##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission file number 0-25135
 Bank of Commerce Holdings
  California
    
    94-2823865(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)1951 Churn Creek Road Redding, California
    
    96002(Address of principal executive offices)
    
    (Zip code)Registrants
telephone number, including area code: (530) 224-3333
  
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Index to Form 10-Q
 Page:PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Condensed Balance Sheets
June 30, 2006, December 31, 2005 and June 30, 2005
    
    
    4Consolidated Condensed Statements of Income
Three and six months ended June 30, 2006 and 2005
    
    
    5Consolidated Condensed Statements of Cash Flows
Three and six months ended June 30, 2006 and 2005
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    15Corporate Overview
    
    
    15Lending Risks Associated with Commercial Banking and Construction Activities
    
    
    18Dependence on Real Estate
    
    
    18Risks Specific to Operations in California
    
    
    18Interest Rate Risk
    
    
    18Potential Volatility of Deposits
    
    
    19Dividends
    
    
    19Government Regulation and Legislation
    
    
    19Economic Conditions and Geographic Concentration
    
    
    19Reliance on Key Employees and Others
    
    
    19Adequacy of Allowance for Loan and Lease Losses (ALLL)
    
    
    20Certain Ownership Restrictions under California and Federal Law
    
    
    20Shares Eligible for Future Sale
    
    
    20Technology and Computer Systems
    
    
    21Environmental Risks
    
    
    21Dilution
    
    
    21Unresolved Staff Comments
    
    
    21Executive Overview
    
    
    22Sources of Income
    
    
    22Financial Highlights  Results of Operations
    
    
    23Net Interest Income and Net Interest Margin
    
    
    23Liquidity
    
    
    23Capital Management
    
    
    24Short term borrowings
    
    
    24Provision for loan losses
    
    
    25Factors that may affect future results
    
    
    25Critical accounting policies
    
    
    26Average balances, Interest Income/Expense and yields/rates paid
    
    
    29Analysis of changes in net interest income and interest expense
    
    
    30Noninterest Income
    
    
    31Noninterest Expense
    
    
    31Income taxes
    
    
    32Asset quality
    
    
    33Allowance for loan and lease losses (ALLL)
    
    
    34Securities portfolio
    
    
    35Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    39
 2




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Index to Form 10-Q
 Page:PART II. OTHER INFORMATIONItem 1.
    
    Legal proceedings
    
    
    40Item 1a.
    
    Risk Factors
    
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3.
    
    Defaults Upon Senior Securities
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    40Item 5.
    
    Other Information
    
    
    40Item 6.
    
    Exhibits
    
    
    40SIGNATURES
    
    
    40EXHIBITS
    
    
    
    
    41,42, 43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (Unaudited)
 Amounts in thousands, except per share data
    
    June 30, 2006
    
    
    Dec. 31,2005
    
    
    June 30, 2005ASSETSCash and due from banks
    
    $
    12,668
    
    
    $
    17,436
    
    
    $
    19,300Federal funds sold and securities purchased under agreements to
resell
    
    
    14,155
    
    
    
    9,120
    
    
    
    11,895Cash and cash equivalents
    
    
    26,823
    
    
    
    26,556
    
    
    
    31,195Securities available-for-sale (including pledged collateral of $83,080
at June 30, 2006; $50,102 at December 31, 2005 and $39,053 at
June 30, 2005)
    
    
    97,366
    
    
    
    94,014
    
    
    
    72,709Securities held-to-maturity, at cost (estimated fair value of $10,889
at June 30, 2006, $6,881 at December 31, 2005
and $5,934 at June 30, 2005)
    
    
    11,141
    
    
    
    6,933
    
    
    
    5,889Loans, net of the allowance for loan losses of $4,502 at June 30,
2006, $4,316 at December 31, 2005 and $4,148 at June 30,
2005
    
    
    401,185
    
    
    
    363,305
    
    
    
    340,230Bank premises and equipment, net
    
    
    6,690
    
    
    
    5,631
    
    
    
    5,581Other assets
    
    
    20,942
    
    
    
    15,205
    
    
    
    12,611TOTAL ASSETS
    
    $
    564,147
    
    
    $
    511,644
    
    
    $
    468,215LIABILITIES AND STOCKHOLDERS EQUITYDemand  noninterest bearing
    
    $
    74,505
    
    
    $
    86,219
    
    
    $
    77,960Demand  interest bearing
    
    
    101,492
    
    
    
    109,101
    
    
    
    115,772Savings
    
    
    23,112
    
    
    
    27,540
    
    
    
    26,898Certificates of deposits
    
    
    189,577
    
    
    
    149,256
    
    
    
    148,507Total deposits
    
    
    388,686
    
    
    
    372,116
    
    
    
