##### 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 September 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
(State or other jurisdiction of incorporation or organization) 
1951 Churn Creek Road Redding, California
    
    94-2823865
(I.R.S. Employer Identification No.)
 96002(Address of principal executive offices)
    
    (Zip code)
   
 þ o
  o o þ
 o þ




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##### 



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Index to Form 10-Q
 Page:PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets
September 30, 2006, December 31, 2005 and September 30, 2005
    
    
    4Condensed Consolidated Statements of Income
Three and nine months ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows
Three and nine months ended September 30, 2006 and 2005
    
    
    6Notes to Unaudited Condensed Consolidated 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 and long term borrowings
    
    
    24Provision for loan and lease 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
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.0
  2




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Index to Form 10-Q
 Page:Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    39PART 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
    
    
    41,42,43
 3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
(Unaudited)
 September 30,
    
    
    December 31,
    
    
    September 30,Amounts in thousands, except per share data
    
    2006
    
    
    2005
    
    
    2005ASSETSCash and due from banks
    
    $
    17,535
    
    
    $
    17,436
    
    
    $
    14,759Federal funds sold and securities purchased under agreements to
resell
    
    
    28,010
    
    
    
    9,120
    
    
    
    8,550Cash and cash equivalents
    
    
    45,545
    
    
    
    26,556
    
    
    
    23,309Securities available-for-sale (including pledged collateral of
$74,022
at September 30, 2006; $50,102 at December 31, 2005 and
$52,988 at September 30, 2005)
    
    
    97,614
    
    
    
    94,014
    
    
    
    98,107Securities held-to-maturity, at cost (estimated fair value of $10,788
at September 30, 2006, $6,881 at December 31, 2005
and $5,834 at September 30, 2005)
    
    
    10,841
    
    
    
    6,933
    
    
    
    5,813Loans, net of the allowance for loan losses of $4,753 at September
30, 2006, $4,316 at December 31, 2005 and $4,251
at September 30, 2005
    
    
    403,657
    
    
    
    363,305
    
    
    
    342,004Bank premises and equipment, net
    
    
    7,350
    
    
    
    5,631
    
    
    
    5,547Other assets
    
    
    20,211
    
    
    
    15,205
    
    
    
    13,228TOTAL ASSETS
    
    $
    585,218
    
    
    $
    511,644
    
    
    $
    488,008LIABILITIES AND STOCKHOLDERS EQUITYDemand  noninterest bearing
    
    $
    81,125
    
    
    $
    86,219
    
    
    $
    80,516Demand  interest bearing
    
    
    111,439
    
    
    
    109,101
    
    
    
    116,137Savings
    
    
    22,610
    
    
    
    27,540
    
    
    
    26,078Certificates of deposits
    
    
    214,019
    
    
    
    149,256
    
    
    
    150,260Total deposits
    
    
    429,193
    
    
    
    372,116
    
    
    
    372,991Securities sold under agreements to repurchase
    
    
    35,260
    
    
    
    22,886
    
    
    
    20,461Federal Home Loan Bank borrowings
    
    
    55,000
    
    
    
    55,000
    
    
    
    35,000Other liabilities
    
    
    6,352
    
    
    
    7,194
    
    
    
    5,809Guaranteed Preferred Beneficial Interests in Companys
Junior Subordinated Debt payable to unconsolidated subsidiary
grantor trust
    
    
    15,465
    
    
    
    15,310
    
    
    
    15,310Total Liabilities
    
    
    541,270
    
    
    
    472,506
    
    
    
    449,571Commitments 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; 8,926,842 shares issued and outstanding
at September 30, 2006, 8,657,896 at December 31, 2005
and 8,654,896 at September 30, 2005
    
    
    12,416
    
    
    
    11,009
    
    
    
    10,998Retained earnings
    
    
    32,526
    
    
    
    29,419
    
    
    
    28,240Accumulated other comprehensive (loss), net of tax
    
    
    (994
    )
    
    
    (1,290
    )
    
    
    (801
    )Total Stockholders equity
    
    
    43,948
    
    
    
    39,138
    
    
    
