    369
    
    
    
    321
    
    
    
    281Stationery & supplies
    
    
    231
    
    
    
    241
    
    
    
    208Postage
    
    
    113
    
    
    
    104
    
    
    
    97Directors expenses
    
    
    243
    
    
    
    220
    
    
    
    267Other expenses
    
    
    1,459
    
    
    
    1,295
    
    
    
    1,190Total Noninterest expense
    
    $
    13,333
    
    
    $
    11,749
    
    
    $
    10,620
  38




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##### Table of Contents



Income Taxes
   Years Ended December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004Income tax provision
    
    $
    3,837
    
    
    $
    3,887
    
    
    $
    2,931Effective tax rate
    
    
    36.9
    %
    
    
    38.2
    %
    
    
    37.1
    %
 
 Asset Quality
   As of December 31,(Dollars in thousands)
    
    2006
    
    
    %
    
    
    2005
    
    
    %
    
    
    2004
    
    
    %
    
    
    2003
    
    
    %
    
    
    2002
    
    
    %Commercial & industrial
    
    $
    125,725
    
    
    
    30.36
    %
    
    $
    115,401
    
    
    
    31.36
    %
    
    $
    105,545
    
    
    
    32.64
    %
    
    $
    104,509
    
    
    
    37.01
    %
    
    $
    99,084
    
    
    
    34.84
    %Real Estateconstruction
    
    
    110,693
    
    
    
    26.73
    %
    
    
    105,094
    
    
    
    28.56
    %
    
    
    77,439
    
    
    
    23.95
    %
    
    
    66,741
    
    
    
    23.64
    %
    
    
    40,662
    
    
    
    14.29
    %Real Estatecommercial
    
    
    159,370
    
    
    
    38.48
    %
    
    
    129,202
    
    
    
    35.11
    %
    
    
    128,317
    
    
    
    39.69
    %
    
    
    95,903
    
    
    
    33.97
    %
    
    
    113,921
    
    
    
    40.05
    %Real Estatemortgage
    
    
    4,278
    
    
    
    1.04
    %
    
    
    3,669
    
    
    
    1.00
    %
    
    
    4,423
    
    
    
    1.37
    %
    
    
    7,086
    
    
    
    2.51
    %
    
    
    19,126
    
    
    
    6.72
    %Real Estateother
    
    
    12,986
    
    
    
    3.14
    %
    
    
    13,790
    
    
    
    3.75
    %
    
    
    6,943
    
    
    
    2.14
    %
    
    
    7,050
    
    
    
    2.49
    %
    
    
    10,289
    
    
    
    3.62
    %Installment
    
    
    202
    
    
    
    0.05
    %
    
    
    439
    
    
    
    0.12
    %
    
    
    300
    
    
    
    0.10
    %
    
    
    451
    
    
    
    0.16
    %
    
    
    720
    
    
    
    0.25
    %Other loans
    
    
    937
    
    
    
    0.20
    %
    
    
    446
    
    
    
    0.10
    %
    
    
    353
    
    
    
    0.11
    %
    
    
    632
    
    
    
    0.22
    %
    
    
    662
    
    
    
    0.23
    %Gross Loans
    
    $
    414,191
    
    
    
    100.00
    %
    
    $
    368,041
    
    
    
    100.00
    %
    
    $
    323,320
    
    
    
    100.00
    %
    
    $
    282,372
    
    
    
    100.00
    %
    
    $
    284,464
    
    
    
    100.00
    %Less:Deferred loan fees and
costs
    
    
    298
    
    
    
    
    
    
    
    420
    
    
    
    
    
    
    
    653
    
    
    
    
    
    
    
    494
    
    
    
    
    
    
    
    584Allowance for Loan losses
    
    
    4,904
    
    
    
    
    
    
    
    4,316
    
    
    
    
    
    
    
    3,866
    
    
    
    
    
    
    
    3,675
    
    
    
    
    
    
    
    3,529Net Loans
    
    $
    408,989
    
    
    
    
    
    
    $
    363,305
    
    
    
    
    
    
    $
    318,801
    
    
    
    
    
    
    $
    278,203
    
    
    
    
    
    
    $
    280,351
  39




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##### Table of Contents



Nonperforming Assets
  As of December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Nonaccrual loans
    
    $
    0
    
    
    $
    372
    
    
    $
    2,383
    
    
    $
    3,931
    
    
    $
    090 days past due and
still accruing interest
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    712
    
    
    
    7Total nonperforming loans
    
    
    0
    
    
    
    372
    
    
    
    2,383
    
    
    
    4,643
    
    
    
    7Other real estate owned
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    338Total nonperforming assets
    
    $
    0
    
    
    $
    372
    
    
    $
    2,383
    
    
    $
    4,643
    
    
    $
    345
  Loan Maturity Schedule
  After One(Dollars in thousands)
    
    Within One Year
    
    
    through Five Years
    
    
    After Five Years
    
    
    TotalCommercial & industrial
    
    $
    111,011
    
    
    $
    12,175
    
    
    $
    2,539
    
    
    $
    125,725Real Estate   construction
    
    
    107,697
    
    
    
    2,026
    
    
    
    970
    
    
    
    110,693Real Estate  commercial
    
    
    153,651
    
    
    
    10,894
    
    
    
    7,811
    
    
    
    172,356Real Estatemortgage
    
    
    2,368
    
    
    
    615
    
    
    
    1,295
    
    
    
    4,278Installment loans
    
    
    202
    
    
    
    0
    
    
    
    0
    
    
    
    202Other loans
    
    
    937
    
    
    
    0
    
    
    
    0
    
    
    
    937Total gross loans
    
    $
    375,866
    
    
    $
    25,710
    
    
    $
    12,615
    
    
    $
    414,191Loans due after one year
with:Fixed Rates
    
    
    
    
    
    $
    23,259
    
    
    $
    12,615
    
    
    $
    35,874Variable Rates
    
    
    
    
    
    
    2,451
    
    
    
    0
    
    
    
    2,451Total
    
    
    
    
    
    $
    25,710
    
    
    $
    12,615
    
    
    $
    38,325
 
 Available-for-sale securities
  Over One through
    
    
    Over Five through
    
    
    OverWithin One
    
    
    Five
    
    
    Ten
    
    
    TenYear
    
    
    Years
    
    
    Years
    
    
    Years
    
    
    Total(Dollars in thousands)
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldU.S. government & agencies
    
    $
    996
    
    
    
    4.21
    %
    
    $
    29,966
    
    
    
    4.46
    %
    
    $
    2,998
    
    
    
    4.02
    %
    
    $
    0
    
    
    
    0.00
    %
    
    $
    33,960
    
    
    
    4.40
    %Obligations of state and
political subdivisions
    
    
    424
    
    
    
    1.96
    %
    
    
    875
    
    
    
    2.58
    %
    
    
    4,092
    
    
    
    3.53
    %
    
    
    15,776
    
    
    
    4.16
    %
    
    
    21,167
    
    
    
    3.93
    %Mortgage backed securities
    
    
    0
    
    
    
    0.00
    %
    
    
    8,862
    
    
    
    3.84
    %
    
    
    5,359
    
    
    
    3.94
    %
    
    
    25,799
    
    
    
    4.64
    %
    
    
    40,020
    
    
    
    4.32
    %Corporate and other bonds
    
    
    0
    
    
    
    0.00
    %
    
    
    2,000
    
    
    
    4.48
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    2,000
    
    
    
    4.48
    %Bankers Acceptances
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %
    
    
    0
    
    
    
    0.00
    %Total
    
    $
    1,420
    
    
    
    3.54
    %
    
    $
    41,703
    
    
    
    4.29
    %
    
    $
    12,449
    
    
    
    3.82
    %
    
    $
    41,575
    
    
    
    4.46
    %
    
    $
    97,147
    
    
    
    4.29
    %
 40




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##### Table of Contents



Deposit Structure
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(Dollars in thousands)
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldNOW accounts
    
    $
    79,885
    
    
    
    1.22
    %
    
    $
    84,070
    
    
    
    0.67
    %
    
    $
    75,154
    
    
    
    0.30
    %Savings
    
    
    24,633
    
    
    
    1.17
    %
    
    
    26,542
    
    
    
    0.69
    %
    
    
    23,384
    
    
    
    0.44
    %Money market accounts
    
    
    28,181
    
    
    
    1.90
    %
    
    
    28,166
    
    
    
    1.32
    %
    
    
    26,730
    
    
    
    0.76
    %Certificates of deposit
    
    
    190,568
    
    
    
    4.45
    %
    
    
    149,204
    
    
    
    2.96
    %
    
    
    138,434
    
    
    
    2.08
    %Other borrowings
    
    
    98,722
    
    
    
    5.37
    %
    
    
    51,934
    
    
    
    3.04
    %
    
    
    35,880
    
    
    
    1.95
    %Interest bearing deposits
    
    
    421,989
    
    
    
    3.69
    %
    
    
    339,916
    
    
    
    2.24
    %
    
    
    299,582
    
    
    
    1.37
    %Noninterest bearing deposits
    
    
    79,245
    
    
    
    
    
    
    
    80,219
    
    
    
    
    
    
    
    73,163Total
    
    $
    501,234
    
    
    
    
    
    
    $
    420,135
    
    
    
    
    
    
    $
    372,745
  Deposit Maturity Schedule
 (Dollars in thousands)
    
    2006Three months or less
    
    $
    40,906Three through six months
    
    
    47,646Six through twelve months
    
    
    27,646Over twelve months
    
    
    30,977Total
    
    $
    147,175
 
 Capital Management and Adequacy
    41




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##### Table of Contents



Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalDecember 31, 2006
    
    Capital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    54,853,400
    
    
    
    9.38
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    54,853,400
    
    
    
    11.52
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    60,154,942
    
    
    
    12.64
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of
CommerceLeverage
    
    $
    54,389,449
    
    
    
    9.54
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    54,389,449
    
    
    
    11.42
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    59,690,992
    
    
    
    12.54
    %
    
    
    10.00
    %
    
    
    8.0
    %
  
 Lending Transactions with Related Parties
    December 31,2006
    
    
    2005Balance at beginning of year
    
    $
    1,854,751
    
    
    $
    3,622,750New loan additions
    
    
    1,507,115
    
    
    
    11,318Other additions
    
    
    0
    
    
    
    0Principal repayments
    
    
    (512,333
    )
    
    
    (1,779,317
    )Balance at end of year
    
    $
    2,849,533
    
    
    $
    1,854,751
 42




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##### Table of Contents



Impact of Inflation
  
 Commitments
 Off-Balance Sheet Financial Instruments
  December 31,2006
    
    
    2005Off-balance sheet commitments:Commitments to extend credit
    
    $
    158,296,132
    
    
    $
    159,485,594Standby letters of credit
    
    
    13,511,196
    
    
    
    9,771,080Guaranteed commitments outstanding
    
    
    1,248,000
    
    
    
    0$
    173,055,328
    
    
    $
    169,256,674
    Commitments and Contingent Liabilities
   Less than
    
    
    
    
    
    
    
    
    
    
    More than 5
    
    
    IndeterminateContractual Obligations
    
    Total
    
    
    One Year
    
    
    1  3 Years
    
    
    3  5 Years
    
    
    years
    
    
    Maturity (1)Long Term Debt (2)
    
    $
    15,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15,465
    
    
    
    FHLB Borrowings
    
    $
    40,000
    
    
    $
    15,000
    
    
    $
    15,000
    
    
    
    10,000
    
    
    
    
    
    
    
    Operating lease obligations
    
    $
    2,256
    
    
    $
    0
    
    
    $
    475
    
    
    $
    500
    
    
    $
    1,281
    
    
    
    Repurchase Agreements
    
    $
    37,117
    
    
    $
    37,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deposits
    
    $
    439,407
    
    
    $
    178,738
    
    
    $
    33,400
    
    
    $
    304
    
    
    
    0
    
    
    
    226,965Total
    
    $
    534,245
    
    
    $
    230,855
    
    
    $
    48,875
    
    
    $
    10,804
    
    
    $
    16,746
    
    
    $
    226,965
 
 (1)
    
    Represents interest-bearing and non-interest bearing checking, money market and savings
accounts.(2)
    
    Represents Junior Subordinated Debentures (Trust I and Trust II) 43




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##### Table of Contents



ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      44




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##### Table of Contents



45




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##### Table of Contents



At December 31, 2006Within 3
    
    
    3 Months to
    
    
    One Year to(Dollars in thousands)
    
    Months
    
    
    One Year
    
    
    Five Years
    
    
    Over Five Years
    
    
    TotalInterest-Earning AssetsHeld-to-maturity securities
    
    $
    105
    
    
    $
    
    
    
    $
    3,703
    
    
    $
    7,002
    
    
    $
    10,810Available-for-sale securities
    
    
    1,391
    
    
    
    1,407
    
    
    
    39,539
    
    
    
    53,264
    
    
    