    369,137Securities sold under agreements to repurchase
    
    
    32,507
    
    
    
    22,886
    
    
    
    21,537Federal Home Loan Bank borrowings
    
    
    80,000
    
    
    
    55,000
    
    
    
    30,000Other liabilities
    
    
    6,536
    
    
    
    7,194
    
    
    
    5,119Guaranteed
Preferred Beneficial Interests in Companys
Junior Subordinated Debt payable to unconsolidated subsidiary
grantor trust
    
    
    15,465
    
    
    
    15,310
    
    
    
    5,000Total Liabilities
    
    
    523,194
    
    
    
    472,506
    
    
    
    430,793Commitments and contingenciesStockholders Equity:Preferred stock, no par value, 2,000,000 authorized
no shares issued and outstanding in 2006 and 2005
    
    
    
    
    
    
    
    
    
    
    Common stock , no par value, 50,000,000 shares authorized;
8,729,672 shares issued and outstanding
at June 30, 2006, 8,657,896 at December 31, 2005
and 8,618,581 at June 30, 2005
    
    
    11,441
    
    
    
    11,009
    
    
    
    10,894Retained earnings
    
    
    31,479
    
    
    
    29,419
    
    
    
    27,097Accumulated other comprehensive (loss), net of tax
    
    
    (1,967
    )
    
    
    (1,290
    )
    
    
    (569
    )Total Stockholders equity
    
    
    40,953
    
    
    
    39,138
    
    
    
    37,422TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    564,147
    
    
    $
    511,644
    
    
    $
    468,215
 See accompanying notes to condensed consolidated financial statements.
 4




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
 Three and six months ended June 30, 2006 and 2005
 Three Months Ended
    
    
    Six Months EndedAmounts in thousands, except for per share data
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Interest income:Interest and fees on loans
    
    $
    8,149
    
    
    $
    5,840
    
    
    $
    15,380
    
    
    $
    11,247Interest on tax exempt securities
    
    
    140
    
    
    
    77
    
    
    
    263
    
    
    
    131Interest on U.S. government securities
    
    
    864
    
    
    
    657
    
    
    
    1,726
    
    
    
    1,308Interest on federal funds sold and
securities purchased under agreements to resell
    
    
    145
    
    
    
    86
    
    
    
    275
    
    
    
    165Interest on other securities
    
    
    44
    
    
    
    0
    
    
    
    88
    
    
    
    0Total interest income
    
    
    9,342
    
    
    
    6,660
    
    
    
    17,732
    
    
    
    12,851Interest expense:Interest on demand deposits
    
    
    286
    
    
    
    273
    
    
    
    519
    
    
    
    412Interest on savings deposits
    
    
    75
    
    
    
    47
    
    
    
    140
    
    
    
    71Interest on time deposits
    
    
    1,872
    
    
    
    1,031
    
    
    
    3,421
    
    
    
    1,861Securities sold under agreements to repurchase
    
    
    267
    
    
    
    99
    
    
    
    466
    
    
    
    118Interest on FHLB and other borrowing expense
    
    
    902
    
    
    
    265
    
    
    
    1,574
    
    
    
    511Interest on junior subordinated debt payable to
unconsolidated subsidiary grantor trust
    
    
    266
    
    
    
    84
    
    
    
    524
    
    
    
    161Total interest expense
    
    
    3,668
    
    
    
    1,799
    
    
    
    6,644
    
    
    
    3,134Net interest income
    
    
    5,674
    
    
    
    4,861
    
    
    
    11,088
    
    
    
    9,717Provision for loan and lease losses
    
    
    143
    
    
    
    177
    
    
    
    154
    
    
    
    354Net interest income after provision for loan losses
    
    
    5,531
    
    
    
    4,684
    
    
    
    10,934
    
    
    
    9,363Noninterest income:Service charges on deposit accounts
    
    
    86
    
    
    
    102
    
    
    
    174
    
    
    
    205Payroll and benefit processing fees
    
    
    89
    
    
    
    84
    
    
    
    198
    
    
    
    183Earnings on cash surrender value -
Bank owned life insurance
    
    
    98
    
    
    
    53
    
    
    
    151
    
    
    
    104Net gain (loss) on sale of securities available-for-sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (2
    )Net gain on sale of loans
    
    
    0
    
    
    
    49
    
    
    
    0
    
    
    
    68Merchant credit card service income, net
    
    
    93
    
    
    
    78
    
    
    
    170
    
    
    
    177Mortgage brokerage fee income
    
    
    35
    
    
    
    71
    
    
    
    52
    
    
    
    157Other income
    
    
    111
    
    
    
    111
    
    
    
    214
    
    
    
    198Total non-interest income
    
    
    512
    
    
    
    548
    
    
    
    959
    
    
    
    1,090Noninterest expense:Salaries and related benefits
    
    
    1,996
    
    
    