    38,437TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    585,218
    
    
    $
    511,644
    
    
    $
    488,008
 See accompanying notes to condensed consolidated financial statements.
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
 Three and nine months ended September 30, 2006 and 2005
 Three Months Ended
    
    
    Nine Months EndedAmounts in thousands, except for per share data
    
    Sept. 30, 2006
    
    
    Sept. 30, 2005
    
    
    Sept. 30, 2006
    
    
    Sept. 30, 2005Interest income:Interest and fees on loans
    
    $
    8,501
    
    
    $
    6,146
    
    
    $
    23,881
    
    
    $
    17,393Interest on tax exempt securities
    
    
    231
    
    
    
    99
    
    
    
    494
    
    
    
    230Interest on U.S. government securities
    
    
    849
    
    
    
    718
    
    
    
    2,575
    
    
    
    2,026Interest on federal funds sold and
securities purchased under agreements to
resell
    
    
    383
    
    
    
    220
    
    
    
    658
    
    
    
    385Interest on other securities
    
    
    25
    
    
    
    16
    
    
    
    113
    
    
    
    16Total interest income
    
    
    9,989
    
    
    
    7,199
    
    
    
    27,721
    
    
    
    20,050Interest expense:Interest on demand deposits
    
    
    449
    
    
    
    276
    
    
    
    968
    
    
    
    688Interest on savings deposits
    
    
    69
    
    
    
    56
    
    
    
    209
    
    
    
    127Interest on time deposits
    
    
    2,423
    
    
    
    1,190
    
    
    
    5,844
    
    
    
    3,051Securities sold under agreements to repurchase
    
    
    328
    
    
    
    146
    
    
    
    794
    
    
    
    264Interest on FHLB and other borrowing expense
    
    
    918
    
    
    
    235
    
    
    
    2,492
    
    
    
    746Interest on junior subordinated debt payable to
unconsolidated subsidiary
grantor trust
    
    
    272
    
    
    
    171
    
    
    
    796
    
    
    
    332Total interest expense
    
    
    4,459
    
    
    
    2,074
    
    
    
    11,103
    
    
    
    5,208Net interest income
    
    
    5,530
    
    
    
    5,125
    
    
    
    16,618
    
    
    
    14,842Provision for loan and lease losses
    
    
    72
    
    
    
    88
    
    
    
    226
    
    
    
    442Net interest income after provision for
loan losses
    
    
    5,458
    
    
    
    5,037
    
    
    
    16,392
    
    
    
    14,400Noninterest income:Service charges on deposit accounts
    
    
    81
    
    
    
    98
    
    
    
    255
    
    
    
    303Payroll and benefit processing fees
    
    
    89
    
    
    
    81
    
    
    
    287
    
    
    
    264Earnings on cash surrender value -
Bank owned life insurance
    
    
    80
    
    
    
    52
    
    
    
    231
    
    
    
    156Net loss on sale of securities available-for-sale
    
    
    (171
    )
    
    
    0
    
    
    
    (171
    )
    
    
    (2
    )Net gain on sale of loans
    
    
    90
    
    
    
    23
    
    
    
    90
    
    
    
    91Merchant credit card service income, net
    
    
    110
    
    
    
    91
    
    
    
    280
    
    
    
    268Mortgage brokerage fee income
    
    
    32
    
    
    
    85
    
    
    
    84
    
    
    
    242Other income
    
    
    117
    
    
    
    85
    
    
    
    331
    
    
    
    283Total non-interest income
    
    
    428
    
    
    
    515
    
    
    
    1,387
    
    
    
    1,605Noninterest expense:Salaries and related benefits
    
    
    1,996
    
    
    
    1,750
    
    
    
    5,870
    
    
    
    5,088Occupancy and equipment expense
    
    
    467
    
    
    
    437
    
    
    
    1,350
    
    
    
    1,173FDIC insurance premium
    
    
    12
    
    
    
    11
    
    
    
    36
    
    
    
    36Data processing fees
    
    
    53
    
    
    
    71
    
    
    
    169
    
    
    