    95,601Federal funds sold
    
    
    24,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,605Loans, net
    
    
    280,536
    
    
    
    37,148
    
    
    
    75,238
    
    
    
    16,067
    
    
    
    408,989Total Interest-earning Assets
    
    $
    306,637
    
    
    $
    38,555
    
    
    $
    118,480
    
    
    $
    76,333
    
    
    $
    540,005Interest-Bearing LiabilitiesDemand  Interest bearing
    
    $
    47,913
    
    
    
    8,201
    
    
    $
    41,604
    
    
    $
    21,719
    
    
    $
    119,437Savings Accounts
    
    
    8,531
    
    
    
    
    
    
    
    8,531
    
    
    
    5,687
    
    
    
    22,749Certificates of deposit
    
    
    124,453
    
    
    
    56,698
    
    
    
    31,291
    
    
    
    
    
    
    
    212,442Repurchase Agreements
    
    
    37,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,117Other borrowings
    
    
    35,938
    
    
    
    2,812
    
    
    
    1,250
    
    
    
    
    
    
    
    40,000Total Interest-bearing Liabilities
    
    $
    253,952
    
    
    $
    67,711
    
    
    $
    82,676
    
    
    $
    27,406
    
    
    $
    431,745GAP in dollars
    
    $
    52,685
    
    
    
    ($29,156
    )
    
    $
    35,804
    
    
    $
    49,927
    
    
    $
    108,260Cumulative GAP in dollars
    
    
    
    
    
    $
    23,529
    
    
    $
    59,333
    
    
    $
    108,260As a percentage of earning assets:GAP Ratio
    
    
    1.21
    
    
    
    0.57
    
    
    
    1.43
    
    
    
    0.97
    
    
    
    1.25Cumulative GAP Ratio
    
    
    1.21
    
    
    
    (0.76
    )
    
    
    0.30
    
    
    
    0.64Gap as % of Earning Assets
    
    
    9.76
    %
    
    
    -5.40
    %
    
    
    6.63
    %
    
    
    9.06
    %
    
    
    20.05
    %Cumulative Gap as % of Earning
Assets
    
    
    9.76
    %
    
    
    4.36
    %
    
    
    10.99
    %
    
    
    20.05
    %
    
    
    20.05
    %
  46




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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
    
    
    48Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    49Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004
    
    
    50Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2005 and 2004
    
    
    51Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    53Notes to Consolidated Financial Statements for the years ended December 31, 2006, 2005 and 2004
    
    
    55
 47




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 
 48




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 2006
    
    
    2005ASSETSCash and due from banks
    
    $
    14,661,386
    
    
    $
    17,435,887Federal funds sold and securities purchased under agreements to resell
    
    
    24,605,000
    
    
    
    9,120,000Cash and cash equivalents
    
    
    39,266,386
    
    
    
    26,555,887Securities available-for-sale (including pledged collateral of
$71,686,000 at December 31, 2006 and
$50,102,000 at December 31, 2005)
    
    
    95,601,107
    
    
    
    94,014,027Securities held-to-maturity, at cost
(estimated fair value of $10,792,938 at December 31 2006
and $6,881,172 at December 31 2005)
    
    
    10,810,113
    
    
    
    6,932,652Loans, net of the allowance for loan and lease losses of $4,904,266
at December 31, 2006 and $4,316,379 at December 31, 2005
    
    
    408,989,228
    
    
    
    363,305,161Bank premises and equipment, net
    
    
    8,595,044
    
    
    
    5,630,684Other assets
    
    
    20,180,149
    
    
    
    15,205,234TOTAL ASSETS
    
    $
    583,442,027
    
    
    $
    511,643,645LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Demand  noninterest bearing
    
    $
    84,778,916
    
    
    $
    86,219,092Demand  interest bearing
    
    
    119,437,370
    
    
    
    109,100,520Savings accounts
    
    
    22,748,885
    
    
    
    27,539,918Certificates of deposit
    
    
    212,442,258
    
    
    
    149,256,239Total Deposits
    
    
    439,407,429
    
    
    
    372,115,769Securities sold under agreements to repurchase
    
    
    37,116,610
    
    
    
    22,885,658Federal Home Loan Bank borrowings
    
    
    40,000,000
    
    
    
    55,000,000Other liabilities
    
    
    7,536,738
    
    
    
    7,194,315Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    15,465,000
    
    
    
    15,310,000Total liabilities
    
    
    539,525,777
    
    
    
    472,505,742Commitments and contingencies (Note 17)Stockholders equity:Preferred stock, no par value; 2,000,000 shares authorized;
no shares issued and outstanding in 2006 and 2005
    
    
    
    
    
    
    Common stock, no par value; 50,000,000 shares
authorized; 8,847,042 shares issued and outstanding in 2006
and 8,657,896 shares issued and outstanding in 2005
    
    
    11,517,368
    
    
    
    11,009,346Retained earnings
    
    
    33,336,032
    
    
    
    29,418,643Accumulated other comprehensive (loss) income, net of tax
    
    
    (937,150
    )
    
    
    (1,290,086
    )Total stockholders equity
    
    
    43,916,250
    
    
    
    39,137,903TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    583,442,027
    
    
    $
    511,643,645
 See accompanying notes to consolidated financial statements.
 49




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 2006
    
    
    2005
    
    
    2004Interest income:Interest and fees on loans
    
    $
    32,394,766
    
    
    $
    24,069,980
    
    
    $
    18,444,703Interest on tax-exempt securities
    
    
    786,972
    
    
    
    332,385
    
    
    
    225,976Interest on U.S. government securities
    
    
    3,421,191
    
    
    
    2,910,695
    
    
    
    2,175,274Interest on federal funds sold and securities purchased
under agreement to resell
    
    
    871,879
    
    
    
    491,019
    
    
    
    143,449Interest on other securities
    
    
    135,651
    
    
    
    59,909
    
    
    
    6,788Total interest income
    
    
    37,610,459
    
    
    
    27,863,988
    
    
    
    20,996,190Interest expense:Interest on demand deposits
    
    
    1,504,180
    
    
    
    938,532
    
    
    
    429,699Interest on savings deposits
    
    
    288,883
    
    
    
    182,994
    
    
    
    103,670Interest on certificates of deposit
    
    
    8,485,799
    
    
    
    4,331,468
    
    
    
    2,876,236Interest on securities sold under repurchase agreements
    
    
    1,138,242
    
    
    
    430,754
    
    
    
    3,161Interest on FHLB borrowings
    
    
    3,079,432
    
    
    
    1,161,762
    
    
    
    446,271Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trusts
    
    
    1,078,884
    
    
    
    580,935
    
    
    
    250,495Total interest expense
    
    
    15,575,420
    
    
    
    7,626,445
    
    
    
    4,109,532Net interest income
    
    
    22,035,039
    
    
    
    20,237,543
    
    
    
    16,886,658Provision for loan and lease losses
    
    
    225,900
    
    
    
    447,700
    
    
    
    554,000Net interest income after provision for loan and lease losses
    
    
    21,809,139
    
    
    
    19,789,843
    
    
    
    16,332,658Noninterest income:Service charges on deposit accounts
    
    
    345,737
    
    
    
    393,661
    
    
    
    475,971Payroll and benefit processing fees
    
    
    385,867
    
    
    
    356,957
    
    
    
    343,086Earnings on
cash surrender value  Bank owned life insurance
    
    
    328,743
    
    
    
    209,322
    
    
    
    258,539Net (loss) gain on sale of securities available-for-sale
    
    
    (170,524
    )
    
    
    (1,537
    )
    
    
    0Net gain on sale of loans
    
    
    89,851
    
    
    
    145,594
    
    
    
    94,878Merchant credit card service income, net
    
    
    380,066
    
    
    
    345,721
    
    
    
    433,822Mortgage brokerage fee income
    
    
    71,350
    
    
    
    249,049
    
    
    
    186,188Other income
    
    
    497,141
    
    
    
    424,973
    
    
    
    403,437Total noninterest income
    
    
    1,928,231
    
    
    
    2,123,740
    
    
    
    2,195,921Noninterest expense:Salaries and related benefits
    
    
    8,020,136
    
    
    
    6,883,754
    
    
    
    5,938,672Occupancy and equipment expense
    
    
    1,845,664
    
    
    
    1,572,458
    
    
    
    1,534,490FDIC insurance premium
    
    
    47,670
    
    
    
    48,659
    
    
    
    47,843Data processing fees
    
    
    216,313
    
    
    
    303,316
    
    
    
    253,895Professional service fees
    
    
    683,602
    
    
    
    648,871
    
    
    
    802,742Payroll processing fees
    
    
    103,518
    
    
    
    110,376
    
    
    
    0Deferred compensation expense
    
    
    368,809
    
    
    
    321,321
    
    
    
    280,771Stationery and supplies
    
    
    230,843
    
    
    
    241,144
    
    
    
    208,102Postage
    
    
    112,740
    
    
    
    104,439
    
    
    
    96,780Directors expenses
    
    
    243,428
    
    
    
    219,687
    
    
    
    266,911Other expenses
    
    
    1,460,008
    
    
    
    1,294,684
    
    
    
    1,189,790Total noninterest expense
    
    
    13,332,731
    
    
    
    11,748,709
    
    
    
    10,619,996Income before provision for income taxes
    
    
    10,404,639
    
    
    
    10,164,874
    
    
    
    7,908,583Provision for income taxes
    
    
    3,836,930
    
    
    
    3,886,504
    
    
    
    2,930,908Net Income
    
    $
    6,567,709
    
    
    $
    6,278,370
    
    
    $
    4,977,675Basic earnings per share
    
    $
    0.75
    
    
    $
    0.73
    
    
    $
    0.60Weighted average shares  basic
    
    
    8,759,568
    
    
    
    8,600,270
    
    
    
    8,282,588Diluted earnings per share
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.57Weighted average shares  diluted
    
    
    8,931,584
    
    
    
    8,844,626
    
    
    
    8,702,611
 See accompanying notes to consolidated financial statements.
 50




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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, 2004
    
    
    
    
    
    
    8,130,174
    
    
    $
    9,358,623
    
    
    $
    21,417,269
    
    
    
    ($264,699
    )
    
    $
    30,511,193Comprehensive Income:Net Income
    
    
    4,977,675
    
    
    
    
    
    
    
    
    
    
    
    4,977,675
    
    
    
    
    
    
    
    4,977,675Other Comprehensive Income, 

net of taxUnrealized losses on securities,
net of reclassification adjustment
    
    
    (68,048
    )Less: reclassification adjustment
for gains included in net
income, net of tax
    
    
    ( 0
    )Other Comprehensive Income
    
    
    (68,048
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68,048
    )
    
    
    (68,048
    )Total Comprehensive Income
    
    $
    4,909,627Cash dividends ($0.23 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 1,955,584
    )
    
    
    
    
    
    
    (1,955,584
    )Compensation expense associated
with stock options
    
    
    
    
    
    
    
    
    
    
    3,856
    
    
    
    
    
    
    
    
    
    
    
    3,856Stock options exercised
    
    
    
    
    
    
    372,657
    
    
    
    1,174,083
    
    
    
    
    
    
    
    
    
    
    
    1,174,083Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640,162
    
    
    
    
    
    
    
    640,162Balance at December 31, 2004
    
    
    
    
    
    
    8,502,831
    
    
    $
    10,536,562
    
    
    $
    25,079,522
    
    
    
    ($332,747
    )
    
    $
    35,283,337Comprehensive Income:Net Income
    
    
    6,278,370
    
    
    
    
    
    
    
    
    
    
    
    6,278,370
    
    
    
    
    
    
    
    6,278,370Other Comprehensive Income:Other Comprehensive Income,
net of taxUnrealized losses on securities, net
of reclassification adjustment
    
    
    (956,436
    )Less: reclassification adjustment
for gains included in net
income, net of tax
    
    
    ( 903
    )Other Comprehensive Income
    
    
    (957,339
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (957,339
    )
    
    
    (957,339
    )Total Comprehensive Income
    
    $
    5,321,031Cash dividends ($0.26 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,243,347
    )
    
    
    
    
    
    
    (2,243,347
    )Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    5,784
    
    
    
    
    
    
    
    
    
    
    
    5,784Stock options exercised
    
    
    
    
    
    
    155,065
    
    
    
    467,000
    
    
    
    
    
    
    
    
    
    
    
    467,000Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304,098
    
    
    
    
    
    
    
    304,098Balance at December 31, 2005
    
    
    
    
    
    
    8,657,896
    
    
    $
    11,009,346
    
    
    $
    29,418,643
    
    
    
    ($1,290,086
    )
    
    $
    39,137,903
  See accompanying notes to the consolidated financial statements.
 51




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedOtherComprehensiveComprehensive
    
    
    Common
    
    
    Stock
    
    
    Retained
    
    
    Income(Loss),Income
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    net of tax
    
    
    TotalBalance at December 31, 2005
    
    
    
    
    
    
    8,657,896
    
    
    $
    11,009,346
    
    
    $
    29,418,643
    
    
    ($
    1,290,086
    )
    