    1,645
    
    
    
    3,874
    
    
    
    3,338Occupancy and equipment expense
    
    
    448
    
    
    
    349
    
    
    
    883
    
    
    
    736FDIC insurance premium
    
    
    12
    
    
    
    13
    
    
    
    24
    
    
    
    25Data processing fees
    
    
    58
    
    
    
    97
    
    
    
    116
    
    
    
    138Professional service fees
    
    
    150
    
    
    
    173
    
    
    
    354
    
    
    
    378Payroll and Benefit fees
    
    
    25
    
    
    
    26
    
    
    
    54
    
    
    
    62Deferred compensation expense
    
    
    90
    
    
    
    76
    
    
    
    178
    
    
    
    149Stationery and Supplies
    
    
    49
    
    
    
    45
    
    
    
    109
    
    
    
    119Postage
    
    
    34
    
    
    
    26
    
    
    
    65
    
    
    
    54Directors expense
    
    
    65
    
    
    
    84
    
    
    
    125
    
    
    
    143Other expenses
    
    
    383
    
    
    
    353
    
    
    
    766
    
    
    
    665Total non-interest expense
    
    
    3,310
    
    
    
    2,887
    
    
    
    6,548
    
    
    
    5,807Income before income taxes
    
    
    2,733
    
    
    
    2,345
    
    
    
    5,345
    
    
    
    4,646Provision for income taxes
    
    
    1,044
    
    
    
    874
    
    
    
    2,064
    
    
    
    1,799Net Income
    
    $
    1,689
    
    
    $
    1,471
    
    
    $
    3,281
    
    
    $
    2,847Basic earnings per share
    
    $
    0.19
    
    
    $
    0.17
    
    
    $
    0.38
    
    
    $
    0.33Weighted average shares  basic
    
    
    8,723
    
    
    
    8,591
    
    
    
    8,702
    
    
    
    8,563Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.37
    
    
    $
    0.31Weighted average shares  diluted
    
    
    8,912
    
    
    
    9,273
    
    
    
    8,896
    
    
    
    9,091
 See accompanying notes to condensed consolidated financial statements.
 5




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Six months ended June 30, 2006 and 2005
 Dollars in thousands
    
    June 30, 2006
    
    
    June 30, 2005Cash flows from operating activities:Net Income
    
    $
    3,281
    
    
    $
    2,847Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan and lease losses
    
    
    154
    
    
    
    354Provision for depreciation and amortization
    
    
    321
    
    
    
    280Compensation expense associated with stock options
    
    
    27
    
    
    
    3Tax benefits from the exercise of stock options
    
    
    (134
    )
    
    
    201Loss on sale of securities available for sale
    
    
    0
    
    
    
    2Amortization of investment premiums and accretion of discounts, net
    
    
    (13
    )
    
    
    86Gain on sale of loans
    
    
    0
    
    
    
    (68
    )Proceeds from sales of loans
    
    
    0
    
    
    
    1,328Loans originated for sale
    
    
    0
    
    
    
    (1,260
    )Effect of changes in:Other assets
    
    
    (4,960
    )
    
    
    (86
    )Deferred loan fees
    
    
    0
    
    
    
    (315
    )Other liabilities
    
    
    (658
    )
    
    
    (3,263
    )Net cash used in operating activities
    
    
    (1,982
    )
    
    
    109Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    5,105
    
    
    
    13,823Proceeds from sales of available-for-sale securities
    
    
    0
    
    
    
    141Proceeds from maturities of held-to-maturity securities
    
    
    216
    
    
    
    45Purchases of available-for-sale securities
    
    
    (14,019
    )
    
    
    (10,437
    )Loan originations, net of principal repayments
    
    
    (38,034
    )
    
    
    (21,469
    )Purchases of premises and equipment
    
    
    (1,380
    )
    
    
    (377
    )Net cash used by investing activities
    
    
    (48,112
    )
    
    
    (18,274
    )Cash flows from financing activities:Net increase in deposits
    
    
    16,570
    
    
    
    16,260Net increase in securities sold under agreement to repurchase
    
    
    9,622
    
    
    
    19,533Proceeds from Federal Home Loan Bank advances
    
    
    45,000
    
    
    
    23,000Repayments of Federal Home Loan Bank advances
    
    
    (20,000
    )
    
    
    (28,000
    )Dividends paid on common stock
    
    
    (1,221
    )
    
    
    (1,031
    )Excess tax benefits from the exercise of stock options
    
    
    134
    
    
    
    0Proceeds from stock options exercised
    
    
    256
    
    
    
    357Net cash provided by financing activities
    
    
    50,361
    
    
    
    30,320Net increase in cash and cash equivalents
    
    
    267
    
    
    
