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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission file number 0-25135
 (BCH LOGO) 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes þ Noo Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the
Exchange Act)
Yes þ Noo Outstanding shares of Common Stock, no par value, as of March 31, 2005: 8,571,871   1




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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
March 31, 2005, December 31, 2004 and March 31, 2004
    
    
    3Condensed Consolidated Statements of Income
Three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations
    
    
    11Corporate Overview
    
    
    11Executive Overview
    
    
    13Sources of Income
    
    
    14Financial Highlights  Results of Operations
    
    
    14Net Interest Income and Net Interest Margin
    
    
    14Liquidity
    
    
    15Capital Management
    
    
    15Short term borrowings
    
    
    15Provision for loan losses
    
    
    16Factors that may affect future results
    
    
    16Specific risks to operations in California
    
    
    17Critical accounting policies
    
    
    17Average balances, Interest Income/Expense and yields/rates paid
    
    
    20Analysis of changes in net interest income and interest expense
    
    
    21Noninterest Income
    
    
    22Noninterest Expense
    
    
    22Income taxes
    
    
    23Asset quality
    
    
    23Allowance for loan losses (ALL)
    
    
    24Securities portfolio
    
    
    26Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 1. Legal proceedings
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    29EXHIBITS
    
    
    30, 31, 32CEO CERTIFICATION - MICHAEL MAYERCEO CERTIFICATION - LINDA MILESCFO CERTIFICATION - LINDA MILES
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
(Unaudited)
 Dollars in thousands
    
    March 31, 2005
    
    

Dec. 31, 2004
    
    

March 31, 2004ASSETSCash and due from banks
    
    $
    14,167
    
    
    $
    13,121
    
    
    $
    23,036Federal funds sold and securities purchased under agreements to
resell
    
    
    19,760
    
    
    
    6,120
    
    
    
    10,125Cash and cash equivalents
    
    
    33,927
    
    
    
    19,241
    
    
    
    33,161Securities available-for-sale (including pledged collateral of
$38,884 at March 31, 2005, $33,345 at December 31, 2004 and
$17,262 at March 31, 2004)
    
    
    77,276
    
    
    
    82,443
    
    
    
    55,634Securities held-to-maturity, at cost (estimated fair value of $457
at March 31, 2005, $487 at Dec. 31, 2004
and $829 at March 31, 2004)
    
    
    423
    
    
    
    449
    
    
    
    769Loans, net of the allowance for loan losses of $4,044 at March
31, 2005, $3,866 at Dec. 31, 2004 and $3,870 at
March 31, 2004
    
    
    320,453
    
    
    
    318,801
    
    
    
    288,651Bank premises and equipment, net
    
    
    5,436
    
    
    
    5,484
    
    
    
    5,693Other assets
    
    
    13,207
    
    
    
    12,127
    
    
    
    10,777TOTAL ASSETS
    
    $
    450,722
    
    
    $
    438,545
    
    
    $
    394,685LIABILITIES AND STOCKHOLDERS EQUITYDemand  noninterest bearing
    
    $
    75,393
    
    
    $
    82,263
    
    
    $
    63,502Demand  interest bearing
    
    
    111,723
    
    
    
    108,645
    
    
    
    91,876Savings accounts
    
    
    24,367
    
    
    
    23,471
    
    
    
    21,707Certificates of deposit
    
    
    144,051
    
    
    
    138,500
    
    
    
    139,067Total deposits
    
    
    355,534
    
    
    
    352,879
    
    
    
    316,152Securities sold under agreements to repurchase
    
    
    13,517
    
    
    
    2,004
    
    
    
    10,239Federal Home Loan Bank borrowings
    
    
    35,000
    
    
    
    35,000
    
    
    
    25,000Other liabilities
    
    
    5,705
    
    
    
    8,379
    
    
    
    6,012Junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,000Total Liabilities
    
    
    414,756
    
    
    
    403,262
    
    
    
    362,403Commitments and contingenciesStockholders Equity:Preferred stock, no par value, 2,000,000 authorized
no shares issued and outstanding in 2005 and 2004
    