    $
    39,137,903Comprehensive Income:Net Income
    
    
    6,567,709
    
    
    
    
    
    
    
    
    
    
    
    6,567,709
    
    
    
    
    
    
    
    6,567,709Other Comprehensive Income:Components of Other
 Comprehensive
Income, net of taxUnrealized gains arising during the 
period on derivative transactions, net
    
    
    27,280Unrealized losses on securities, net
of reclassification adjustment
    
    
    496,180Less: reclassification adjustment
for losses included in net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,936income, net of tax
    
    
    ( 170,524
    )Other Comprehensive Income
    
    
    352,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,936Total Comprehensive Income
    
    $
    6,920,645Cash dividends ($0.29 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 2,650,320
    )
    
    
    
    
    
    
    (2,650,320
    )Compensation expense associated with stock options
    
    
    
    
    
    
    
    
    
    
    64,493
    
    
    
    
    
    
    
    
    
    
    
    64,493Share Repurchase
    
    
    
    
    
    
    (92,000
    )
    
    
    (1,089,868
    )
    
    
    
    
    
    
    
    
    
    
    (1,089,868
    )Stock options exercised
    
    
    
    
    
    
    281,146
    
    
    
    879,279
    
    
    
    
    
    
    
    
    
    
    
    879,279Tax benefit on exercise of options
    
    
    
    
    
    
    
    
    
    
    654,118
    
    
    
    
    
    
    
    
    
    
    
    654,118Balance at December 31, 2006
    
    
    
    
    
    
    8,847,042
    
    
    $
    11,517,368
    
    
    $
    33,336,032
    
    
    ($
    937,150
    )
    
    $
    43,916,250
 52




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    6,567,709
    
    
    $
    6,278,370
    
    
    $
    4,977,675Adjustments to reconcile net income to net cash
provided by operating activities:Provision for loan and lease losses
    
    
    225,900
    
    
    
    447,700
    
    
    
    554,000Provision for depreciation and amortization
    
    
    732,906
    
    
    
    564,779
    
    
    
    610,997Compensation expense associated with stock options
    
    
    64,494
    
    
    
    5,784
    
    
    
    3,856Tax benefits from the exercise of stock options
    
    
    (654,118
    )
    
    
    (304,098
    )
    
    
    (640,162
    )Loss on sale of securities available-for-sale
    
    
    170,524
    
    
    
    1,537
    
    
    
    0Amortization of securities premiums and accretion
of discounts, net
    
    
    15,402
    
    
    
    96,188
    
    
    
    272,479Gain on sale of loans
    
    
    (89,851
    )
    
    
    (145,594
    )
    
    
    (94,878
    )Gain on sale of fixed assets
    
    
    8,158
    
    
    
    (50
    )
    
    
    (50
    )Proceeds from sale of loans
    
    
    2,089,851
    
    
    
    3,645,594
    
    
    
    1,664,878Loans originated for sale
    
    
    (2,000,000
    )
    
    
    (3,500,000
    )
    
    
    (1,570,000
    )Deferred income taxes
    
    
    (408,197
    )
    
    
    (398,727
    )
    
    
    (314,555
    )Increase in cash surrender value of bank owned life policies
    
    
    (3,295,772
    )
    
    
    (166,296
    )
    
    
    (217,846
    )Effect of changes in:Other assets
    
    
    (616,829
    )
    
    
    (918,005
    )
    
    
    2,130,018Deferred loan fees
    
    
    (122,449
    )
    
    
    (232,565
    )
    
    
    158,604Other liabilities
    
    
    342,423
    
    
    
    (1,573,694
    )
    
    
    4,699,608Net cash provided by operating activities
    
    
    3,030,151
    
    
    
    3,800,923
    
    
    
    12,234,624Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    10,049,495
    
    
    
    23,560,650
    
    
    
    32,797,174Proceeds from sale of available-for-sale securities
    
    
    10,258,020
    
    
    
    141,270
    
    
    
    0Purchases of available-for-sale securities
    
    
    (21,736,709
    )
    
    
    (37,224,733
    )
    
    
    (45,599,957
    )Purchases of held-to-maturity securities
    
    
    (4,418,146
    )
    
    
    (6,540,000
    )
    
    
    0Maturities of held-to-maturity securities
    
    
    549,809
    
    
    
    50,569
    
    
    
    948,022Loan originations, net of principal repayments
    
    
    (45,787,518
    )
    
    
    (44,719,709
    )
    
    
    (41,348,638
    )Purchase of Bank premises and equipment, net
    
    
    (3,705,424
    )
    
    
    (711,217
    )
    
    
    (282,354
    )Net cash used in investing activities
    
    
    (54,790,473
    )
    
    
    (65,443,170
    )
    
    
    (53,485,753
    )Cash flows from financing activities:Net increase in demand deposits and savings accounts
    
    
    4,105,641
    
    
    
    8,481,086
    
    
    
    26,909,207Net increase (decrease) in certificates of deposit
    
    
    63,186,019
    
    
    
    10,756,400
    
    
    
    (1,569,567
    )Increase (decrease) in securities sold under
agreements to repurchase
    
    
    14,230,952
    
    
    
    20,881,946
    
    
    
    (1,745,085
    )Proceeds from Federal Home Loan Bank advances
    
    
    70,000,000
    
    
    
    88,000,000
    
    
    
    95,000,000Repayments of Federal Home Loan Bank advances
    
    
    (85,000,000
    )
    
    
    (68,000,000
    )
    
    
    (90,000,000
    )Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    155,000
    
    
    
    10,310,000
    
    
    
    0Cash dividends paid on common stock
    
    
    (2,650,320
    )
    
    
    (2,243,347
    )
    
    
    (1,955,584
    )Proceeds from stock options exercised
    
    
    879,279
    
    
    
    467,000
    
    
    
    1,174,083Common Stock Repurchase
    
    
    (1,089,868
    )
    
    
    0
    
    
    
    0Tax benefits from the exercise of stock options
    
    
    654,118
    
    
    
    304,098
    
    
    
    640,162Net cash provided by financing activities
    
    
    64,470,821
    
    
    
    68,957,183
    
    
    
    28,453,216Net increase (decrease) in cash and cash equivalents
    
    
    12,710,499
    
    
    
    7,314,936
    
    
    
    (12,797,913
    )Cash and cash equivalents at beginning of year
    
    
    26,555,887
    
    
    
    19,240,951
    
    
    
    32,038,864Cash and cash equivalents at end of year
    
    $
    39,266,386
    
    
    $
    26,555,887
    
    
    $
    19,240,951
 53




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 2006
    
    
    2005
    
    
    2004Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    3,507,000
    
    
    $
    3,755,000
    
    
    $
    1,959,700Interest
    
    $
    15,164,624
    
    
    $
    7,467,150
    
    
    $
    4,083,048
 See accompanying notes to consolidated financial statements.
 54




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    THE BUSINESS OF THE COMPANYBank of Commerce Holdings (the Holding Company), is a financial
holding company (FHC) with its principal offices in Redding, California. A financial
holding company may engage in commercial banking, insurance, securities business and offer
other financial products to customers. The Company received notification from the Federal
Reserve Board approving the election to change to a financial holding company on April 22,
2001. The election to change to a financial holding company has had no impact to date on the
operations of the Company. As a financial holding company, Bank of Commerce Holdings is
subject to the Financial Holding Company Act and to supervision by the Board of Governors of
the Federal Reserve System (the FRB). The Holding Companys wholly-owned subsidiaries are
Redding Bank of Commerce (the Bank) and Bank of Commerce Mortgage, (collectively the
Company). The Company has an unconsolidated subsidiary in Bank of Commerce Holdings Trust
I and Bank of Commerce Holdings Trust II. Bank of Commerce Mortgage offers mortgage
brokerage services through an affiliate agreement with BWC Mortgage Services. The Bank is
principally supervised and regulated by the California Department of Financial Institutions
(DFI) and the Federal Deposit Insurance Corporation (FDIC). Substantially all of the
Companys activities are carried out through the Bank. The Bank was incorporated as a
California banking corporation on November 25, 1981. The Bank operates five full service
branches in Redding, Roseville, and Yuba City, California.The Bank conducts a general commercial banking business in the counties of El Dorado,
Placer, Shasta, Sacramento, Tehama, Sutter and Yuba, California. The Company considers
California to be the major market area of the Bank. The services offered by the Bank include
those traditionally offered by commercial banks of similar size and character in California,
including checking, interest-bearing (NOW) and savings accounts, money market deposit
accounts; commercial, real estate, and construction loans; travelers checks, safe deposit
boxes, collection services and electronic banking activities. The primary focus of the Bank
is to provide services to the business and professional community of its major market area,
including Small Business Administration loans, payroll and accounting packages, benefit
administration and billing programs. The Bank does not offer trust services or international
banking services and does not plan to do so in the near future. Most of the customers of the
Bank are small to medium sized businesses and individuals with medium to high net worth.2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe accounting and reporting policies of the Company conform with accounting principles
generally accepted in the United States of America and general practices within the banking
industry. In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Certain amounts for prior periods
have been reclassified to conform to the current financial statement presentation. 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.
 55




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash
equivalents include amounts due from correspondent banks and the Federal Reserve Bank,
federal funds sold and securities purchased under agreements to resell. Generally, federal
funds sold are for a one-day period and securities purchased under agreements to resell are
for no more than a 90-day period.Securities purchased under agreements to resell  The Company enters into purchases of
securities under agreements to resell substantially identical securities. Securities
purchased under agreements to resell consist primarily of U.S. Treasury 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 mature within 90 days and no material amount of agreements to resell securities
purchased is outstanding with any individual dealer.Securities At the time of purchase, the Company designates the security as
held-to-maturity or available-for-sale, based on its investment objectives, operational
needs and intent to hold. The Company does not engage in trading activity. Securities
designated as held-to-maturity are carried at cost adjusted for the accretion of discounts
and amortization of premiums. The Company has the ability and intent to hold these
securities to maturity. Securities designated as available-for-sale may be sold to implement
the Companys asset/liability management strategies and in response to changes in interest
rates, prepayment rates and similar factors. Securities designated as available-for-sale are
recorded at fair value and unrealized gains or losses, net of income taxes, are reported as
part of accumulated other comprehensive income(loss), a separate component of stockholders
equity. Gains or losses on sale of securities are based on the specific identification
method. The market value and underlying rating of the security is monitored for quality.
Securities may be adjusted to reflect changes in valuation as a result of
other-than-temporary declines in value. Investments with fair values that are less than
amortized cost are considered impaired. Impairment may result from either a decline in the
financial condition of the issuing entity or, in the case of fixed rate investments, from
changes in interest rates. At each financial statement date, management assesses each
investment to determine if impaired investments are temporarily impaired or if the
impairment is other than temporary based upon the positive and negative evidence available.
Evidence evaluated includes, but is not limited to, industry analyst reports, credit market
conditions, and interest rate trends. If negative evidence outweighs positive evidence that
the carrying amount is recoverable within a reasonable period of time, the impairment is
deemed other-than-temporary and the security is written down in the period in which such
determination is made.Loans Loans are stated at the principal amounts outstanding less deferred loan fees and
costs and the allowance for loan losses. Interest on commercial, installment and real
estate loans is accrued daily based on the principal outstanding. Loan origination and
commitment fees and certain origination costs are deferred and the net amount is amortized
over the contractual life of the loans as an adjustment of their yield. A loan is impaired
when, based on current information and events, management believes it is probable that the
Company will not be able to collect all amounts due according to the contractual terms of
the loan agreement. Impairment is measured based upon the present value of future cash flows
discounted at the loans effective rate, the loans observable market price, or the fair
value of collateral if the loan is collateral dependent. Interest on impaired loans is
recognized on a cash basis, and only when the principal is not considered impaired.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Companys practice is to place an asset on nonaccrual status when one of the
following events occurs: (i) Any installment of principal or interest is 90 days or more
past due (unless in managements opinion the loan is well-secured and in the process of
collection), (ii) management determines the ultimate collection of principal or interest to
be unlikely or (iii) the terms of the loan have been renegotiated due to a serious weakening
of the borrowers financial condition. Nonperforming loans may be on nonaccrual, are 90 days
past due and still accruing, or have been restructured. Accruals are resumed on loans only
when they are brought fully current with respect to interest and principal and when the loan
is estimated to be fully collectible. Restructured loans are those loans on which
concessions in terms have been granted because of the borrowers financial or legal
difficulties. Interest is generally accrued on such loans in accordance with the new terms.Allowance for Loan and Lease Losses The allowance for loan and lease losses are
established through a provision charged to expense. Loans are charged off against the
allowance for loan losses when management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management believes will be adequate to absorb
losses inherent in existing loans and overdrafts based on evaluations of collectibility and
prior loss experience. The evaluations take into consideration such factors as changes in
the nature and volume of the portfolio, overall portfolio quality, loan concentrations,
specific problem loans, and current economic conditions that may affect the borrowers
ability to pay. Material estimates relating to the determination of the allowance for loan
losses are particularly susceptible to significant change in the near term. While management
uses available information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In addition, the FDIC and DFI, as
an integral part of their examination process, periodically review the Banks allowance for
loan losses. The FDIC may require the Bank to recognize additions to the allowance based on
their judgment about information available to them at the time of their examination.Bank Premises and Equipment Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets. Expenditures for major renewals and
improvements are capitalized and those for maintenance and repairs are charged to expense as
incurred.Securities Sold under Agreements to Repurchase At December 31, 2006 and 2005, 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, Agency and Municipal securities. These securities
are held as collateral for non-FDIC insured deposits.Federal Home Loan Bank Borrowings As part of its asset/liability management strategy the
Company has obtained advances from the Federal Home Loan Bank. The Company has pledged
collateral of commercial real estate loans and specific securities to support the
borrowings.Goodwill and Other Intangibles Net assets of companies acquired in purchase transactions
are recorded at fair value at the date of acquisition, as such, the historical cost basis of
individual assets and liabilities are adjusted to reflect their fair value. Identified
intangibles are amortized on a straight-line basis over the period benefited. In June 2001,
the Company purchased a bank branch office. The Company recorded core deposit intangibles,
which are being amortized over seven years by the straight-line method. Amortization
expense for the year ended December 31, 2006, 2005 and 2004 was $106,800, $106,800 and
$108,800, respectively. Estimated amortization expense for 2007, 2008, and 2009 is
approximately $107,000 per year. Deposit retention, growth and activities are evaluated for
impairment on an annual basis.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 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.
 2006
    