    209Professional service fees
    
    
    149
    
    
    
    199
    
    
    
    503
    
    
    
    577Payroll and Benefit fees
    
    
    24
    
    
    
    24
    
    
    
    78
    
    
    
    86Deferred compensation expense
    
    
    94
    
    
    
    85
    
    
    
    272
    
    
    
    234Stationery and Supplies
    
    
    71
    
    
    
    40
    
    
    
    180
    
    
    
    159Postage
    
    
    26
    
    
    
    45
    
    
    
    91
    
    
    
    84Directors expense
    
    
    45
    
    
    
    30
    
    
    
    170
    
    
    
    188Other expenses
    
    
    362
    
    
    
    403
    
    
    
    1,128
    
    
    
    1,068Total non-interest expense
    
    
    3,299
    
    
    
    3,095
    
    
    
    9,847
    
    
    
    8,902Income before provision for income taxes
    
    
    2,587
    
    
    
    2,457
    
    
    
    7,932
    
    
    
    7,103Provision for income taxes
    
    
    915
    
    
    
    897
    
    
    
    2,979
    
    
    
    2,696Net Income
    
    $
    1,672
    
    
    $
    1,560
    
    
    $
    4,953
    
    
    $
    4,407Basic earnings per share
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    0.57
    
    
    $
    0.51Weighted average shares  basic
    
    
    8,764
    
    
    
    8,619
    
    
    
    8,723
    
    
    
    8,582Diluted earnings per share
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    0.55
    
    
    $
    0.50Weighted average shares  diluted
    
    
    8,937
    
    
    
    8,874
    
    
    
    8,945
    
    
    
    8,911
 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)
 Nine months ended September 30, 2006 and 2005
 September 30,
    
    
    September 30,Dollars in thousands
    
    2006
    
    
    2005Cash flows from operating activities:Net Income
    
    $
    4,953
    
    
    $
    4,407Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan and lease losses
    
    
    226
    
    
    
    442Provision for depreciation and amortization
    
    
    516
    
    
    
    421Compensation expense associated with stock options
    
    
    40
    
    
    
    4Tax benefits from the exercise of stock options
    
    
    (560
    )
    
    
    (304
    )Loss on sale of securities available for sale
    
    
    171
    
    
    
    2Amortization of investment premiums and accretion of
discounts, net
    
    
    8
    
    
    
    100Gain on sale of loans
    
    
    (90
    )
    
    
    (91
    )Proceeds from sales of loans
    
    
    2,090
    
    
    
    2,351Loans originated for sale
    
    
    (2,000
    )
    
    
    (2,260
    )Effect of changes in:Other assets
    
    
    (5,119
    )
    
    
    (231
    )Deferred loan fees
    
    
    (43
    )
    
    
    (302
    )Other liabilities
    
    
    (842
    )
    
    
    (2,266
    )Net cash (used in) /provided by operating activities
    
    
    (650
    )
    
    
    2,273Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    8,100
    
    
    
    20,005Proceeds from sales of available-for-sale securities
    
    
    10,258
    
    
    
    121Proceeds from maturities of held-to-maturity securities
    
    
    518
    
    
    
    141Purchases of available-for-sale securities
    
    
    (26,155
    )
    
    
    (42,426
    )Loan originations, net of principal repayments
    
    
    (40,535
    )
    
    
    (23,343
    )Purchases of premises and equipment
    
    
    (2,236
    )
    
    
    (483
    )Net cash used by investing activities
    
    
    (50,050
    )
    
    
    (45,985
    )Cash flows from financing activities:Net increase in deposits
    
    
    57,077
    
    
    
    20,112Net increase in securities sold under agreement to repurchase
    
    
    12,376
    
    
    
    18,457Proceeds from Federal Home Loan Bank advances
    
    
    70,000
    
    
    
    38,000Repayments of Federal Home Loan Bank advances
    
    
    (70,000
    )
    
    
    (38,000
    )Dividends paid on common stock
    
    
    (1,846
    )
    
    
    (1,550
    )Excess tax benefits from the exercise of stock options
    
    
    560
    
    
    