    11,954Cash and cash equivalents, beginning of period
    
    
    26,556
    
    
    
    19,241Cash and cash equivalents, end of period
    
    $
    26,823
    
    
    $
    31,195Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    1,782
    
    
    $
    1,814Interest
    
    
    6,579
    
    
    
    3,040
 See accompanying notes to condensed consolidated financial statements.
 6




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Consolidation and Basis of Presentation
     2. Recent Accounting pronouncements
 On July 13, 2006, the FASB issued the Summary of Interpretation No. 48, Accounting for Uncertainty
in Income Taxes  (FIN 48). Accounting for income taxes.
   7




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
  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
 On February 16, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting for Certain Hybrid Instruments (SFAS 155),
 3. Earnings per Share
   Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Basic EPS Calculation:Numerator (net income)
    
    $
    1,689
    
    
    $
    1,471
    
    
    $
    3,281
    
    
    $
    2,847Denominator (average common
shares outstanding)
    
    
    8,723
    
    
    
    8,591
    
    
    
    8,702
    
    
    
    8,563Basic earnings per Share
    
    $
    0.19
    
    
    $
    0.17
    
    
    $
    0.38
    
    
    $
    0.33Diluted EPS Calculation:Numerator (net income)
    
    $
    1,689
    
    
    $
    1,471
    
    
    $
    3,281
    
    
    $
    2,847Denominator:Average common shares outstanding
    
    
    8,723
    
    
    
    8,591
    
    
    
    8,702
    
    
    
    8,563Options
    
    
    189
    
    
    
    682
    
    
    
    194
    
    
    
    5288,912
    
    
    
    9,273
    
    
    
    8,896
    
    
    
    9,091Diluted earnings per Share
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.37
    
    
    $
    0.31
 8




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
 4. Stock Option Plans
 Share-Based Payment, Accounting
for Stock-Based Compensation Transition and Disclosure,
   Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net incomeAs reported
    
    $
    1,471
    
    
    $
    2,847Deduct:Total stock-based employee
compensation
expense determined under fair
value based
method for all awards, net of
related tax effects
    
    
    (37
    )
    
    
    (74
    )Pro forma net income
    
    $
    1,434
    
    
    $
    2,773Earnings per share:Basic  as reported
    
    $
    0.17
    
    
    $
    0.33Basic  pro forma
    
    $
    0.17
    
    
    $
    0.32Diluted  as reported
    
    $
    0.16
    
    
    $
    0.31Diluted  pro forma
    
    $
    0.15
    
    
    $
    0.31
  9




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
 June 30, 2005Risk-free interest rate
    
    
    3.92
    %Dividend Yield
    
    
    2.49
    %Volatility
    
    
    32.36
    %Expected lives (years)
    
    
    7Weighted average grant-date fair value per share of options
granted
    
    $
    3.35
 Description of stock-based compensation plans
   Activity in stock-based compensation plans
  Weighted
    
    
    AggregateAverage
    
    
    IntrinsicNumber of Shares
    
    
    Exercise Price
    
    
    ValueOptions outstanding, January 1, 2006
    
    
    608,316
    
    
    $
    5.20Granted
    
    
    0
    
    
    $
    0.00
    
    
    $
    Exercised
    
    
    (71,776
    )
    
    $
    3.58
    
    
    $
    5.79Forfeited
    
    
    (1,425
    )
    
    $
    10.60
    
    
    $
    Options outstanding, June 30, 2006
    
    
    535,115
    
    
    $
    4.43
    
    
    $
    6.62Exercisable at June 30, 2006
    
    
    507,409
    
    
    $
    3.98
    
    
    $
    6.42
  10




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
  Weighted AverageRemainingContractual lifeExercise Price
    
    Options Outstanding
    
    (Years)
    
    Options Exercisable$  2.75
    
    
    214,600
    
    
    
    1.3
    
    
    
    214,600$  3.23
    
    
    62,760
    
    
    
    1.3
    
    
    
    62,760$  5.42
    
    
    29,250
    
    
    
    4.4
    
    
    
    29,250$  6.67
    
    
    60,500
    
    
    
    4.6
    
    
    
    60,500$  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
    
    
    10,800
    
    
    
    7.3
    
    
    
    4,320$11.59
    
    
    3,500
    
    
    
    8.4
    
    
    
    700$10.20
    
    
    2,500
    
    
    
    8.4
    
    
    
    500535,115
    
    
    
    
    
    
    
    507,409
   5. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Net Income as reported
    
    $
    1,689
    
    
    $
    1,471
    
    
    $
    3,281
    
    
    $
    2,847Components of other comprehensive income:Unrealized (losses) gains
arising during
the period on investment
securities
available-for-sale
    
    
    (579
    )
    
    
    394
    
    
    
    (677
    )
    