    
    2005
    
    
    2004Basic EPS CalculationNumerator (net income)
    
    $
    6,567,709
    
    
    $
    6,278,370
    
    
    $
    4,977,675Denominator (weighted average common shares
outstanding)
    
    
    8,759,568
    
    
    
    8,600,270
    
    
    
    8,282,588Basic EPS
    
    $
    0.75
    
    
    $
    0.73
    
    
    $
    0.60Diluted EPS CalculationNumerator (net income)
    
    $
    6,567,709
    
    
    $
    6,278,370
    
    
    $
    4,977,675Denominator:Weighted average common shares outstanding
    
    
    8,759,568
    
    
    
    8,600,270
    
    
    
    8,282,588Diluted effect of stock options
    
    
    172,016
    
    
    
    244,356
    
    
    
    420,023Adjusted weighted average common shares
outstanding
    
    
    8,931,584
    
    
    
    8,844,626
    
    
    
    8,702,611Diluted EPS
    
    $
    0.74
    
    
    $
    0.71
    
    
    $
    0.57
 Other Real Estate Owned Real estate acquired by foreclosure, is carried at the lower
of the recorded investment in the property or its fair value less estimated selling costs.
Prior to foreclosure, the value of the underlying loan is written down to the fair value of
the real estate to be acquired, less costs to sell, by a charge to the allowance for loan
losses, if necessary. Fair value of other real estate is generally determined based on an
appraisal of the property. Any subsequent write-downs are charged against noninterest
expenses. Operating expenses of such properties, net of related income, and gains and
losses on their disposition are included in other expenses.Gain recognition on the disposition of real estate is dependent upon the transaction meeting
certain criteria relating to the nature of the property sold and the terms of the sale. This
includes the buyers initial and continuing investment, the degree of continuing involvement
by the Company with the property after the sale, and other matters. Under certain
circumstances, revenue recognition may be deferred until these criteria are met.Income Taxes The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using currently enacted tax rates applied
to such taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Stock Option Plan The Company adopted Statement of Financial Accounting
Standards No. 123R (FAS 123R), Share-Based Payment,on January 1, 2006. The scope of FAS
123R includes a wide range of stock-based compensation arrangements including stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and employee
stock purchase plans. FAS 123R requires the Company to measure the cost of employee services
received in exchange for an award of equity instruments. The cost is determined based on the
fair value of the award on the grant date. That cost must be recognized in the income
statement over the service period of the award. Under the modified prospective transition
method, awards that are granted, modified or settled beginning at the date of adoption will
be measured and accounted for in accordance with FAS 123R. In addition, expense must be
recognized in the income statement for unvested awards that were granted prior to the date
of adoption. Prior to the adoption of FAS 123R and as permitted by FAS 123 and FAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure,the Company elected to
follow APB 25 and related interpretations in accounting for our employee stock options. The
Company adopted FAS 123R using the modified prospective method. Under this transition
method, stock option expense for 2006 includes the cost for all share-based payments granted
prior to, but not yet vested, as of January 1, 2006, as well as any share-based payments
granted subsequent to December 31, 2005. This compensation expense is measured on the date
of grant using an option-pricing model. The option-pricing model is based on certain
assumptions, and changes to those assumptions may result in different fair value estimates.During 2006, stock option compensation expense charged against income was $64,494 ($61,336
net of tax), or less than one cent per diluted share. At December 31, 2006, there was
$178,395 of total unrecognized compensation costs related to non-vested share based payments
which is expected to be recognized over a period of five years. Three new option grants
totaling 52,000 shares were granted during 2006.Prior to adopting FAS 123R, the Company accounted for its stock option plan under the
intrinsic value method in accordance with the provisions of Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. As required by the
Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for Stock-Based
Compensation,as amended, by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosurethe Company provides pro forma net income and pro forma earnings
per share disclosures for employee stock option grants. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS Statement No. 123, to stock-based employee compensation.In accordance with SFAS 123R, the Company provides disclosures as if it had adopted the fair
value-based method of measuring all outstanding employee stock options during 2005.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Net income before option expense less compensation expense associated with stock
options
 Year Ended December 312005
    
    
    2004Net income before option expense less
compensation expense associated with stock
options
    
    $
    6,284,154
    
    
    $
    4,981,531(5,784
    )
    
    
    (3,856
    )Net income as reported
    
    $
    6,278,370
    
    
    $
    4,977,675Deduct:Total stock-based employee compensation
expense determined under fair
value based method for all
awards, net of tax
    
    
    (306,870
    )
    
    
    (149,639
    )Pro forma net income
    
    $
    5,971,500
    
    
    $
    4,828,036Earnings per share:Basic  as reported
    
    $
    0.73
    
    
    $
    0.60Basic  pro forma
    
    $
    0.69
    
    
    $
    0.58Diluted  as reported
    
    $
    0.71
    
    
    $
    0.57Diluted  pro forma
    
    $
    0.68
    
    
    $
    0.55
 December 31, 2005
    
    
    December 31, 2004Risk-free interest rate
    
    
    3.92
    %
    
    
    3.62
    %Dividend Yield
    
    
    2.49
    %
    
    
    2.00
    %Volatility
    
    
    32.36
    %
    
    
    30.88
    %Expected lives (years)
    
    
    7
    
    
    
    7Weighted average grant-date fair
value per share of options
granted
    
    $
    3.34
    
    
    $
    3.29
 Description of stock-based compensation planOn February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the Plan)
which was approved by the Companys stockholders on April 21, 1998. The Plan provides for
awards in the form of options, which may constitute incentive stock options (Incentive
Options) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the
Code), or non-statutory stock options (NSOs) to key personnel of the Company, including
directors. The Plan provides that Incentive Options under the Plan may not be granted at
less than 100% of fair market value of the Companys common stock on the date of the grant.
The strike price of NSOs may not be granted at less than 85% of the fair market value of the
common stock on the date of the grant.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Companys stock option plans provide for awards of incentive and nonqualified stock
options. Incentive options must have an exercise price at or above fair market value of the
stock at the date of the grant and a term of no more than 10 years. Options generally become
exercisable over five years from the date of the grant. Nonqualified stock options must have
an exercise price of no less than 85% of the fair market value of the stock at the date of
the grant and for a term of no more than 10 years. Nonqualified stock options generally
become exercisable over five years from the date of the grant. A total of 1,782,000 shares
of the Companys common stock are reserved for grant under the Plan. At December 31, 2006,
74,165 shares were available for future grants under the Plan. At December 31, 2006, 300,631
shares were available to be exercised. The weighted average grant exercise price at December
31, 2006 was $6.93. The total intrinsic value (which is the amount by which the stock price
exceeded the exercise price on the date of exercise) of options exercised during the twelve
months ended December, 2006 was $2,036,775.Comprehensive Income Comprehensive income represents net earnings and any revenues,
expenses, gains and losses that, under accounting principles generally accepted in the
United States of America, are excluded from net earnings and recognized directly as a
component of stockholders equity. The Companys sources of other comprehensive income
(loss) include unrealized gains and losses on securities available-for-sale and unrealized
gains and losses on derivative activities. Reclassification adjustments result from gains
or losses on securities that were realized and included in net income of the current period
that also had been included in other comprehensive income (loss) as unrealized holding gains
or losses in the period in which they arose.Operating Segments Reportable operating segments are generally defined as components of an
enterprise for which discrete financial information is available, whose operating results
are regularly reviewed by the organizations management and whose revenue is 10 percent or
more of total revenue. Under this definition the Company does not have reportable operating
segments. In the years 2006, 2005 and 2004, the Company accounted for its operations as one
operating segment.Transfer of Financial Assets  Transfers of financial assets are accounted for as sales,
when control over the assets has been surrendered. Control over transferred assets is deemed
surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before
their maturity. The Company services, for others, loans and participation of loans that are
sold of $3,494,130, $3,522,609 and $4,550,992 as of December 31, 2006, 2005 and 2004,
respectively.Derivative Financial Instruments and Hedging Activities As part of the overall risk
management, the Company pursues various asset and liability management strategies, which may
include obtaining derivative financial instruments to mitigate the impact of interest
fluctuations on the Companys net interest margin. During the third quarter of 2006, the
Company entered into an interest rate swap agreement for the purpose of minimizing interest
rate fluctuations on its interest rate margin and equity. Under the interest rate swap
agreement, the company received a fixed rate and pays a variable rate based on the Prime
Rate (Prime). The swap qualifies as a cash flow hedge under SFAS no. 133, Accounting for
Derivative Instruments and Hedging Activities,as amended, and is designated as a hedge of
the variability of cash flows the Company receives from certain variable-rate loans indexed
to Prime.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 In accordance with SFAS No. 133, the swap agreement is measured at fair value and
reported as an asset or liability on the consolidated balance sheet. The portion of the
change in the fair value of the swap that is deemed effective in hedging the cash flows of
the designated assets is recorded in other comprehensive income and reclassified into
interest income when such cash flow occurs in the future. Any ineffectiveness resulting from
the hedge is recorded as a gain or loss in the consolidated statement of income as part of
noninterest income.The hedge has a notional value of $100 million, matures in June 2009 and has duration of
approximately 36 months. As of December 31, 2006, the loss amounts in accumulated other
comprehensive income associated with these cash flows totaled $46,363 (net of tax of
$27,280).Recent Accounting PronouncementsOn February 16, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Instruments(SFAS No. 155), which permits, but does not
require, fair value accounting for any hybrid financial instrument that contains an embedded
derivative that would otherwise require bifurcation in accordance with SFAS 133. The
statement also subjects beneficial interests issued by securitization vehicles to the
requirements of SFAS 133. The statement is effective as of January 1, 2007, with earlier
adoption permitted. Management does not expect the statement to have a material effect on
the Companys results of operations and financial condition.In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities(SFAS No. 156).SFAS No. 156 requires all
separately recognized servicing assets and liabilities to be initially measured at fair
value. In addition, entities are permitted to choose to either subsequently measure
servicing rights at fair value and report changes in fair value in earnings, or amortize
servicing rights in proportion to and over the estimated net servicing income or loss, and
assess the rights for impairment. Beginning with the fiscal year in which an entity adopts
SFAS No. 156, it may elect to subsequently measure a class of servicing assets and
liabilities at fair value. Post adoption, an entity may make this election as of the
beginning of any fiscal year. An entity that elects to subsequently measure a class of
servicing assets and liabilities at fair value should apply that election to all new and
existing recognized servicing assets and liabilities within that class. The effect of
re-measuring an existing class of servicing assets and liabilities at fair value is to be
reported as a cumulative-effect adjustment to retained earnings as of the beginning of the
period of adoption. SFAS No. 156 is effective as of the beginning of an entitys first
fiscal year that begins after September 15, 2006.Management does not expect the statement to have a material effect on the Companys results
of operations and financial condition.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 On July 13, 2006, the Financial Accounting Standards Board (FASB) issued Financial
Interpretation No. 48 Accounting for Income Tax Uncertainties (FIN 48). FIN 48 supplements
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109),
 On September 15, 2006, the FASB issued FAS 157, Fair Value Measurements ,
 On September 29, 2006, the FASB issued FAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans 
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3.
    
    RESTRICTIONS ON CASH AND DUE FROM BANKSThe Bank maintains compensating balances with its primary correspondent, which totaled
$2,000,000 at December 31, 2006, and $2,500,000 at December 31, 2005 and 2004.4.
    