    0Proceeds from stock options exercised
    
    
    840
    
    
    
    457Tax benefits from the exercise of stock options
    
    
    527
    
    
    
    304Net cash from Trust Preferred
    
    
    155
    
    
    
    10,000Net cash provided by financing activities
    
    
    69,689
    
    
    
    47,780Net increase in cash and cash equivalents
    
    
    18,989
    
    
    
    4,068Cash and cash equivalents, beginning of period
    
    
    26,556
    
    
    
    19,241Cash and cash equivalents, end of period
    
    $
    45,545
    
    
    $
    23,309Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    2,936
    
    
    $
    2,582Interest
    
    
    10,851
    
    
    
    4,979
 See accompanying notes to condensed consolidated financial statements.
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Consolidation and Basis of Presentation
     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(FAS 109). 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
 3. Earnings per Share
  Three Months Ended
    
    
    Nine Months Ended(Amounts in thousands, except per share data)
    
    Sept. 30, 2006
    
    
    Sept. 30, 2005
    
    
    Sept. 30, 2006
    
    
    Sept. 30, 2005Basic EPS Calculation:Numerator (net income)
    
    $
    1,672
    
    
    $
    1,560
    
    
    $
    4,953
    
    
    $
    4,407Denominator (average common
shares outstanding)
    
    
    8,764
    
    
    
    8,619
    
    
    
    8,723
    
    
    
    8,582Basic earnings per Share
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    0.57
    
    
    $
    0.51Diluted EPS Calculation:Numerator (net income)
    
    $
    1,672
    
    
    $
    1,560
    
    
    $
    4,953
    
    
    $
    4,407Denominator:Average common shares outstanding
    
    
    8,764
    
    
    
    8,619
    
    
    
    8,723
    
    
    
    8,582Options
    
    
    173
    
    
    
    255
    
    
    
    222
    
    
    
    3298,937
    
    
    
    8,874
    
    
    
    8,945
    
    
    
    8,911Diluted earnings per Share
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    0.55
    
    
    $
    0.50
 8




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 Stock Option Plan
 Share-Based
Payment, Accounting
for Stock-Based Compensation Transition and Disclosure,
   Three Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September30,2005
    
    
    30,2005Net incomeAs reported
    
    $
    1,560
    
    
    $
    4,407Deduct:Total stock-based employee compensation
expense determined under
fair value based
method for all awards, net of related tax
effects
    
    
    (37
    )
    
    
    (147
    )Pro forma net income
    
    $
    1,523
    
    
    $
    4,260Earnings per share:Basic  as reported
    
    $
    0.18
    
    
    $
    0.51Basic  pro forma
    
    $
    0.18
    
    
    $
    0.50Diluted  as reported
    
    $
    0.18
    
    
    $
    0.50Diluted  pro forma
    
    $
    0.17
    
    
    $
    0.48
  9




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 December 31, 2005
    
    
    September 19, 2006Risk-free interest rate
    
    
    3.92
    %
    
    
    4.75
    %Dividend Yield
    
    
    2.49
    %
    
    
    2.67
    %Volatility
    
    
    32.36
    %
    
    
    32.98
    %Expected lives (years)
    
    
    7
    
    
    
    7Weighted average grant-date fair
value per share of options
granted
    
    $
    3.35
    
    
    $
    3.33
 Description of stock-based compensation plan
   Activity in stock-based compensation plan
  Weighted
    
    
    AggregateNumber of
    
    
    Average
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    ValueOptions outstanding, January 1, 2006
    
    
    608,316
    
    
    $
    5.20Granted
    
    
    20,000
    
    
    $
    10.40
    
    
    $
    Exercised
    
    
    (268,946
    )
    
    $
    3.12
    
    
    $
    1,933,722Forfeited
    
    
    (1,425
    )
    
    $
    10.60
    
    
    $
    Options outstanding, September 30, 2006
    
    
    357,945
    
    
    $
    5.24
    
    
    $
    70,461Exercisable at September 30, 2006
    
    
    312,831
    
    
    $
    6.01
    
    
    $
    1,348,301
  10




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
  Weighted AverageRemaining ContractualExercise Price
    