    
    (329
    )Less: Income tax benefit
related to
unrealized (losses) gains on
investment
securities,
available-for-sale
    
    
    221
    
    
    
    (107
    )
    
    
    261
    
    
    
    92Reclassification adjustment for
loss on available for sale
securities
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2Total other comprehensive income
    
    
    (358
    )
    
    
    287
    
    
    
    (416
    )
    
    
    (235
    )Total comprehensive income
    
    $
    1,331
    
    
    $
    1,758
    
    
    $
    2,865
    
    
    $
    2,612
 11




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
 6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust
       12




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
 7. Commitments and contingent liabilities
 Lease Commitments 
 (Dollars in thousands)2006
    
    $
    2192007
    
    $
    4742008
    
    $
    4992009
    
    $
    4472010
    
    $
    396Thereafter
    
    $
    428Total
    
    $
    2,464Minimum rental due in the future
Under non-cancelable subleases
    
    $
    40
 Legal Proceedings 
 FHLB Advances 
 Advance #
    
    Amount
    
    Interest Rate
    
    Maturity#059277
    
    $
    10,000,000
    
    
    
    5.18
    %
    
    
    01/24/2008#077115
    
    $
    10,000,000
    
    
    
    5.14
    %
    
    
    11/27/2006#080890
    
    $
    10,000,000
    
    
    
    5.22
    %
    
    
    11/24/2011#087271
    
    $
    10,000,000
    
    
    
    5.31
    %
    
    
    04/26/2007#087416
    
    $
    5,000,000
    
    
    
    5.23
    %
    
    
    04/28/2008#087272
    
    $
    5,000,000
    
    
    
    5.22
    %
    
    
    10/24/2006#092527
    
    $
    5,000,000
    
    
    
    5.28
    %
    
    
    07/26/2006#093100
    
    $
    3,500,000
    
    
    
    5.30
    %
    
    
    07/31/2006#093101
    
    $
    6,500,000
    
    
    
    5.31
    %
    
    
    07/31/2006#077383
    
    $
    15,000,000
    
    
    
    5.14
    %
    
    
    11/30/2007$
    80,000,000
  13




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited)
 Off-Balance Sheet Financial Instruments
    June 30, 2006
    
    
    June 30, 2005Commitment lines of credit
    
    $
    156,695,891
    
    
    $
    144,019,131Standby letters of credit
    
    
    14,177,689
    
    
    
    8,705,602Guaranteed commitments outstanding
    
    
    248,000
    
    
    
    0$
    171,121,580
    
    
    $
    152,724,733
 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward Looking Statements and Risk Factors
 This discussion and information in the accompanying financial statements contains certain
forward-looking statements, which are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties
that could cause actual results to differ materially from those stated. These risks and
uncertainties include the Companys ability to maintain or expand its market share and net interest
margins, or to implement its marketing and growth strategies. Further, actual results may be
affected by the Companys ability to compete on price and other factors with other financial
institutions; customer acceptance of new products and services; and general trends in the banking
and the regulatory environment, as they relate to the Companys cost of funds and return on assets.
The reader is advised that this list of risks is not exhaustive and should not be construed as any
prediction by the Company as to which risks would cause actual results to differ materially from
those indicated by the forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements.
 For additional information concerning risks and uncertainties related to the Company and its
operations please refer to the Companys Annual Report on Form 10-K for the year ended December 31,
2005, under the heading Risk factors that may affect results. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of any revision to these
forward-looking statements to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
 The following sections discuss significant changes and trends in financial condition, capital
resources and liquidity of the Company from December 31, 2005 to June 30, 2006. Also discussed are
significant trends and changes in the Companys results of operations for the three and six months
ended June 30, 2006, compared to the same period in 2005. The consolidated financial statements and
related notes appearing elsewhere in this report are condensed and unaudited. The following
discussion and analysis is intended to provide greater detail of the Companys financial condition
and results.
 
 Corporate Overview
  15




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  www.reddingbankofcommerce.com www.rosevillebankofcommerce.com, www.sutterbankofcommerce.com www.sec.gov
       16




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
         17




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Lending Risks Associated with Commercial Banking and Construction Activities
  
 Dependence on Real Estate
   
 Risks Specific to Operations in California
  
 Interest Rate Risk
  18




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Potential Volatility of Deposits
  
 Dividends
  
 Government Regulation and Legislation
  
 Economic Conditions and Geographic Concentration
  
 Reliance on Key Employees and Others
  19




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Adequacy of Allowance for Loan and Lease Losses (ALLL)
  
 Certain Ownership Restrictions under California and Federal Law
   
 Shares Eligible for Future Sale
  20




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Technology and Computer Systems
   
 Environmental Risks
  
 Dilution
  
 UNRESOLVED STAFF COMMENTS
  21




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




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Financial Highlights  Results of Operations
   