    SECURITIESThe amortized cost and estimated fair value of securities available-for-sale are summarized as follows:
 December 31, 2006Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    33,959,800
    
    
    $
    29,993
    
    
    $
    (648,631
    )
    
    $
    33,341,162Obligations of state and political
subdivisions
    
    
    21,167,316
    
    
    
    84,206
    
    
    
    (183,681
    )
    
    
    21,067,841Mortgage-backed securities
    
    
    40,019,818
    
    
    
    185,697
    
    
    
    (990,967
    )
    
    
    39,214,548Corporate Bonds
    
    
    2,000,519
    
    
    
    0
    
    
    
    (22,963
    )
    
    
    1,977,556$
    97,147,453
    
    
    $
    299,896
    
    
    $
    (1,846,242
    )
    
    $
    95,601,107
 December 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury securities and
obligations of U.S. agencies
    
    $
    43,793,691
    
    
    $
    0
    
    
    $
    (894,167
    )
    
    $
    42,899,524Obligations of state and political
subdivisions
    
    
    6,347,437
    
    
    
    30,213
    
    
    
    (199,013
    )
    
    
    6,178,637Mortgage-backed securities
    
    
    42,018,403
    
    
    
    0
    
    
    
    (1,093,908
    )
    
    
    40,924,495Corporate Bonds
    
    
    4,047,030
    
    
    
    0
    
    
    
    (35,659
    )
    
    
    4,011,371$
    96,206,561
    
    
    $
    30,213
    
    
    $
    (2,222,747
    )
    
    $
    94,014,027
  December 31, 2006Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    1,763,305
    
    
    $
    14,424
    
    
    $
    0
    
    
    $
    1,777,729Obligations of state and political
Subdivisions
    
    
    9,046,808
    
    
    
    18,264
    
    
    
    (49,863
    )
    
    
    9,015,209$
    10,810,113
    
    
    $
    32,688
    
    
    $
    (49,863
    )
    
    $
    10,792,938
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2005Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueMortgage backed securities
    
    $
    323,773
    
    
    $
    20,555
    
    
    $
    0
    
    
    $
    344,328Obligations of state and political
Subdivisions
    
    
    6,608,879
    
    
    
    77
    
    
    
    (72,112
    )
    
    
    6,536,844$
    6,932,652
    
    
    $
    20,632
    
    
    $
    (72,112
    )
    
    $
    6,881,172
  Available-for-Sale
    
    
    Held-to-MaturityEstimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    1,420,294
    
    
    $
    1,406,748
    
    
    $
    105,237
    
    
    $
    105,107Due after one year through five years
    
    
    41,702,546
    
    
    
    40,930,308
    
    
    
    3,702,107
    
    
    
    3,666,470Due after five years through ten years
    
    
    12,449,473
    
    
    
    12,015,867
    
    
    
    3,156,892
    
    
    
    3,147,860Due after ten years
    
    
    41,575,140
    
    
    
    41,248,184
    
    
    
    3,845,877
    
    
    
    3,873,501$
    97,147,453
    
    
    $
    95,601,107
    
    
    $
    10,810,113
    
    
    $
    10,792,938
  Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Treasury
securities and
Obligations of U.
S. Agencies
    
    $
    0
    
    
    $
    0
    
    
    $
    31,312,932
    
    
    ($
    648,631
    )
    
    $
    31,312,932
    
    
    ($
    648,631
    )Obligations of
state and political
subdivisions
    
    $
    7,194,234
    
    
    ($
    71,674
    )
    
    $
    5,485,824
    
    
    ($
    112,007
    )
    
    $
    12,680,058
    
    
    ($
    183,681
    )H-T-M Obligations
of state and
political
subdivisions
    
    $
    1,484,426
    
    
    ($
    12,458
    )
    
    $
    4,979,442
    
    
    ($
    37,405
    )
    
    $
    6,463,868
    
    
    ($
    49,863
    )Mortgage-backed
securities
    
    $
    0
    
    
    $
    0
    
    
    $
    33,738,819
    
    
    ($
    990,967
    )
    
    $
    33,738,819
    
    
    ($
    990,967
    )Corporate Bonds
    
    $
    0
    
    
    $
    0
    
    
    $
    1,977,556
    
    
    ($
    22,963
    )
    
    $
    1,977,556
    
    
    ($
    22,963
    )Total temporarily
impaired securities
    
    $
    8,678,660
    
    
    ($
    84,132
    )
    
    $
    77,494,573
    
    
    ($
    1,811,973
    )
    
    $
    86,173,233
    
    
    ($
    1,896,105
    )
 65




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004Economic factors may affect market pricing over the stated maturity of the security.
The unrealized losses associated with securities are not considered to be
other-than-temporary because their unrealized losses are related to changes in interest
rates and do not affect the expected cash flows of the underlying collateral or issuer.
Security income is accrued when earned and included in interest income. The Company requires
a credit rating of A or higher on its initial acquisition of investments and maintains an
average rating of AA on the overall securities portfolio. A total of twenty US Treasury and
Agency securities, nineteen municipal securities and thirteen mortgage-backed securities
have been in an unrealized loss position for greater than 12 months. Management has
evaluated each security in an unrealized loss position to determine if the impairment is
other-than-temporary. Management has determined that no security is other than temporarily
impaired. The unrealized losses are due to interest rate changes and the Company has the
ability and intent to hold all securities with identified impairments to the earlier of the
forecasted recovery or the maturity of the underlying security.At December 31, 2006, the Company has pledged book values of $1,000,000 in securities for
treasury, tax and loan accounts, $18,569,000 for deposits of public funds, $37,117,000 for
collateralized repurchase agreements, and $15,000,000 for Federal Home Loan borrowings.Gross realized gains and gross realized losses, respectively, on available-for-sale
securities were $5,062 and $180,531 in 2006 and $0 and $1,537 in 2005. Gross unrealized
gains and gross unrealized losses, respectively, on available-for-sale securities were
$299,896 and $1,846,242 in 2006 and $30,213 and $2,222,747 in 2005. Gross realized gains and
gross realized losses, respectively, on held-to-maturity securities were $4,945 and $0.
There were no gains or losses recognized in securities held-to-maturity in 2005 and 2004.5.
    
    LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSESOutstanding loan balances consist of the following:
 December 31,2006
    
    
    2005Commercial and industrial loans
    
    $
    125,724,514
    
    
    $
    115,400,728Real estate  construction loans
    
    
    110,693,230
    
    
    
    105,094,301Real estate  commercial
    
    
    172,356,243
    
    
    
    142,992,349Real estate  mortgage
    
    
    4,278,117
    
    
    
    3,669,353Installment loans
    
    
    202,487
    
    
    
    439,044Other
    
    
    936,759
    
    
    
    446,170414,191,350
    
    
    
    368,041,945Less:Deferred loan fees, net
    
    
    297,856
    
    
    
    420,405Allowance for loan and lease losses
    
    
    4,904,266
    
    
    
    4,316,379$
    408,989,228
    
    
    $
    363,305,161
 Included in total loans are nonaccrual loans of $0 and $372,479 at December 31, 2006 and
2005, respectively. If interest on nonaccrual loans at December 31, 2006 and 2005 had been
accrued, such interest income would be $0 and $547 during the years ended December 31, 2006
and 2005, 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.
 66




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Bank had outstanding balances of $0 and $328,067 in impaired loans that had
impairment allowances of $0 and $291,723 as of December 31, 2006 and 2005, respectively.The average outstanding balances of impaired loans were $0, $1,748,956 and $3,601,274, for
the years ended December 31, 2006, 2005 and 2004 respectively. There was interest of $0,
$20,000 and $0 recognized on impaired loans during the year ended December 31, 2006, 2005
and 2004, respectively.The Company concentrates its lending activities primarily within Shasta, El Dorado, Placer
Sacramento, Sutter, Yuba and Tehama counties, in California, and the location of the five
full service offices of the Bank. Although the Company has a diversified loan portfolio, a
significant portion of its customers ability to repay the loans is dependent upon the
professional services and 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.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, 2006 and 2005, the
Company had pledged $52,365,899 and $44,251,812, 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 31,2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    4,316,379
    
    
    $
    3,866,498
    
    
    $
    3,675,084Provision for loan losses
    
    
    225,900
    
    
    
    447,700
    
    
    
    554,000Loans charged off
    
    
    (299,421
    )
    
    
    (92,958
    )
    
    
    (368,300
    )Recoveries of loans previously charged off
    
    
    661,408
    
    
    
    95,139
    
    
    
    5,714Balance at end of year
    
    $
    4,904,266
    
    
    $
    4,316,379
    
    
    $
    3,866,498
 67




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 6.
    
    BANK PREMISES AND EQUIPMENTBank premises and equipment consist of the following:
 Estimated
    
    
    December 31,Lives
    
    
    2006
    
    
    2005Land
    
    
    
    
    
    $
    1,507,628
    
    
    $
    1,507,628Bank buildings
    
    31.5 years
    
    
    3,779,956
    
    
    
    4,134,364Furniture, fixtures and equipment
    
    3 - 7 years
    
    
    5,357,366
    
    
    
    4,187,00410,644,950
    
    
    
    9,828,996Less accumulated depreciation
    
    
    
    
    
    
    (4,958,685
    )
    
    
    (4,619,257
    )5,686,265
    
    
    
    5,209,739Construction in progress
    
    
    
    
    
    
    2,908,779
    
    
    
    420,945$
    8,595,044
    
    
    $
    5,630,684
 Depreciation expense, included in net occupancy and equipment expense, is $732,906,
$564,779, and $610,997 for the years ended December 31, 2006, 2005 and 2004, respectively.7.
    
    OTHER ASSETS
 Other assets consist of the following:
 December 31,2006
    
    
    2005Cash surrender value of bank owned life insurance
policies
    
    $
    8,272,919
    
    
    $
    4,977,147Deferred tax asset, net
    
    
    3,913,577
    
    
    
    3,752,268Accrued interest on loans
    
    
    2,404,259
    
    
    
    1,794,294Accrued interest on investment securities
    
    
    989,754
    
    
    
    748,225Goldman Sachs Sweep account receivable
    
    
    52,518
    
    
    
    18,339Federal Home Loan Bank Stock
    
    
    3,106,400
    
    
    
    2,585,000Core Deposit Intangible, net of accumulated
amortization of $614,936 and $508,136
    
    
    154,209
    
    
    
    261,009Investment in junior subordinated debt payable to
subsidiary grantor trust
    
    
    465,000
    
    
    
    310,000Other
    
    
    821,513
    
    
    
    758,952$
    20,180,149
    
    
    $
    15,205,234
 8.
    
    DEPOSITSTime certificates of deposit of $100,000 or more totaled $147,174,522 and $95,901,445 at
December 31, 2006 and 2005, respectively. Interest expense on such deposits was $5,025,273,
$2,813,533 and $1,760,780 during 2006, 2005 and 2004, respectively.
 68




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 At December 31, 2006, the scheduled maturities for all time deposits are as follows:Time Deposit Maturity Schedule
 One year or less
    
    $
    178,738,140One to three years
    
    
    33,399,361Three to five years
    
    
    304,757Over five years
    
    
    0Total
    
    $
    212,442,258
 9.
    
    OTHER LIABILITIESOther liabilities consist of the following:
 December 31,2006
    
    
    2005Deferred compensation
    
    $
    3,870,520
    
    
    $
    3,500,969Employee incentive payable
    
    
    716,435
    
    
    
    656,356Accrued 401(k) match payable
    
    
    74,407
    
    
    
    36,729Accrued interest payable
    
    
    799,025
    
    
    
    388,229Reserve for off-balance sheet commitments
    
    
    421,877
    
    
    
    391,876Taxes payable
    
    
    117,054
    
    
    
    206,641Interest payable Junior Subordinated Debentures
    
    
    114,255
    
    
    
    90,892Dividend payable
    
    
    804,226
    
    
    
    692,632Goldman Sachs Sweep account payable
    
    
    54,931
    
    
    
    784,031Other
    
    
    564,008
    
    
    
    445,960$
    7,536,738
    
    
    $
    7,194,315
 10.
    