    Options Outstanding
    
    life (Years)
    
    Options Exercisable$
    2.75
    
    43,350
    
    1.3
    
    43,350$
    3.23
    
    42,160
    
    1.3
    
    42,160$
    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
    
    0357,945
    
    6.2
    
    312,831
   5. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Income as reported
    
    $
    1,672
    
    
    $
    1,560
    
    
    $
    4,953
    
    
    $
    4,407Components of other comprehensive income:Unrealized gains arising
during the
period on derivative
transactions
    
    
    235
    
    
    
    0
    
    
    
    235
    
    
    
    0Unrealized (losses) gains
arising during
the period on investment
securities
available-for-sale
    
    
    1,242
    
    
    
    (327
    )
    
    
    (4
    )
    
    
    (661
    )Less: Income tax benefit
related to
unrealized (losses) gains on
comprehensive income
    
    
    (676
    )
    
    
    95
    
    
    
    (106
    )
    
    
    193Reclassification adjustment for
loss on available-for-sale
securities
    
    
    171
    
    
    
    0
    
    
    
    171
    
    
    
    2Total other comprehensive income
    
    
    972
    
    
    
    (232
    )
    
    
    296
    
    
    
    (466
    )Total comprehensive income
    
    $
    2,644
    
    
    $
    1,328
    
    
    $
    5,249
    
    
    $
    3,941
 11




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 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)
 7.
    
    Commitments and contingent liabilities
 Lease Commitments 
 (Dollars in thousands)2006
    
    $
    1102007
    
    $
    4752008
    
    $
    5002009
    
    $
    4482010
    
    $
    400Thereafter
    
    $
    437Total
    
    $
    2,370Minimum rental due in the future
Under non-cancelable subleases
    
    $
    28
 Legal Proceedings 
 FHLB Advances 
 Advance #
    
    Amount
    
    Interest Rate
    
    Maturity#059277
    
    $10,000,000
    
    5.43%
    
    01/24/2008#077115
    
    $10,000,000
    
    5.39%
    
    11/27/2006#080890
    
    $10,000,000
    
    5.47%
    
    11/24/2011#087416
    
    $  5,000,000
    
    5.23%
    
    04/28/2008#087272
    
    $  5,000,000
    
    5.22%
    
    10/24/2006#077383
    
    $15,000,000
    
    5.39%
    
    11/30/2007$55,000,000
  13




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 Off-Balance Sheet Financial Instruments
    September 30, 2006
    
    September 30, 2005Commitment lines of credit
    
    $
    155,898,477
    
    
    $
    125,925,924Standby letters of credit
    
    
    14,211,847
    
    
    
    10,029,239Guaranteed commitments outstanding
    
    
    1,248,000
    
    
    
    0$
    171,358,324
    
    
    $
    135,955,163
 Derivative Financial Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging Activities,
  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 September 30, 2006. Also discussed
are significant trends and changes in the Companys results of operations for the three and nine
months ended September 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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##### Table of Contents



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
    
    
    CapitalSeptember 30, 2006
    
    Capital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    54,942,252
    
    
    
    9.99
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    54,942,252
    
    
    
    11.64
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    60,092,573
    
    
    
    12.73
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of CommerceLeverage
    
    $
    53,132,814
    
    
    
    9.28
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    53,132,814
    
    
    
    11.25
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    58,283,135
    
    
    
    12.34
    %
    
    
    10.00
    %
    
    
    8.0
    %
 
 Short and Long Term Borrowings
   24




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##### Table of Contents



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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##### Table of Contents



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)
 Nine Months Ended
    
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    
    September 30, 2005Yield/
    
    
    
    Average
    
    
    
    
    
    
    Yield/Average Balance
    
    
    Interest
    
    
    Rate
    
    
    
    Balance
    
    
    Interest
    
    
    RateEarning AssetsPortfolio Loans
    
    $
    388,886
    
    
    $
    23,881
    
    
    
    8.19
    %
    
    
    $
    332,476
    
    
    $
    17,393
    
    
    