 Net Interest Income and Net Interest Margin
     
 Liquidity
  23




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
   
 Capital Management
   Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalJune 30, 2006
    
    Capital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    52,921,000
    
    
    
    9.62
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    52,921,000
    
    
    
    11.36
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    57,822,641
    
    
    
    12.41
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of CommerceLeverage
    
    $
    53,415,878
    
    
    
    9.88
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    53,415,878
    
    
    
    11.47
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    58,317,519
    
    
    
    12.52
    %
    
    
    10.00
    %
    
    
    8.0
    %
 
 Short and Long Term Borrowings
   24




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Provision for Loan and Lease Losses
   
 Factors that may affect future results
      25




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
   
 Critical Accounting Policies
   Preparation of financial statements
  Use of estimates
  Generally Accepted Accounting Principles in the United States of America
  26




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  Allowance for Loan and Lease Losses (ALLL)
    Revenue recognition
  Stock-based Compensation
 Accounting for Stock Based
Compensation
 27




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  Income Taxes
  28




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
 Table 1. Average Balances, Interest Income/Expense and Yields/Rates Paid
(Unaudited, Dollars in thousands)
 Six Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2006Average
    
    
    
    
    
    
    Yield/
    
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    
    Balance
    
    
    Interest
    
    
    RateEarning AssetsPortfolio Loans
    
    $
    381,070
    
    
    $
    15,380
    
    
    
    8.07
    %
    
    
    $
    331,057
    
    
    $
    11,247
    
    
    
    6.79
    %Tax-exempt Securities
    
    
    14,911
    
    
    
    263
    
    
    
    3.53
    %
    
    
    
    7,910
    
    
    
    131
    
    
    
    3.31
    %US Government Securities
    
    
    84,890
    
    
    
    1,726
    
    
    
    4.07
    %
    
    
    
    72,160
    
    
    
    1,308
    
    
    
    3.63
    %Federal Funds Sold
    
    
    11,463
    
    
    
    275
    
    
    
    4.80
    %
    
    
    
    12,196
    
    
    
    165
    
    
    
    2.71
    %Other Securities
    
    
    4,053
    
    
    
    88
    
    
    
    4.34
    %
    
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %Average Earning Assets
    
    $
    496,387
    
    
    $
    17,732
    
    
    
    7.14
    %
    
    
    $
    423,323
    
    
    $
    12,851
    
    
    
    6.07
    %Cash & Due From Banks
    
    $
    14,078
    
    
    
    
    
    
    
    
    
    
    
    $
    15,032Bank Premises
    
    
    6,249
    
    
    
    
    
    
    
    
    
    
    
    
    5,526Allowance for Loan and Lease Losses
    
    
    (4,372
    )
    
    
    
    
    
    
    
    
    
    
    
    (4,042
    )Other Assets
    
    
    14,537
    
    
    
    
    
    
    
    
    
    
    
    
    11,230Average Total Assets
    
    $
    526,879
    
    
    
    
    
    
    
    
    
    
    
    $
    451,069Interest Bearing LiabilitiesDemand Interest Bearing
    
    $
    104,439
    
    
    $
    519
    
    
    
    0.99
    %
    
    
    $
    111,006
    
    
    $
    412
    
    
    
    0.74
    %Savings Deposits
    
    
    26,736
    
    
    
    140
    
    
    
    1.05
    %
    
    
    
    25,361
    
    
    
    71
    
    
    
    0.56
    %Certificates of Deposit
    
    
    172,074
    
    
    
    3,421
    
    
    
    3.98
    %
    
    
    
    145,370
    
    
    
    1,861
    
    
    
    2.56
    %Repurchase Agreements
    
    
    25,972
    
    
    
    466
    
    
    
    3.59
    %
    
    
    
    12,723
    
    
    
    118
    
    
    
    1.85
    %FHLB Borrowings
    
    
    63,370
    
    
    
    1,574
    
    
    
    4.93
    %
    
    
    
    34,033
    
    
    
    511
    
    
    
    2.96
    %Trust Preferred Borrowings
    
    
    15,000
    
    
    
    524
    
    
    
    7.16
    %
    
    
    
    5,000
    
    
    
    161
    
    
    
    6.72
    %Average Interest Bearing Liabilities
    
    
    407,591
    
    
    $
    6,644
    
    
    
    3.26
    %
    
    
    
    333,493
    
    
    $
    3,134
    
    
    
    1.88
    %Non interest Demand
    
    
    77,213
    
    
    
    
    
    
    
    
    
    
    
    
    75,631Other Liabilities
    
    
    5,903
    
    
    
    
    
    
    
    
    
    
    
    
    6,928Shareholder Equity
    
    
    36,172
    
    
    
    
    
    
    
    
    