    
    
    
    
    
    
    
    
    
    Common stock , no par value, 10,000,000 shares
authorized; 8,571,781 shares issued and
outstanding
at March 31, 2005, 8,502,831 at Dec. 31, 2004
and 8,173,674 at March 31, 2004
    
    
    10,756
    
    
    
    10,537
    
    
    
    9,734Retained earnings
    
    
    26,067
    
    
    
    25,079
    
    
    
    22,348Accumulated other comprehensive income (loss), net of tax
    
    
    (857
    )
    
    
    (333
    )
    
    
    200Total stockholders equity
    
    
    35,966
    
    
    
    35,283
    
    
    
    32,282TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    450,722
    
    
    $
    438,545
    
    
    $
    394,685
 See accompanying notes to condensed consolidated financial statements. 3




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES 
 Condensed Consolidated Statements of Income (Unaudited)
 Three months ended March 31, 2005 and 2004
 Three Months EndedDollars in thousands, except for per share data
    
    March 31, 2005
    
    
    March 31, 2004Interest income:Interest and fees on loans
    
    $
    5,407
    
    
    $
    4,347Interest on tax exempt securities
    
    
    54
    
    
    
    56Interest on U.S. government securities
    
    
    651
    
    
    
    477Interest on federal funds sold and
securities purchased under agreements to resell
    
    
    79
    
    
    
    17Interest on other securities
    
    
    0
    
    
    
    7Total interest income
    
    
    6,191
    
    
    
    4,904Interest expense:Interest on demand deposits
    
    
    139
    
    
    
    102Interest on savings deposits
    
    
    24
    
    
    
    29Interest on time deposits
    
    
    830
    
    
    
    723Securities sold under agreements to repurchase
    
    
    19
    
    
    
    2Interest on FHLB and other borrowings
    
    
    246
    
    
    
    67Interest on junior subordinated debt payable to unconsolidated
subsidiary grantor trust
    
    
    77
    
    
    
    56Total interest expense
    
    
    1,335
    
    
    
    979Net interest income
    
    
    4,856
    
    
    
    3,925Provision for loan and lease losses
    
    
    177
    
    
    
    192Net interest income after provision for loan and lease losses
    
    
    4,679
    
    
    
    3,733Noninterest income:Service charges on deposit accounts
    
    
    103
    
    
    
    99Payroll and benefit processing fees
    
    
    99
    
    
    
    97Earnings on cash surrender value -
Bank owned life insurance
    
    
    51
    
    

    
    54Net (loss) gain on sale of securities available-for-sale
    
    
    (2
    )
    
    
    0Net gain on sale of loans
    
    
    19
    
    
    
    35Merchant credit card service income, net
    
    
    99
    
    
    
    97Mortgage brokerage fee income
    
    
    86
    
    
    
    16Other income
    
    
    87
    
    
    
    97Total noninterest income
    
    
    542
    
    
    
    495Noninterest expense:Salaries and related benefits
    
    
    1,693
    
    
    
    1,393Occupancy and equipment expense
    
    
    387
    
    
    
    369FDIC insurance premium
    
    
    12
    
    
    
    13Data processing fees
    
    
    41
    
    
    
    44Professional service fees
    
    
    205
    
    
    
    146Deferred compensation expense
    
    
    73
    
    
    
    67Stationery and supplies
    
    
    59
    
    
    
    54Postage
    
    
    28
    
    
    
    21Directors expense
    
    
    74
    
    
    
    89Other expenses
    
    
    348
    
    
    
    268Total noninterest expense
    
    
    2,920
    
    
    
    2,464Income before income taxes
    
    
    2,301
    
    
    
    1,764Provision for income taxes
    
    
    925
    
    
    
    652Net income
    
    $
    1,376
    
    
    $
    1,112Basic earnings per share
    
    $
    0.16
    
    
    $
    0.14Weighted average shares  basic
    
    
    8,533
    
    
    
    8,133Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.13Weighted average shares  diluted
    