    6.98
    %Tax-exempt Securities
    
    
    18,059
    
    
    
    494
    
    
    
    3.65
    %
    
    
    
    9,235
    
    
    
    230
    
    
    
    3.32
    %US Government Securities
    
    
    83,440
    
    
    
    2,575
    
    
    
    4.11
    %
    
    
    
    73,162
    
    
    
    2,026
    
    
    
    3.69
    %Federal Funds Sold
    
    
    17,335
    
    
    
    658
    
    
    
    5.06
    %
    
    
    
    16,818
    
    
    
    385
    
    
    
    3.05
    %Other Securities
    
    
    3,437
    
    
    
    113
    
    
    
    4.38
    %
    
    
    
    488
    
    
    
    16
    
    
    
    4.37
    %Average Earning Assets
    
    $
    511,157
    
    
    $
    27,721
    
    
    
    7.23
    %
    
    
    $
    432,179
    
    
    $
    20,050
    
    
    
    6.19
    %Cash & Due From Banks
    
    $
    14,161
    
    
    
    
    
    
    
    
    
    
    
    $
    15,211Bank Premises
    
    
    6,500
    
    
    
    
    
    
    
    
    
    
    
    
    5,543Allowance for Loan and Lease Losses
    
    
    (4,459
    )
    
    
    
    
    
    
    
    
    
    
    
    (4,091
    )Other Assets
    
    
    14,969
    
    
    
    
    
    
    
    
    
    
    
    
    11,188Average Total Assets
    
    $
    542,328
    
    
    
    
    
    
    
    
    
    
    
    $
    460,030Interest Bearing LiabilitiesDemand Interest Bearing
    
    $
    106,002
    
    
    $
    968
    
    
    
    1.22
    %
    
    
    $
    112,259
    
    
    $
    688
    
    
    
    0.82
    %Savings Deposits
    
    
    25,095
    
    
    
    209
    
    
    
    1.11
    %
    
    
    
    25,884
    
    
    
    127
    
    
    
    0.65
    %Certificates of Deposit
    
    
    182,478
    
    
    
    5,844
    
    
    
    4.27
    %
    
    
    
    147,834
    
    
    
    3,051
    
    
    
    2.75
    %Repurchase Agreements
    
    
    28,010
    
    
    
    794
    
    
    
    3.78
    %
    
    
    
    16,345
    
    
    
    264
    
    
    
    2.15
    %FHLB Borrowings
    
    
    64,597
    
    
    
    2,492
    
    
    
    5.14
    %
    
    
    
    31,337
    
    
    
    746
    
    
    
    3.17
    %Trust Preferred Borrowings
    
    
    15,000
    
    
    
    796
    
    
    
    7.08
    %
    
    
    
    10,000
    
    
    
    332
    
    
    
    4.43
    %Average Interest Bearing Liabilities
    
    
    421,182
    
    
    $
    11,103
    
    
    
    3.51
    %
    
    
    
    343,659
    
    
    $
    5,208
    
    
    
    2.02
    %Non interest Demand
    
    
    78,388
    
    
    
    
    
    
    
    
    
    
    
    
    79,612Other Liabilities
    
    
    4,547
    
    
    
    
    
    
    
    
    
    
    
    
    5,003Shareholder Equity
    
    
    38,211
    
    
    
    
    
    
    
    
    
    
    
    
    31,756Average Liabilities and
Stockholders Equity
    
    $
    542,328
    
    
    
    
    
    
    
    
    
    
    
    $
    460,030Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    16,618
    
    
    
    4.33
    %
    
    
    
    
    
    
    $
    14,842
    
    
    
    4.58
    %
   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)
 (Dollars in thousands)
    
    September 30, 2006 over September 30, 2005Volume
    
    
    Rate
    
    
    TotalIncrease(Decrease) In Interest IncomePortfolio Loans
    
    $
    4,472
    
    
    $
    2,016
    
    
    $
    6,488Tax-exempt Securities
    
    
    249
    
    
    
    15
    
    
    
    264US Government Securities
    
    
    394
    
    
    
    155
    
    
    