    
    
    
    35,017Average Liabilities and
Stockholders Equity
    
    $
    526,879
    
    
    
    
    
    
    
    
    
    
    
    $
    451,069Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    11,088
    
    
    
    4.47
    %
    
    
    
    
    
    
    $
    9,717
    
    
    
    4.59
    %
   29




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  
 Table 2. Analysis of Changes in Net Interest Income and Interest Expense
(Unaudited)
 June 30, 2006 over June 30, 2005(Dollars in thousands)
    
    Volume
    
    
    Rate
    
    
    TotalIncrease(Decrease) In Interest IncomePortfolio Loans
    
    $
    2,019
    
    
    $
    2,114
    
    
    $
    4,133Tax-exempt Securities
    
    
    123
    
    
    
    9
    
    
    
    132US Government Securities
    
    
    259
    
    
    
    159
    
    
    
    418Federal Funds Sold
    
    
    (18
    )
    
    
    128
    
    
    
    110Other Securities
    
    
    88
    
    
    
    0
    
    
    
    88Total Increase
    
    $
    2,471
    
    
    $
    2,410
    
    
    $
    4,881Increase(Decrease) In Interest ExpenseInterest Bearing Demand
    
    $
    (33
    )
    
    $
    140
    
    
    $
    107Savings Deposits
    
    
    7
    
    
    
    62
    
    
    
    69Certificates of Deposit
    
    
    531
    
    
    
    1,029
    
    
    
    1,560Repurchase Agreements
    
    
    238
    
    
    
    110
    
    
    
    348FHLB Borrowings
    
    
    723
    
    
    
    340
    
    
    
    1,063Trust Preferred Borrowings
    
    
    358
    
    
    
    5
    
    
    
    363Total Increase
    
    $
    1,824
    
    
    $
    1,686
    
    
    $
    3,510Net Increase
    
    $
    647
    
    
    $
    724
    
    
    $
    1,371
    30




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Noninterest Income
  (Dollars in thousands)
    
    Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Noninterest incomeService charges on deposit accounts
    
    $
    86
    
    
    $
    102
    
    
    $
    174
    
    
    $
    205Payroll and benefit processing fees
    
    
    89
    
    
    
    84
    
    
    
    198
    
    
    
    183Earnings on cash surrender value -
Bank owned insurance
    
    
    98
    
    
    
    53
    
    
    
    151
    
    
    
    104Net gain on sale of securities
available-for-sale
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (2
    )Net gain on sale of loans
    
    
    0
    
    
    
    49
    
    
    
    0
    
    
    
    68Merchant credit card service
income, net
    
    
    93
    
    
    
    78
    
    
    
    170
    
    
    
    177Mortgage brokerage fee income
    
    
    35
    
    
    
    71
    
    
    
    52
    
    
    
    157Other Income
    
    
    111
    
    
    
    111
    
    
    
    214
    
    
    
    198Total Noninterest income
    
    $
    512
    
    
    $
    548
    
    
    $
    959
    
    
    $
    1,090
   
 Noninterest Expense
 Three Months Ended
    
    
    Six Months Ended(Dollars in thousands)
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Noninterest ExpenseSalaries and related benefits
    
    $
    1,996
    
    
    $
    1,645
    
    
    $
    3,874
    
    
    $
    3,338Occupancy and equipment expense
    
    
    448
    
    
    
    349
    
    
    
    883
    
    
    
    736FDIC insurance premium
    
    
    12
    
    
    
    13
    
    
    
    24
    
    
    
    25Data processing fees
    
    
    58
    
    
    
    97
    
    
    
    116
    
    
    
    138Professional service fees
    
    
    150
    
    
    
    173
    
    
    
    354
    
    
    
    378Payroll and Benefit fees
    
    
    25
    
    
    
    26
    
    
    
    54
    
    
    
    62Deferred compensation expense
    
    
    90
    
    
    
    76
    
    
    
    178
    
    
    
    149Stationery and Supplies
    
    
    49
    
    
    
    45
    
    
    
    109
    
    
    
    119Postage
    
    
    34
    
    
    
    26
    
    
    
    65
    
    
    
    54Directors expense
    
    
    65
    
    
    
    84
    
    
    
    125
    
    
    
    143Other expenses
    
    
    383
    
    
    
    353
    
    
    
    766
    
    
    
    665Total Noninterest expense
    
    $
    3,310
    
    
    $
    2,887
    
    
    $
    6,548
    
    
    $
    5,807
 31




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
   
 Income Taxes
   (Dollars in thousands)
    
    Three Months Ended
    
    
    Six Months EndedIncome Taxes
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Tax provision
    