    
    8,780
    
    
    
    8,529
 See accompanying notes to condensed consolidated financial statements. 4




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 2005 and 2004
 Dollars in thousands
    
    March 31, 2005
    
    
    March 31, 2004Cash flows from operating activities:Net income
    
    $
    1,376
    
    
    $
    1,112Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan and lease losses
    
    
    177
    
    
    
    192Provision for depreciation and amortization
    
    
    140
    
    
    
    163Compensation expense associated with stock options
    
    
    1
    
    
    
    0Loss (Gain) on sale of securities available-for-sale
    
    
    2
    
    
    
    0Amortization of investment premiums and accretion of
discounts, net
    
    
    59
    
    
    
    23Gain on sale of loans
    
    
    (19
    )
    
    
    (35
    )Gain on sale of fixed assets
    
    
    0
    
    
    
    0Proceeds from sale of loans
    
    
    279
    
    
    
    635Loans originated for sale
    
    
    (260
    )
    
    
    (600
    )Effect of changes in:Other assets
    
    
    (713
    )
    
    
    2,576Deferred loan fees
    
    
    (72
    )
    
    
    0Other liabilities
    
    
    (2,548
    )
    
    
    1,652Net cash from operating activities
    
    
    (1,578
    )
    
    
    5,718Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    5,000
    
    
    
    15,442Proceeds from sales of available-for-sale securities
    
    
    141
    
    
    
    0Proceeds from maturities of held-to-maturity securities
    
    
    2,065
    
    
    
    623Purchases of available-for-sale securities
    
    
    (2,965
    )
    
    
    (276
    )Loan origination, net of principal repayments
    
    
    (1,758
    )
    
    
    (10,640
    )Purchases of Bank premises and equipment, net
    
    
    (92
    )
    
    
    (43
    )Net cash from investing activities
    
    
    2,391
    
    
    
    5,106Cash flows from financing activities:Net increase(decrease) in deposits
    
    
    2,656
    
    
    
    (11,386
    )Net increase in securities sold under agreement to repurchase
    
    
    11,513
    
    
    
    6,490Proceeds from Federal Home Loan Bank advances
    
    
    23,000
    
    
    
    35,000Repayments of Federal Home Loan Bank advances
    
    
    (23,000
    )
    
    
    (40,000
    )Equity transactions, net
    
    
    (296
    )
    
    
    194Net cash from financing activities
    
    
    13,873
    
    
    
    (9,702
    )Net increase in cash and cash equivalents
    
    
    14,686
    
    
    
    1,122Cash and cash equivalents, beginning of period
    
    
    19,241
    
    
    
    32,039Cash and cash equivalents, end of period
    
    $
    33,927
    
    
    $
    33,161Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    0
    
    
    $
    0Interest
    
    
    1,288
    
    
    