    549Federal Funds Sold
    
    
    104
    
    
    
    169
    
    
    
    273Other Securities
    
    
    97
    
    
    
    0
    
    
    
    97Total Increase
    
    $
    5,316
    
    
    $
    2,355
    
    
    $
    7,671Increase(Decrease) InInterest ExpenseInterest Bearing Demand
    
    $
    55
    
    
    $
    225
    
    
    $
    280Savings Deposits
    
    
    23
    
    
    
    59
    
    
    
    82Certificates of Deposit
    
    
    1,671
    
    
    
    1,122
    
    
    
    2,793Repurchase Agreements
    
    
    397
    
    
    
    133
    
    
    
    530FHLB Borrowings
    
    
    1,437
    
    
    
    309
    
    
    
    1,746Trust Preferred
Borrowings
    
    
    332
    
    
    
    132
    
    
    
    464Total Increase
    
    $
    3,915
    
    
    $
    1,980
    
    
    $
    5,895Net Increase
    
    $
    1,401
    
    
    $
    375
    
    
    $
    1,776
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Noninterest incomeService charges on deposit accounts
    
    $
    81
    
    
    $
    98
    
    
    $
    255
    
    
    $
    303Payroll and benefit processing fees
    
    
    89
    
    
    
    81
    
    
    
    287
    
    
    
    264Earnings on cash surrender value -Bank owned insurance
    
    
    80
    
    
    
    52
    
    
    
    231
    
    
    
    156Net loss on sale of securities available-for-sale
    
    
    (171
    )
    
    
    0
    
    
    
    (171
    )
    
    
    (2
    )Net gain on sale of loans
    
    
    90
    
    
    
    23
    
    
    
    90
    
    
    
    91Merchant credit card service income, net
    
    
    110
    
    
    
    91
    
    
    
    280
    
    
    
    268Mortgage brokerage fee income
    
    
    32
    
    
    
    85
    
    
    
    84
    
    
    
    242Other Income
    
    
    117
    
    
    
    85
    
    
    
    331
    
    
    
    283Total Noninterest income
    
    $
    428
    
    
    $
    515
    
    
    $
    1,387
    
    
    $
    1,605
 .
  
 Noninterest Expense
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Noninterest ExpenseSalaries and related benefits
    
    $
    1,996
    
    
    $
    1,750
    
    
    $
    5,870
    
    
    $
    5,088Occupancy and equipment expense
    
    
    467
    
    
    
    437
    
    
    
    1,350
    
    
    
    1,173FDIC insurance premium
    
    
    12
    
    
    
    11
    
    
    
    36
    
    
    
    36Data processing fees
    
    
    53
    
    
    
    71
    
    
    
    169
    
    
    
    209Professional service fees
    
    
    149
    
    
    
    199
    
    
    
    503
    
    
    
    577Payroll and Benefit fees
    
    
    24
    
    
    
    24
    
    
    
    78
    
    
    
    86Deferred compensation expense
    
    
    94
    
    
    
    85
    
    
    
    272
    
    
    
    234Stationery and Supplies
    
    
    71
    
    
    
    40
    
    
    
    180
    
    
    
    159Postage
    
    
    26
    
    
    
    45
    
    
    
    91
    
    
    
    84Directors expense
    
    
    45
    
    
    
    30
    
    
    
    170
    
    
    
    188Other expenses
    
    
    362
    
    
    
    403
    
    
    
    1,128
    
    
    
    1,068Total Noninterest expense
    
    $
    3,299
    
    
    $
    3,095
    
    
    $
    9,847
    
    
    $
    8,902
 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,Income Taxes
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Tax provision
    
    $
    915
    
    
    $
    897
    
    
    $
    2,979
    
    
    $
    2,696Effective tax rate
    
    
    35.4
    %
    
    
    36.5
    %
    
    
    37.6
    %
    
    
    38.0
    %
   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)
    
    September 30, 2006
    
    
    December 31, 2005Portfolio LoansCommercial and financial loans
    
    $
    123,904
    
    
    $
    115,401Real estate-construction loans
    
    
    111,352
    
    
    