    FEDERAL HOME LOAN BANK ADVANCESIncluded in other borrowings are advances from the Federal Home Loan Bank of San Francisco
(FHLB) totaling $40,000,000 as of December 31, 2006 and $55,000,000 as of December 31,
2005. The FHLB advances bear fixed and floating rates of interest ranging from 5.23% to
5.47%. Interest on borrowing # 087416 is payable monthly, all other interest is payable
quarterly.
 Advance #
    
    Amount
    
    Interest Rate
    
    Maturity#059277
    
    $
    10,000,000
    
    
    
    5.43
    %
    
    
    01/24/2008#080890
    
    $
    10,000,000
    
    
    
    5.47
    %
    
    
    01/24/2011#087416
    
    $
    5,000,000
    
    
    
    5.23
    %
    
    
    04/28/2008#077383
    
    $
    15,000,000
    
    
    
    5.39
    %
    
    
    11/30/2007$
    40,000,000
 69




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 These borrowings are secured by an investment in FHLB stock and certain real estate
mortgage loans which have been specifically pledged to the FHLB pursuant to their collateral
requirements. Based upon the level of FHLB advances, the Company was required to hold a
minimum investment in FHLB stock of $3,106,400 at December 31, 2006 and to pledge
$52,365,899,$44,251,812 and $44,982,725 of its real estate mortgage loans to the FHLB as
collateral as of December 31, 2006, 2005 and 2004. At December 31, 2006 the Bank had
available borrowing lines at the FHLB of $63,628,000 and additional federal fund borrowing
lines at two correspondent banks totaling $25,000,000.11.
    
    JUNIOR SUBORDINATED DEBT PAYABLE TO UNCONSOLIDATED SUBSIDIARY GRANTOR TRUSTSDuring the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued
$5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings
junior subordinated debentures (the trust notes) to the public and $155,000 common
securities to the Company. These debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. The proceeds from the issuance of the trust notes were transferred from the
grantor trust to the Holding Company and from the Holding Company to the Bank as surplus
capital. The trust notes accrue and pay distributions on a quarterly basis at 3 month London
Interbank Offered Rate (LIBOR) plus 3.30%. The rate at December 31, 2006 was 8.67%. The
rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity
on the trust notes is March 18, 2033, and the debt allows for prepayment after five years on
the quarterly payment date.On July 29, 2005, Bank of Commerce Holdings (the Company) participated in a private
placement to an institutional investor of $10 million of fixed rate trust preferred
securities (the Trust Preferred Securities); through a newly formed Delaware trust
affiliate, Bank of Commerce Holdings Trust II (the Trust). The Trust Preferred Securities
mature on September 15, 2035, and are redeemable at the Companys option on any March 15,
June 15, September 15 or December 15 on or after September 15, 2010. In addition, the Trust
Preferred Securities require quarterly distributions by the Trust to the holder of the Trust
Preferred Securities at a rate of 6.115%, until September 10, 2010 after which the rate will
reset quarterly to equal LIBOR plus 1.58%. The Trust simultaneously issued $310,000 of the
Trusts common securities of beneficial interest to the Company.The proceeds from the sale of the Trust Preferred Securities were used by the Trust to
purchase from the Company the aggregate principal amount of $10,310,000 of the Companys
floating rate junior subordinate notes (the Notes). The net proceeds to the Company from
the sale of the Notes to the Trust will be used by the Company for general corporate
purposes, including funding the growth of the Companys various financial services.The Notes were issued pursuant to a Junior Subordinated Indenture (the Indenture), dated
July 29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association,
as trustee. Like the Trust Preferred Securities, the Notes bear interest at a floating
rate, at 6.115% until September 10, 2010, after which the rate will reset on a quarterly
basis to equal LIBOR plus 1.58%. The interest payments by the Company will be used to pay
the quarterly distributions payable by the Trust to the holder of the Trust Preferred
Securities. However, so long as no event of default, as described below, has occurred under
the Notes, the Company may, at any time and from time to time, defer interest payments on
the Notes (in which case the Trust will be entitled to defer distributions otherwise due on
the Trust Preferred Securities) for up to twenty (20) consecutive quarters.
 70




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Notes are subordinated to the prior payment of other indebtedness of the Company
that, by its terms, is not similarly subordinated. Although the Notes will be recorded as a
long term liability on the Companys balance sheet, for regulatory purposes, the Notes are
expected to be treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve
Board, the Companys primary federal regulatory agency.The Notes mature on September 15, 2035, but may be redeemed at the Companys option at any
time on or after September 15, 2010 or at any time upon certain events, such as a change in
the regulatory capital treatment of the Notes, the Trust being deemed to be an investment
company or the occurrence of certain adverse tax events. In each case, the Company may
redeem the Notes for their aggregate principal amount, plus accrued interest, if any.12.
    
    INCOME TAXESProvision for income taxes consists of the following:
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    3,247,200
    
    
    $
    3,396,316
    
    
    $
    2,571,071State
    
    
    984,927
    
    
    
    888,915
    
    
    
    674,392Total currently payable
    
    
    4,232,127
    
    
    
    4,285,231
    
    
    
    3,245,463Deferred:Federal
    
    
    (315,359
    )
    
    
    (333,092
    )
    
    
    (224,682
    )State
    
    
    (92,838
    )
    
    
    (65,635
    )
    
    
    (89,873
    )Total deferred provision
    
    
    (408,197
    )
    
    
    (398,727
    )
    
    
    (314,555
    )Total provision for income taxes
    
    $
    3,836,930
    
    
    $
    3,886,504
    
    
    $
    2,930,908
 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 Income2006
    
    2005
    
    2004Income tax at the Federal statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State franchise tax, net of Federal tax benefit
    
    
    5.66
    
    
    
    5.35
    
    
    
    4.85Tax-exempt interest
    
    
    (2.02
    )
    
    
    (1.01
    )
    
    
    (0.91
    )Other
    
    
    (0.76
    )
    
    
    (0.11
    )
    
    
    (0.88
    )36.88
    %
    
    
    38.23
    %
    
    
    37.06
    %
 71




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 consist of
the following:
 2006
    
    
    2005Deferred tax assets:State franchise taxes
    
    $
    276,048
    
    
    $
    280,605Deferred compensation
    
    
    1,735,541
    
    
    
    1,569,835Loan loss reserves
    
    
    1,926,296
    
    
    
    1,673,718Net unrealized losses on securities available-for-sale
    
    
    655,559
    
    
    
    902,447Other
    
    
    208,910
    
    
    
    235,839Total deferred tax assets
    
    
    4,802,354
    
    
    
    4,662,444Deferred tax liabilities:Depreciation
    
    
    (229,998
    )
    
    
    (300,845
    )Deferred loan origination costs
    
    
    (413,431
    )
    
    
    (395,547
    )Deferred state taxes
    
    
    (245,348
    )
    
    
    (213,784
    )Total deferred tax liabilities
    
    
    (888,777
    )
    
    
    (910,176
    )Net deferred tax asset
    
    $
    3,913,577
    
    
    $
    3,752,268
 13.
    
    STOCK OPTION PLANOn February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the Plan)
which was approved by the Companys stockholders on April 21, 1998. The Plan provides for
awards in the form of options, which may constitute incentive stock options (Incentive
Options) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the
Code), or non-statutory stock options (NSOs) to key personnel of the Company, including
directors. The Plan provides that Incentive Options under the Plan may not be granted at
less than 100% of fair market value of the Companys common stock on the date of the grant.
NSOs may not be granted at less than 85% of the fair market value of the common stock on the
date of the grant. The purpose of the plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging key personnel to focus on
critical long range objectives, (b) increasing the ability of the Company to attract and
retain key personnel and (c) linking key personnel directly to stockholder interests through
increased stock ownership.A total of 1,782,000 shares of the Companys common stock are reserved for grant under the
Plan.The Plan provides that all options under the Plan shall vest at a rate of at least 20% per
year from the date of the grant. Vesting may be accelerated in case of an optionees death,
disability, and retirement or in case of a change of control.During 2006, stock option compensation expense charged against income was $64,494 ($61,336
net of tax), or less than one cent per diluted share. At December 31, 2006, there was
$178,395 of total unrecognized compensation costs related to non-vested share based payments
which is expected to be recognized over a period of five years. Three new options totaling
52,000 shares were granted during 2006.
 72




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Activity in stock-based compensation planThe following table presents the changes in outstanding stock options for the periods
indicated:
 Weighted
    
    
    AggregateNumber of
    
    
    Average
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    ValueOptions outstanding, December 31, 2005
    
    
    608,316
    
    
    $
    5.20
    
    
    $
    3,290,989Granted
    
    
    52,000
    
    
    $
    10.13
    
    
    $
    56,640Exercised
    
    
    (281,146
    )
    
    $
    3.13
    
    
    $
    2,036,775Forfeited
    
    
    (1,425
    )
    
    $
    10.60
    
    
    
    Options outstanding, December 31, 2006
    
    
    377,745
    
    
    $
    6.93
    
    
    $
    1,793,156Exercisable at December 31, 2006
    
    
    300,631
    
    
    $
    6.93
    
    
    $
    1,427,095
 At December 31, 2006, 300,631 shares were available to be exercised. The weighted
average grant price at December 31, 2006 was $6.93. The total intrinsic value (which is the
amount by which the stock price exceeded the exercise price on the date of exercise) of
options exercised during 2006 was $2,036,775. At December 31, 2006, 74,165 shares were
available for future grants under the Plan. As of December 31, 2006, 2005 and 2004,
respectively, 300,631, 539,314 and 572,488 shares respectively were available to be
exercised. The weighted average option cost for December 31, 2006, 2005 and 2004,
respectively, was $6.93, $4.11 and $7.74, respectively.Additional information regarding options outstanding as of December 31, 2006 is as follows:
 Weighted Avg. RemainingExercise

    
    
    
    
    
    Contractual Life (Years)Prices
    
    
    Options Outstanding
    
    
    
    
    
    
    Options Exercisable$
    2.75
    
    
    43,350
    
    
    
    1.3
    
    
    
    43,350$
    3.23
    
    
    29,960
    
    
    
    1.3
    
    
    
    29,960$
    5.42
    
    
    29,250
    
    
    
    4.4
    
    
    
    29,250$
    6.67
    
    
    59,500
    
    
    
    4.6
    
    
    
    59,500$
    7.30
    
    
    55,130
    
    
    
    5.5
    
    
    
    44,104$
    6.75
    
    
    13,500
    
    
    
    6.0
    
    
    
    8,100$
    10.72
    
    
    7,500
    
    
    
    7.4
    
    
    
    7,500$
    10.60
    
    
    72,075
    
    
    
    7.5
    
    
    
    72,075$
    10.76
    
    
    3,000
    
    
    
    7.9
    
    
    
    3,000$
    9.11
    
    
    6,480
    
    
    
    7.3
    
    
    
    2,592$
    11.59
    
    
    3,500
    
    
    
    8.4
    
    
    
    700$
    10.20
    
    
    2,500
    
    
    
    8.4
    
    
    
    500$
    10.40
    
    
    20,000
    
    
    
    9.7
    
    
    
    0$
    9.99
    
    
    32,000
    
    
    
    9.9
    
    
    
    0377,745
    
    
    
    6.4
    
    
    
    300,631
 73




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004The fair value of the options granted during 2006, 2005 and 2004, is estimated as
$195,000, $20,068 and $364,769, respectively, on the date of grant using a binomial
option-pricing model with the following assumptions: volatility of 32.03%, 32.36% and
30.88%, respectively, risk-free interest rate of 4.65%, 3.92% and 3.62%, respectively,
expected dividends of $0.29 per share per year for 2006 and $0.28 per share in 2005, annual
dividend rate of 3.07%, 2.49% and 2.00%, assumed forfeiture rate of zero and an expected
life of seven years. There were 52,000 options granted in 2006, 6,000 options granted in
2005 and 111,000 options granted in 2004. The fair value per share of the 2006, 2005 and
2004 awards was $3.75, $3.34 and $3.29, respectively.14.
    
    CAPITAL STOCKOn 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. There were 92,000 shares repurchased during 2006 at an average
price of $11.85 per share. No shares were repurchased during 2005, 2004 or 2003. Shares
purchased are retired by a charge to common stock and retained earnings for the cost. To
date, the Company has repurchased 1,515,311 shares at an average price of $7.15.The Company paid a quarterly cash dividend of $0.08, $0.07, $0.07 and $0.07 on January 5,
2006, April 7, 2006, July 7, 2006 and October 13, 2006, respectively, to stockholders of
record as of December 31, 2005, March 31, 2006, June 30, 2006 and September 30, 2006,
respectively. The fourth quarter dividend of $0.09 per share is payable to shareholders of
record as of December 31, 2006 to be paid on January 5, 2007. On April 20, 1999, the Board
of Directors authorized 2,000,000 shares of preferred stock. As of December 31, 2006, no
preferred shares had been issued.15.
    