    960
 See accompanying notes to condensed consolidated financial statements. 5




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 1.
 Consolidation and Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of Bank of Commerce
Holdings (the Holding Company) and its subsidiaries Redding Bank of Commerce (RBC or the
Bank) and Bank of Commerce Mortgage (collectively the Company). All significant inter-company
balances and transactions have been eliminated. The financial information contained in this report
reflects all adjustments that in the opinion of management are necessary for a fair presentation of
the results of the interim periods. All such adjustments are of a normal recurring nature. Certain
reclassifications have been made to the prior period condensed consolidated financial statements to
conform to the current financial statement presentation. The accounting and reporting policies of the Company conform to accounting principles generally
accepted in the United States of America and general practices within the banking industry. In
preparation of the condensed consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date
of the balance sheet and revenue and expenses for the period. Actual results could differ from
those estimates. The accompanying unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes contained in Bank of
Commerce Holdings 2004 Annual Report on Form 10-K. The results of operations and cash flows for the
2005 interim periods shown in this report are not necessarily indicative of the results for any
future interim period or the entire fiscal year. For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due
from banks, federal funds sold and repurchase agreements. Generally, federal funds are sold for a
one-day period and securities purchased under agreements to resell are for no more than a 90-day
period. 2. Recent Accounting pronouncements On September 30, 2004, the FASB issued a proposed Board-directed Staff Position, FSP EITF Issue
03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.The
proposed FSP would provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary
impairment under paragraph 16 of Issue 03-1. The accounting standard setters have decided to delay
the effective date of and provide further implementation guidance for the rule that would require
financial institutions to recognize unrealized losses of debt securities from rising interest rates
as an expense item. This delay does not suspend the requirement to recognize other-than-temporary
impairments as required by existing authoritative literature. The delay of the effective date for
paragraphs 10-20 of Issue 03-1 will be superseded concurrent with the final issuance of FSP EITF
Issue 03-1-a. Application of Accounting Principles to Loan Commitments (SAB105) On March 9, 2004, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 Application of
Accounting Principles to Loan Commitments(SAB 105), which specifies that servicing assets
embedded in commitments for loans to be held for sale should be recognized only when the servicing
asset has been contractually separated from the associated loans by sale or securitization. SAB 105
is effective for commitments entered into after March 31, 2004. SAB 105 has had no effect on the
Companys results of operations or financial condition. Statement of Financial Accounting Standards No. 123 (revised 2004) In December 2004 the FASB
revised SFAS No. 123, Accounting for Stock Based Compensation.This statement supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees,and its related implementation guidance.
The Statement establishes standards for the accounting of transactions in which an entity exchanges
its equity instruments for goods and services. 6




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIESNotes to Condensed Consolidated Financial Statements (Unaudited) It also addresses transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entitys equity instruments or that may be settled
by the issuance of those equity instruments. The Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions. This
Statement does not change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement No. 123 as originally issued and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The Statement requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. The
cost will be recognized over the period during which an employee is required to provide service in
exchange for the award  the requisite service period (usually the vesting period). No compensation
cost is recognized for equity instruments for which employees do not render the requisite service.
A public entity will initially measure the cost of employee services received in exchange for an
award of liability instruments based on its current fair value; the fair value of that award will
be remeasured subsequently at each reporting date through the settlement date. Changes in fair
value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using
option-pricing models adjusted for the unique characteristics of those instruments. If an equity
award is modified after the grant date, incremental compensation cost will be recognized in amount
equal to the excess of the fair value of the modified award over the fair value of the original
award immediately before the modification. The notes to financial statements of both public and
nonpublic entities will disclose information to assist users of financial information to understand
the nature of share-based payment transactions and the effects of those transactions on the
financial statements. This Statement is effective for public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period that begins after January 01, 2006.
The Statement applies to all awards granted after the required effective date and to awards
modified, repurchased or cancelled after that date. The cumulative effect of initially applying
this Statement, if any, will be recognized as of the required effective date. Under the transition
method, compensation cost is recognized on or after the required effective date for the portion of
outstanding awards, for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under Statement No. 123 for either recognition or
pro forma disclosures. The Company will adopt the fair value based method of accounting for stock
based employee compensation effective for financial statements after January 1, 2006. Management
believes that the adoption of this rule will not have a material impact on the Companys results of
operations or financial condition. 7




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited) 3. Earnings per Share Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Stock options are considered to be common stock equivalents.
The following table displays the computation of earnings per share for the three months ended March
31, 2005 and 2004. (Dollars in thousands, except per share data) Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Basic EPS calculation:Numerator (net income)
    
    $
    1,376
    
    
    $
    1,112Denominator (average common
shares outstanding)
    
    
    8,533
    
    
    
    8,133Basic EPS
    
    $
    0.16
    
    
    $
    0.14Diluted EPS calculation:Numerator (net income)
    
    $
    1,376
    
    
    $
    1,112Denominator:Average common shares outstanding
    
    
    8,533
    
    
    
    8,133Dilutive effect of stock options
    
    
    247
    
    
    
    396Adjusted weighted average common shares outstanding
    
    
    8,780
    
    
    