    $
    1,044
    
    
    $
    874
    
    
    $
    2,064
    
    
    $
    1,799Effective tax rate
    
    
    38.2
    %
    
    
    37.3
    %
    
    
    38.6
    %
    
    
    38.7
    %
   32




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Asset Quality
    (Dollars in thousands)Portfolio Loans
    
    June 30, 2006
    
    
    December 31, 2005Commercial and financial loans
    
    $
    129,196
    
    
    $
    115,401Real estate-construction loans
    
    
    112,713
    
    
    
    100,786Real estate-commercial
    
    
    143,326
    
    
    
    133,510Real estate-other
    
    
    14,942
    
    
    
    13,790Real estate-mortgage
    
    
    3,477
    
    
    
    3,669Installment
    
    
    171
    
    
    
    439Other loans
    
    
    2,282
    
    
    
    446Less:Net deferred loan fees
    
    
    (420
    )
    
    
    (420
    )Allowance for loan losses
    
    
    (4,502
    )
    
    
    (4,316
    )Total net loans
    
    $
    401,185
    
    
    $
    363,305
   33




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  (Dollars in thousands)Non performing assets
    
    June 30, 2006
    
    
    December 31, 2005Nonaccrual loans
    
    $
    0
    
    
    $
    37290 days past due and still accruing
interest
    
    
    0
    
    
    
    0Total nonaccrual loans
    
    
    0
    
    
    
    372Other Real Estate Owned
    
    
    0
    
    
    
    0Total non performing assets
    
    $
    0
    
    
    $
    372
 
 Allowance for Loan and Lease Losses (ALLL)
  Accounting for Contingencies Accounting by Creditors for Impairment of a Loan. Accounting for Contingencies
    34




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  (Dollars in thousands)
    
    Three Months Ended
    
    Six Months EndedAllowance for Loan Losses
    
    June 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Beginning balance for Loan
Losses
    
    $
    4,295
    
    
    $
    4,043
    
    
    $
    4,316
    
    
    $
    3,866Provision for Loan Losses
    
    
    143
    
    
    
    177
    
    
    
    154
    
    
    
    354Charge offs:Commercial
    
    
    (120
    )
    
    
    (77
    )
    
    
    (269
    )
    
    
    (77
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )Other
    
    
    (1
    )
    
    
    (0
    )
    
    
    (1
    )
    
    
    (0
    )Total Charge offs
    
    
    (121
    )
    
    
    (77
    )
    
    
    (270
    )
    
    
    (77
    )Recoveries:Commercial
    
    
    180
    
    
    
    5
    
    
    
    296
    
    
    
    5Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    5
    
    
    
    0
    
    
    
    6
    
    
    
    0Total Recoveries
    
    
    185
    
    
    
    5
    
    
    
    302
    
    
    
    5Ending Balance
    
    $
    4,502
    
    
    $
    4,148
    
    
    $
    4,502
    
    
    $
    4,148ALLL to total loans
    
    
    1.11
    %
    
    
    1.20
    %
    
    
    1.11
    %
    
    
    1.20
    %Net Charge offs to average loans
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.00
    %
    
    
    0.02
    %
 
 Securities Portfolio
    (Dollars in thousands)
    
    as of June 30, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCosts
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    44,337
    
    
    $
    0
    
    
    $
    (1,314
    )
    
    $
    43,023Obligations of state and
political subdivisions
    
    
    13,941
    
    
    
    20
    
    
    
    (267
    )
    
    
    13,694Mortgage backed securities
    
    
    38,371
    
    
    
    0
    
    
    
    (1,718
    )
    
    
    36,653Other securities
    
    
    4,060
    
    
    
    0
    
    
    
    (64
    )
    
    
    3,996Total
    
    $
    100,709
    
    
    $
    20
    
    
    $
    (3,363
    )
    
    $
    97,366
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 (Dollars in thousands)
    
    as of June 30, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCosts
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    28,940
    
    
    $
    4
    
    
    $
    (509
    )
    
    $
    28,435Obligations of state and
political subdivisions
    
    
    6,369
    
    
    
    44
    
    
    
    (97
    )
    
    
    6,316Mortgage backed securities
    
    
    38,366
    
    
    
    0
    
    
    
    (408
    )
    
    
    37,958Total
    
    $
    73,675
    
    
    $
    48
    
    
    $
    (1,014
    )
    
    $
    72,709
  36




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
      37




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38




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ITEM 4. CONTROLS AND PROCEDURES
     39




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##### Table of Contents



PART II. Other Information
 
 Item 1. Legal proceedings
  
 Item 1a. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a vote of Security Holders
      
 Item 5. Other Information
 
 Item 6. Exhibits
    
 SIGNATURES
  BANK OF COMMERCE HOLDINGS(Registrant)Date: August 3, 2006
    
    
    
    /s/ Linda J. MilesLinda J. MilesExecutive Vice President &Chief Financial Officer
 40