    RETIREMENT BENEFITSProfit Sharing Plan  In 1985, the Company adopted a profit sharing 401(k) plan for eligible
employees to be funded out of the earnings of the Company. The employees contributions are
limited to the maximum amount allowable under IRS Section 402(G). The Companys
contributions include a matching contribution of 100% of the first 3% of salary deferred and
50% of the next 2% of salary deferred. Discretionary contributions are also permitted. The
Company made matching contributions aggregating $224,000, $157,000 and $134,570 for the
years ended December 31, 2006, 2005 and 2004, respectively. No discretionary contributions
were made in 2006, 2005 or 2004.Salary Continuation Plan In April 2001, the Board of Directors approved the
implementation of the Executive Salary Continuation Plan (SCP), which is a non-qualified
executive benefit plan in which the Bank agrees to pay the executives covered by the SCP
plan additional benefits in the future in return for continued satisfactory performance by
the executives. Benefits under the salary continuation plan include a benefit generally
payable commencing upon a designated retirement date for a fixed period of twenty years;
disability or termination of employment, and a death benefit for the participants designated
beneficiaries. Key-man life insurance policies were purchased as an investment to provide
for the Banks contractual obligation to pay pre-retirement death benefits and to recover
the Banks cost of providing benefits. The executive is the insured under the policy, while
the Bank is the owner and beneficiary. The assets of the SCP, under Internal Revenue Service
Regulations, are the property of the Company and are available to the Companys general
creditors. The insured executive has no claim on the insurance policy, its cash value or the
proceeds thereof. Three executives were added to the plan in 2006.
 74




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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
$160,917 and $124,356 for 2006 and 2005, respectively. As of December 31, 2006 and 2005, the
vested benefit payable was $706,391 and $488,085, respectively.Directors deferred fee compensation Effective January 1, 1993, the Board of Directors
approved the implementation of the Directors Deferred Compensation Plan, which is a
non-qualified plan in which a Director may elect to defer the payment of all or any part of
the fee compensation to which such director would otherwise be entitled to as directors
fees or committee fees to be payable upon retirement of the director in a lump sum
distribution or over a period not to exceed fifteen years. Interest on Directors deferred
compensation is fixed at ten percent (10%) per the plan. Deferred compensation expense
totaled $368,809 and $321,320 at December 31, 2006 and 2005, respectively. As of December
31, 2006 and 2005, the vested benefit payable was $2,035,218 and $1,818,017, respectively.16.
    
    RELATED PARTY TRANSACTIONSSome of the directors, officers and principal stockholders of the Company and their
associates were customers of and had banking transactions with the Bank in the ordinary
course of the Banks business during 2006 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.An analysis of the activity in related party loans consists of the following:
 December 31,2006
    
    
    2005Balance at beginning of year
    
    $
    1,854,751
    
    
    $
    3,622,750New loan additions
    
    
    1,507,115
    
    
    
    11,318Principal repayments
    
    
    (512,333
    )
    
    
    (1,779,317
    )Balance at end of year
    
    $
    2,849,533
    
    
    $
    1,854,751
 As of December 31, 2006 and 2005 there were no related party loans, which were past due or
classified. At December 31, 2006 there was approximately $3,741,000 available in commitments
to related party loans.
 75




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17.
    
    COMMITMENTS AND CONTINGENCIESLease Commitments The Company leases certain facilities where it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as of December
31, 2006 are below:(Dollars in thousands)
 2007
    
    $
    4752008
    
    $
    5002009
    
    $
    4442010
    
    $
    4002011
    
    $
    308Thereafter
    
    $
    129Total
    
    $
    2,256Minimum rental due in the future
Under non-cancelable subleases
    
    $
    16
 Rental expense for the years ended December 31, 2006, 2005 and 2004 was $453,450,
$466,061 and $424,205, 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.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 31,2006
    
    
    2005Off-balance sheet commitments:Commitments to extend credit
    
    $
    158,296,132
    
    
    $
    159,485,594Standby letters of credit
    
    
    13,511,196
    
    
    
    9,771,080Guaranteed commitments outstanding
    
    
    1,248,000
    
    
    
    0$
    173,055,328
    
    
    $
    169,256,674
 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.
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Standby letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Credit risk arises in these transactions
from the possibility that a customer may not be able to repay the Bank upon default of
performance. Collateral held for standby letters of credit is based on an individual
evaluation of each customers creditworthiness, but may include cash and securities.Commitments to extend credit and standby letters of credit bear similar credit risk
characteristics as outstanding loans.Litigation The Company is subject to various pending and threatened legal actions arising
in the ordinary course of business. The Company maintains reserves for losses from legal
actions that are both probable and estimable. In the opinion of management the disposition
of claims currently pending will not have a material effect on the Companys consolidated
financial position or results of operations.18.
    
    REGULATORY MATTERSThe Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary
actions by regulators that if undertaken, could have a direct material effect on the
Companys and Consolidated Financial Statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices.The capital amounts and the Banks prompt corrective action classifications are also
subject to qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to Bank Holding
Companies. Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets and of Tier 1 capital to average assets. Management believes as of
December 31, 2006 that the Company and the Bank met all capital adequacy requirements to
which they are subject.As of December 31, 2006, 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, 2006 and 2005 are also presented in the table.
 77




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 To BeCategorized asWell CapitalizedFor Capital
    
    Under PromptActual
    
    Adequacy Purposes
    
    Corrective ActionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt December 31, 2006:CompanyLeverage capital (to average assets)
    
    $
    54,583,400
    
    
    
    9.38
    %
    
    $
    19,800,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    54,583,400
    
    
    
    11.52
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    60,154,942
    
    
    
    12.64
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aBankLeverage capital (to average assets)
    
    $
    54,389,449
    
    
    
    9.54
    %
    
    $
    19,783,694
    
    
    
    4.00
    %
    
    $
    24,729,617
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    54,389,449
    
    
    
    11.42
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    25,101,570
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    59,690,992
    
    
    
    12.54
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    41,835,950
    
    
    
    10.00
    %At December 31, 2005:CompanyLeverage capital (to average assets)
    
    $
    50,427,990
    
    
    
    10.19
    %
    
    $
    19,800,000
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTier 1 capital (to risk-weighted assets)
    
    
    50,427,990
    
    
    
    12.05
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    n/a
    
    
    
    n/aTotal capital (to risk-weighted assets)
    
    
    54,744,369
    
    
    
    13.09
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    n/a
    
    
    
    n/aBankLeverage capital (to average assets)
    
    $
    50,530,699
    
    
    
    10.22
    %
    
    $
    19,783,694
    
    
    
    4.00
    %
    
    $
    24,729,617
    
    
    
    5.00
    %Tier 1 capital (to risk-weighted assets)
    
    
    50,530,699
    
    
    
    12.08
    %
    
    
    16,734,380
    
    
    
    4.00
    %
    
    
    25,101,570
    
    
    
    6.00
    %Total capital (to risk-weighted assets)
    
    
    54,841,378
    
    
    
    13.11
    %
    
    
    33,468,760
    
    
    
    8.00
    %
    
    
    41,835,950
    
    
    
    10.00
    %
 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, 2006, the maximum amount available for dividend
distribution under this restriction was approximately $10,974,493.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 2006
or 2005.
 78




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 19.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTSThe following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:Cash and cash equivalents The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents are a reasonable estimate of fair value.Securities Fair values for securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted market prices of
comparable instruments. Securities available-for-sale are carried at their aggregate fair
value, while securities held-to-maturity are carried at amortized cost.Loans receivable For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values for fixed
rate loans are estimated using discounted cash flow analysis, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.Commitments to extend credit and standby letters of credit The fair value of commitments
is the off-balance sheet amount of loan commitments and outstanding letters of credit.Federal Home Loan Bank borrowingsThe fair value of borrowed funds 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.
 79




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Limitations Fair value estimates are made at a specific point in time, based on
relevant market information and other information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering for sale at
one time the Companys entire holdings of a particular financial instrument.Because no market exists for a significant portion of the Companys financial instruments,
fair value estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial instruments, and
other factors.These estimates are subjective in nature, involve uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.Fair value estimates are based on current on and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other significant
assets and liabilities that are not considered financial assets or liabilities include
deferred tax assets and liabilities, and property, plant and equipment. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of the
estimates.The estimated fair values of the Companys financial instruments are approximately as
follows:
 December 31, 2006Contract
    
    Carrying
    
    FairAmount
    
    Amount
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    39,266,386
    
    
    $
    39,266,386Securities
    
    
    
    
    
    
    106,411,220
    
    
    
    106,394,045Loans, net
    
    
    
    
    
    
    408,989,228
    
    
    
    408,940,966Accrued interest on loans
    
    
    
    
    
    
    2,404,259
    
    
    
    2,404,259Accrued interest on securities
    
    
    
    
    
    
    989,754
    
    
    
    989,754Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    226,965,171
    
    
    $
    222,859,530Fixed rate certificates
    
    
    
    
    
    
    173,661,670
    
    
    
    173,816,680Variable certificates
    
    
    
    
    
    
    38,780,889
    
    
    
    38,780,889Accrued interest payable
    
    
    
    
    
    
    799,025
    
    
    
    799,025Securities sold under agreements to repurchase
    
    
    
    
    
    
    37,116,610
    
    
    
    37,116,610Federal Home Loan Borrowings
    
    
    
    
    
    
    40,000,000
    
    
    
    40,000,000Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    15,465,000
    
    
    
    15,465,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    158,296,132
    
    
    
    
    
    
    $
    158,296,132Standby letters of credit
    
    
    13,511,196
    
    
    
    
    
    
    
    13,511,196Guaranteed commitments outstanding
    
    
    1,248,000
    
    
    
    
    
    
    
    1,248,000
 80




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2005Contract
    
    
    Carrying
    
    
    FairAmount
    
    
    Amount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    
    
    
    
    $
    26,555,887
    
    
    $
    26,555,887Securities
    
    
    
    
    
    
    100,946,679
    
    
    
    100,895,199Loans, net
    
    
    
    
    
    
    363,305,161
    
    
    
    361,486,951Accrued interest on loans
    
    
    
    
    
    
    1,794,294
    
    
    
    1,794,294Accrued interest on securities
    
    
    
    
    
    
    748,225
    
    
    
    748,225Financial Liabilities:Demand and savings
    
    
    
    
    
    $
    222,859,530
    
    
    $
    222,859,530Fixed rate certificates
    
    
    
    
    
    
    120,699,610
    
    
    
    120,659,339Variable certificates
    
    
    
    
    
    
    28,556,629
    
    
    
    28,556,629Accrued interest payable
    
    
    
    
    
    
    388,229
    
    
    
    388,229Securities sold under agreements to repurchase
    
    
    
    
    
    
    22,885,658
    
    
    
    22,885,658Federal Home Loan Borrowings
    
    
    
    
    
    
    55,000,000
    
    
    
    54,999,419Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    
    
    
    
    15,310,000
    
    
    
    15,310,000Off balance sheet financial instruments:Commitments to extend credit
    
    $
    159,485,594
    
    
    
    
    
    
    $
    159,485,594Standby letters of credit
    
    
    9,771,080
    
    
    
    
    
    
    
    9,771,080
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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 20.
    
    BANK OF COMMERCE HOLDINGS (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
 December 31,2006
    
    
    2005Condensed Balance SheetsAssets:Cash
    
    $
    1,983,893
    
    
    $
    361,485Time deposit with subsidiary
    
    
    432,885
    
    
    
    2,532,885Cash and cash equivalents
    
    
    2,416,778
    
    
    
    2,894,370Participation loans, net of allowance
for loan and lease losses of $18,900 in 2006
and $5,700 in 2005
    
    
    3,332,883
    
    
    
    2,009,036Investment in subsidiaries
    
    
    54,512,570
    
    
    
    50,260,520Other assets
    
    
    37,500
    
    
    
    67,500Total assets
    
    $
    60,299,731
    
    
    $
    55,231,426Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    15,465,000
    
    
    
    15,310,000Other liabilities
    
    
    918,481
    
    
    
    783,523Stockholders equity
    
    
    43,916,250
    
    
    
    39,137,903Total liabilities and stockholders equity
    
    $
    60,299,731
    
    
    $
    55,231,426
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Condensed Statements of IncomeIncome:Interest on time deposit
    
    $
    93,167
    
    
    $
    79,931
    
    
    $
    13,852Dividend from subsidiary
    
    
    4,641,352
    
    
    
    514,307
    
    
    
    1,955,5844,734,519
    
    
    
    594,238
    
    
    
    1,969,436Expenses:
    
    
    1,405,409
    
    
    
    825,549
    
    
    
    549,431Income before income taxes and
equity in undistributed net income
of subsidiaries
    
    
    3,329,110
    
    
    
    (231,311
    )
    
    
    1,420,005Provision for income taxes
    
    
    800
    
    
    
    800
    
    
    
    800Income before equity in undistributed
net income of subsidiaries
    
    
    3,328,310
    
    
    
    (232,111
    )
    
    
    1,419,205Equity in undistributed net income of
subsidiaries
    
    
    3,239,399
    
    
    
    6,510,481
    
    
    
    3,558,470Net income
    
    $
    6,567,709
    
    
    $
    6,278,370
    
    
    $
    4,977,675
 82




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BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Statements of Cash FlowsCash flows from operating activities:Net income
    
    $
    6,567,709
    
    
    $
    6,278,370
    
    
    
    4,977,675Adjustments to reconcile net income to
net cash provided by operating activities:Provision for loan losses
    
    
    18,900
    
    
    
    5,700
    
    
    
    0Compensation associated with stock options
    
    
    7,672
    
    
    
    5,784
    
    
    
    3,856Effect of changes in:Other Assets
    
    
    30,000
    
    
    
    30,000
    
    
    
    197,667Other Liabilities
    
    
    134,958
    
    
    
    20,399
    
    
    
    0Equity in undistributed
net income of subsidiaries
    
    
    (3,239,399
    )
    
    
    (6,510,481
    )
    
    
    (3,558,470
    )Net cash provided by operating activities
    
    
    3,519,840
    
    
    
    (170,228
    )
    
    
    1,620,728Cash flows from investing activities:Investment in subsidiary trust
    
    
    (155,000
    )
    
    
    (310,000
    )
    
    
    0Capital contribution to Bank
    
    
    0
    
    
    
    (5,000,000
    )
    
    
    0Participation loan purchased
    
    
    (981,523
    )
    
    
    (2,014,736
    )
    
    
    0Net cash used by investing activities
    
    
    (1,136,523
    )
    
    
    (7,324,736
    )
    
    
    0Cash flows from financing activities:Equity transactions, net
    
    
    (210,589
    )
    
    
    467,000
    
    
    
    1,174,083Proceeds from unconsolidated subsidiary
Grantor trust
    
    
    0
    
    
    
    10,310,000
    
    
    
    0Cash dividends
    
    
    (2,650,320
    )
    
    
    (1,550,715
    )
    
    
    (1,955,584
    )Net cash used by financing activities
    
    
    (2,860,909
    )
    
    
    9,226,285
    
    
    
    (781,501
    )Increase (decrease) in cash and cash equivalents
    
    
    (477,592
    )
    
    
    1,731,321
    
    
    
    839,227Cash and cash equivalents at beginning of year
    
    
    2,894,370
    
    
    
    1,163,049
    
    
    
    323,822Cash and cash equivalents at end of year
    
    $
    2,416,778
    
    
    $
    2,894,370
    
    
    $
    1,163,049
 83




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##### Table of Contents



BANK OF COMMERCE HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 22.
    