    8,529Diluted EPS
    
    $
    0.16
    
    
    $
    0.13
 4. Stock Option Plans The Company accounts for its stock option plan under the intrinsic value method in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense is recorded only if the
current market price of the underlying stock exceeds the exercise price on the date of the grant.
As required by the Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for
Stock-Based Compensationas amended by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure,the Company provides pro forma net income and pro forma earnings per
share disclosures for employee stock option grants. The following table illustrates the effect on
net income and earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation,to stock-based employee
compensation. 8




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited) Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Net income as reported
    
    $
    1,376
    
    
    $
    1,112Deduct:Total stock-based employee
compensation
expense determined
under fair value based method
for all awards, net of
tax
    
    
    (37
    )
    
    
    (18
    )Pro forma net income
    
    $
    1,339
    
    
    $
    1,094Earnings per share:Basic  as reported
    
    $
    0.16
    
    
    $
    0.14Basic  pro forma
    
    $
    0.16
    
    
    $
    0.14Diluted  as reported
    
    $
    0.16
    
    
    $
    0.13Diluted  pro forma
    
    $
    0.15
    
    
    $
    0.13
 5. Comprehensive Income The Companys total comprehensive income was as follows: (Dollars in thousands)
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Net income as reported
    
    $
    1,376
    
    
    $
    1,112Other comprehensive income,
net of tax:Unrealized holding (loss) gain
on
securities available for
sale
    
    
    (524
    )
    
    
    464Reclassification adjustment for
gain on available for sale
securities, net of tax
    
    
    2
    
    
    
    (0
    )Total other comprehensive (loss) income
    
    
    (522
    )
    
    
    464Total comprehensive income
    
    $
    854
    
    
    $
    1,576
 6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust During 2003, Bank of Commerce Holdings formed a wholly-owned Delaware statutory business trust,
Bank of Commerce Holdings Trust, which issued $5.0 million of guaranteed preferred beneficial
interests in Bank of Commerce Holdings junior subordinated debentures (the Trust Notes). These
debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. The proceeds from the
issuance of the Trust Notes were transferred from the subsidiary grantor trust to the Holding
Company and from the Holding Company to the Bank as additional capital. The Trust Notes accrue and
pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (LIBOR) plus
3.30%. The rate at March 31, 2005 was 5.96%. The rate increase is capped at 2.75% annually and the
lifetime cap is 12.5%. The final maturity on the Trust Notes is March 18, 2033, and the debt allows
for prepayment after five years on the quarterly payment date. 9




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(Unaudited) 7. Commitments and Contingent Liabilities Lease Commitments The Company leases certain facilities at which it conducts its
operations. Future minimum lease commitments under all non-cancelable operating leases as of
March 31, 2005 are below: (Dollars in thousands)2005
    
    $
    3592006
    
    $
    3712007
    
    $
    3772008
    
    $
    3832009
    
    $
    340Thereafter
    
    $
    1,238Total
    
    $
    3,068Minimum rental due in the future
Under noncancellable subleases
    
    $
    8
 Legal Proceedings -The Company is involved in various pending and threatened legal actions
arising in the ordinary course of business. The Company maintains reserves for losses from
legal actions, which are both probable and estimable. In the opinion of management, the
disposition of claims, currently pending will not have a material adverse affect on the
Companys financial position or results of operations. FHLB Advances -Included in other borrowings are advances from the Federal Home Loan Bank of
San Francisco (FHLB) totaling $35,000,000 as of
March 31, 2005 and $25,000,000 as of March
31, 2004. The FHLB advances bear fixed rates of interest ranging from 2.43% to 4.08%.
Interest is payable on a monthly basis. FHLB advances due as follows: $5,000,000 maturing May
09, 2005 at 2.47%, $10,000,000 maturing November 25, 2005 at 2.87%, $10,000,000 maturing
January 24, 2008 at 2.94% (prime minus 281 basis points), and $10,000,000 maturing February
8, 2010 at 4.08% . These borrowings are secured by an investment in FHLB stock and certain
real estate mortgage loans which have been specifically pledged to the FHLB pursuant to their
collateral requirements. Based upon the level of FHLB advances, the Company was required to
hold a minimum investment in FHLB stock of $1,802,600 and to pledge $43,964,115 of its real
estate mortgage loans to the FHLB as collateral as of March 31, 2005. Off-Balance Sheet Financial Instruments- In the ordinary course of business, the
Company enters various types of transactions, which involve financial instruments with
off-balance sheet risk. These instruments include commitments to extend credit and standby
letter of credits, which are not reflected in the accompanying consolidated balance sheets.
These transactions may involve, to varying degrees, credit and interest rate risk more than
the amount, if any recognized in the consolidated balance sheets. 10