    100,786Real estate-commercial
    
    
    153,020
    
    
    
    133,510Real estate-other
    
    
    14,238
    
    
    
    13,790Real estate-mortgage
    
    
    3,210
    
    
    
    3,669Installment
    
    
    222
    
    
    
    439Other loans
    
    
    2,841
    
    
    
    446Less:Net deferred loan fees
    
    
    (377
    )
    
    
    (420
    )Allowance for loan losses
    
    
    (4,753
    )
    
    
    (4,316
    )Total net loans
    
    $
    403,657
    
    
    $
    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
    
    September 30, 2006
    
    
    December 31, 2005Nonaccrual loans
    
    $
    5
    
    
    $
    37290 days past due and still
accruing interest
    
    
    0
    
    
    
    0Total nonaccrual loans
    
    
    5
    
    
    
    372Other Real Estate Owned
    
    
    0
    
    
    
    0Total non performing assets
    
    $
    5
    
    
    $
    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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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
  (Dollars in thousands)
    
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,Allowance for Loan Losses
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Beginning balance for Loan
Losses
    
    $
    4,502
    
    
    $
    4,148
    
    
    $
    4,316
    
    
    $
    3,866Provision for Loan Losses
    
    
    72
    
    
    
    88
    
    
    
    226
    
    
    
    442Charge offs:Commercial
    
    
    (0
    )
    
    
    (3
    )
    
    
    (269
    )
    
    
    (80
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    0
    
    
    
    0Other
    
    
    (1
    )
    
    
    (0
    )
    
    
    (1
    )
    
    
    0Total Charge offs
    
    
    (1
    )
    
    
    (3
    )
    
    
    (270
    )
    
    
    (80
    )Recoveries:Commercial
    
    
    180
    
    
    
    18
    
    
    
    475
    
    
    
    23Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other
    
    
    0
    
    
    
    0
    
    
    
    6
    
    
    
    0Total Recoveries
    
    
    180
    
    
    
    18
    
    
    
    481
    
    
    
    23Ending Balance
    
    $
    4,753
    
    
    $
    4,251
    
    
    $
    4,753
    
    
    $
    4,251ALLL to total loans
    
    
    1.16
    %
    
    
    1.23
    %
    
    
    1.16
    %
    
    
    1.23
    %Net Charge offs to average loans
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.02
    %
 
 Securities Portfolio
    (Dollars in thousands)
    as of September 30, 2006Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCosts
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    35,954
    
    
    $
    19
    
    
    $
    (785
    )
    
    $
    35,188Obligations of state and
political subdivisions
    
    
    20,026
    
    
    
    129
    
    
    
    (159
    )
    
    
    19,996Mortgage backed securities
    
    
    41,558
    
    
    
    124
    
    
    
    (1,224
    )
    
    
    40,458Other securities
    
    
    2,000
    
    
    
    0
    
    
    
    (28
    )
    
    
    1,972Total
    
    $
    99,538
    
    
    $
    272
    
    
    $
    (2,196
    )
    
    $
    97,614
 35




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
 (Dollars in thousands)
    as of September 30, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCosts
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    44,772
    
    
    $
    1
    
    
    $
    (583
    )
    
    $
    44,190Obligations of state and
political subdivisions
    
    
    6,351
    
    
    
    39
    
    
    
    (123
    )
    
    
    6,267Mortgage backed securities
    
    
    44,306
    
    
    
    0
    
    
    
    (689
    )
    
    
    43,617Corporate bonds
    
    
    4,040
    
    
    
    0
    
    
    
    (7
    )
    
    
    4,033Total
    
    $
    99,469
    
    
    $
    40
    
    
    $
    (1,402
    )
    
    $
    98,107
  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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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
 (31.1)
    
    Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002(31.2)
    
    Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002(32.0)
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Sarbanes-Oxley Act of 2002
 40




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SIGNATURES
  BANK OF COMMERCE HOLDINGS(Registrant)Date: November 3, 2006
    
    
    
    /s/ Linda J. MilesLinda J. MilesExecutive Vice President &Chief Financial Officer
 41