    UNAUDITED QUARTERLY RESULTS
 UNAUDITED QUARTERLY STATEMENTS OF INCOME DATA
 For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except per share data)
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Net interest income
    
    $
    5,413
    
    
    $
    5,674
    
    
    $
    5,530
    
    
    $
    5,418Provision for loan losses
    
    
    (11
    )
    
    
    (143
    )
    
    
    (72
    )
    
    
    (0
    )Noninterest income
    
    
    448
    
    
    
    512
    
    
    
    428
    
    
    
    541Noninterest expense
    
    
    (3,238
    )
    
    
    (3,310
    )
    
    
    (3,299
    )
    
    
    (3,486
    )Income before taxes
    
    
    2,612
    
    
    
    2,733
    
    
    
    2,587
    
    
    
    2,473Provision for income tax
    
    
    (1,020
    )
    
    
    (1,044
    )
    
    
    (915
    )
    
    
    (858
    )Net Income
    
    $
    1,592
    
    
    $
    1,689
    
    
    $
    1,672
    
    
    $
    1,615Per common share:Basic earnings per share
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.18Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.17Dividends per share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.07
 For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except per share data)
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005Net interest income
    
    $
    4,856
    
    
    $
    4,861
    
    
    $
    5,125
    
    
    $
    5,395Provision for loan losses
    
    
    (177
    )
    
    
    (177
    )
    
    
    (88
    )
    
    
    (6
    )Noninterest income
    
    
    542
    
    
    
    548
    
    
    
    515
    
    
    
    519Noninterest expense
    
    
    (2,920
    )
    
    
    (2,887
    )
    
    
    (3,095
    )
    
    
    (2,846
    )Income before taxes
    
    
    2,301
    
    
    
    2,345
    
    
    
    2,457
    
    
    
    3,062Provision for income tax
    
    
    (925
    )
    
    
    (874
    )
    
    
    (897
    )
    
    
    (1,191
    )Net Income
    
    $
    1,376
    
    
    $
    1,471
    
    
    $
    1,560
    
    
    $
    1,871Per common share:Basic earnings per share
    
    $
    0.16
    
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.22Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.18
    
    
    $
    0.21Dividends per share
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.08
 For the Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands, except per share data)
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004Net interest income
    
    $
    3,915
    
    
    $
    4,087
    
    
    $
    4,269
    
    
    $
    4,606Provision for loan losses
    
    
    (192
    )
    
    
    (97
    )
    
    
    (131
    )
    
    
    (134
    )Noninterest income
    
    
    466
    
    
    
    494
    
    
    
    573
    
    
    
    634Noninterest expense
    
    
    (2,425
    )
    
    
    (2,640
    )
    
    
    (2,641
    )
    
    
    (2,875
    )Income before taxes
    
    
    1,764
    
    
    
    1,844
    
    
    
    2,070
    
    
    
    2,231Provision for income tax
    
    
    (652
    )
    
    
    (683
    )
    
    
    (803
    )
    
    
    (793
    )Net Income
    
    $
    1,112
    
    
    $
    1,161
    
    
    $
    1,267
    
    
    $
    1,438Per common share:Basic earnings per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.17Dividends per share
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.23
 84




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
   
 PART III
  85




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##### Table of Contents



ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 Executive Officers of the Registrant
  Name
    
    Age
    
    Position(s)Michael C. Mayer
    
    
    50
    
    
    President and Chief Executive Officer Redding
Bank of Commerce and DirectorLinda J. Miles
    
    
    53
    
    
    Executive Vice President, Chief Financial
Officer and Assistant Secretary
 Michael C. Mayer
 Linda J. Miles
 http://www.reddingbankofcommerce.com
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  86




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
    87




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
 (a)
    
    The following documents are filed as a part of this Form 10-K:
      ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended filed 12/4/1998.*3.2
    
    Bylaws, as amended filed 12/4/1998.*4.1
    
    Specimen Common Stock Certificate filed 12/4/1998.*10.1
    
    Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998 filed 12/4/1998.*10.2
    
    Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998 filed 12/4/1998.*10.3
    
    1998 Stock Option Plan filed 12/4/1998.*10.4
    
    Form of Incentive Stock Option Agreement used in connection with
1998 Stock Option Plan filed 12/4/1998.*10.5
    
    Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan filed 12/4/1998.*10.7
    
    Directors Deferred Compensation Plan filed 12/4/1998.*10.8
    
    Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan filed 12/4/1998.*10.9
    
    Merchant Services Agreement dated as of April 1, 1993, between
Cardservice International, Inc. and Redding Bank of Commerce, as amended filed
12/4/1998  Fifth Amendment filed 4/4/2001.*10.10
    
    Employment contracts dated April 2001 filed 9/27/2001.*10.11
    
    Affiliated Business Arrangement Agreement filed 8/20/2004*10.12
    
    Office building lease by and between Wainright #3 Partners and
Redding Bank of Commerce dated 9/23/2005 and filed 9/26/2005*10.13
    
    Amendment to Employment contracts dated April 2001, filed
12/20/2005*10.14
    
    Change in Control Agreements filed on 12/21/2005*10.15
    
    Salary Continuation  Blais filed on 12/19/2006*10.16
    
    Salary Continuation  Moty filed on 12/19/2006*10.17
    
    Salary Continuation  Eslick filed on 12/19/2006*10.18
    
    Employment Agreement  Mayer filed on 12/29/06*10.19
    
    Employment Agreement  Miles filed on 12/29/06*10.20
    
    Salary Continuation  Mayer filed on 12/29/06*10.21
    
    Salary Continuation  Miles filed on 12/29/06*11.1
    
    Statement re: Computation of Earnings per Share (see page ___57_).14.0
    
    RBC Code of Ethics filed on 2/26/2003*16.1
    
    Letter on Change in Certifying Accountants filed 12/4/1998. *21.1
    
    Subsidiaries of the Company filed 12/4/1998. *23.1
    
    Consent of Moss Adams LLP24.1
    
    Power of Attorney (see page ___88___)32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 88




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##### Table of Contents



*
    
    Previously filed with the Companys Registration Statement on Form 10 and by the Companys
filing of reports on Form 8-K. (b)
    
    Reports on Form 8-K:
 12/29/06
    
    Employment Agreement  Michael C. MayerEmployment Agreement  Linda J. MilesSalary Continuation Agreement  Michael C. MayerSalary Continuation Agreement  Linda J. Miles12/19/06
    
    Salary Continuation Agreements  Caryn A. Blais, Patrick J. Moty and Randy S. Eslick12/14/06
    
    Fourth Quarter Dividend announcement $0.09 per share11/27/06
    
    10B-5 plan for John C. Fitzpatrick10/31/06
    
    10B-5 plan for Linda J. Miles10/27/06
    
    Third Quarter operating results
 89




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##### Table of Contents



SIGNATURES
  BANK OF COMMERCE HOLDINGSBy
    /s/ Michael C. MayerMichael C. MayerPresident, Chief Executive
Officer and Director POWER OF ATTORNEY
   Name
    
    Title
    
    Date/s/Michael C. Mayer

Michael C. Mayer
    
    President, Chief Executive
Officer Redding Bank of
Commerce and Director
    
    March 9, 2007/s/Linda J. Miles

Linda J. Miles
    
    Executive Vice President and Chief
Financial Officer and Assistant
Secretary (Principal Financial and
Accounting Officer)
    
    March 9, 2007/s/Harry L. Grashoff, Jr.

Harry L. Grashoff, Jr.
    
    Chairman of the Board
    
    March 9, 2007/s/Welton L. Carrel

Welton L. Carrel
    
    Director
    
    March 9, 2007/s/Russell L. Duclos

Russell L. Duclos
    
    Director
    
    March 9, 2007/s/John C. Fitzpatrick

John C. Fitzpatrick
    
    Director
    
    March 9, 2007/s/Kenneth R. Gifford, Jr.

Kenneth R. Gifford, Jr.
    
    Director
    
    March 9, 2007/s/David H. Scott

David H. Scott
    
    Director
    
    March 9, 2007/s/Lyle L. Tullis

Lyle L. Tullis
    
    Director
    
    March 9, 2007/s/ Jon Halfhide

Jon Halfhide
    
    Director
    
    March 9, 2007/s/ Orin Bennett

Orin Bennett
    
    Director
    
    March 9, 2007
 90




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Document3.1
    
    Articles of Incorporation, as amended filed 12/4/1998.*3.2
    
    Bylaws, as amended filed 12/4/1998.*4.1
    
    Specimen Common Stock Certificate filed 12/4/1998.*10.1
    
    Office Building Lease by and between David and Maria Wong and
Redding Bank of Commerce dated June 10, 1998 filed 12/4/1998.*10.2
    
    Office Building Lease between Garian Partnership/First Avenue
Square and Redding Bank of Commerce dated July 16, 1998 filed 12/4/1998.*10.3
    
    1998 Stock Option Plan filed 12/4/1998.*10.4
    
    Form of Incentive Stock Option Agreement used in connection
with 1998 Stock Option Plan filed 12/4/1998.*10.5
    
    Form of Nonstatutory Stock Option Agreement used in connection
with 1998 Stock Option Plan filed 12/4/1998.*10.7
    
    Directors Deferred Compensation Plan filed 12/4/1998.*10.8
    
    Form of Deferred Compensation Agreement Used In Connection With
Directors Deferred Compensation Plan filed 12/4/1998.*10.10
    
    Merchant Services Agreement dated as of April 1, 1993, between
Card service International, Inc. and Redding Bank of Commerce, as amended filed
12/4/1998  Fifth Amendment filed 4/4/2001.*10.10
    
    Employment contracts dated April 2001 filed 9/27/2001.*10.11
    
    Affiliated Business Arrangement Agreement filed 8/20/2004*10.12
    
    Office building lease by and between Wainright #3 Partners and
Redding Bank of Commerce dated 9/23/2005 and filed 9/26/2005*10.13
    
    Amendment to Employment contracts dated April 2001, filed
12/20/2005*10.14
    
    Change in Control Agreements filed on 12/21/2005*10.15
    
    Salary Continuation  Blais filed on 12/19/2006*10.16
    
    Salary Continuation  Moty filed on 12/19/2006*10.17
    
    Salary Continuation  Eslick filed on 12/19/2006*10.18
    
    Employment Agreement  Mayer filed on 12/29/06*10.19
    
    Employment Agreement  Miles filed on 12/29/06*10.20
    
    Salary Continuation  Mayer filed on 12/29/06*10.21
    
    Salary Continuation  Miles filed on 12/29/06*11.1
    
    Statement re: Computation of Earnings per Share (see page ___57_).14.0
    
    RBC Code of Ethics filed on 2/26/2003*16.1
    
    Letter on Change in Certifying Accountants filed 12/4/1998. *21.1
    
    Subsidiaries of the Company filed 12/4/1998. *23.1
    
    Consent of Moss Adams LLP24.1
    
    Power of Attorney (see page ___88___)32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
 
 *
    
    Previously filed with the Companys Registration Statement on Form 10 and by the Companys
filing of reports on Form 8-K.