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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,
2004 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, 2004 to March 31, 2005. Also discussed are
significant trends and changes in the Companys results of operations for the three months ended
March 31, 2005, compared to the same period in 2004. 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 Bank of Commerce Holdings (the Holding Company) is a financial holding company (FHC) registered
under the Bank Holding Company Act of 1956, as amended, and was incorporated in California on
January 21, 1982 (under the name Redding Bancorp), for the purpose of organizing, as a wholly owned
subsidiary, Redding Bank of Commerce (the Bank). The Holding Company elected to change to a FHC
in 2000. As a financial holding company, the Holding Company is subject to the Financial Holding
Company Act and to supervision by the Board of Governors of the Federal Reserve System (FRB).
The Holding Companys principal business is to serve as a holding company for Redding Bank of
Commerce, Bank of Commerce Mortgage, a California corporation and for other banking or
banking-related subsidiaries which the Holding Company may establish or acquire (collectively the
Company). The Holding Company also has an unconsolidated subsidiary, Bank of Commerce Holdings
Trust. During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware
statutory business trust, Bank of Commerce Holdings Trust (the grantor trust), which issued $5.0
million of guaranteed preferred beneficial interests in Bank of Commerce Holdings junior
subordinated debentures (the Trust Notes). These debentures qualify as Tier 1 capital under
Federal Reserve Board guidelines. The proceeds from the issuance of the Trust Notes were
transferred from the grantor trust to the Holding Company and from the Holding Company to the Bank
as surplus capital. 11




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) The Bank was incorporated as a California banking corporation on November 25, 1981, and
received its certificate of authority to begin banking operations on October 22, 1982. The Bank
operates four full service branch facilities. The Bank established its first full service branch
at 1177 Placer Street, Redding, California, and opened for business on October 22, 1982. On
November 1, 1988, the Bank received a certificate of authority to establish and maintain a loan
production office in Citrus Heights, California. On September 1, 1998, the Bank relocated the loan
production office to 2400 Professional Drive in Roseville, California. On March 1, 1994, the Bank received a certificate of authority to open a second full-service branch
at 1951 Churn Creek Road in Redding, California. On June 30, 2000, the Bank received a certificate
of authority to convert the loan production office in Roseville to a full service banking facility
under the name Roseville Bank of Commerce, a division of Redding Banking of Commerce. On June 15, 2001, the Bank acquired the deposit liabilities of FirstPlus Bank at Citrus Heights,
California and has renamed the facility Roseville Bank of Commerce at Sunrise, a division of
Redding Bank of Commerce. On February 22, 2002, the Roseville Bank of Commerce at Eureka Road, a
division of Redding Bank of Commerce, relocated to its permanent location at 1504 Eureka Road,
Suite 100, Roseville, California. On March 18, 2004, RBC Mortgage Services, an affiliate of Redding Bank of Commerce and a
wholly-owned subsidiary of the Holding Company, changed its name to Bank of Commerce Mortgage (the
Mortgage Company), an affiliate of Redding Bank of Commerce. The principal business of the
subsidiary is mortgage brokerage services. Before the formation of the subsidiary, mortgage banking
services were performed as a department of the Bank. On May 18, 2004, by majority shareholder vote, the Holding Company (Redding Bancorp) amended the
Articles of Incorporation to change the Companys name to Bank of Commerce Holdings. The new name
proves to be more reflective of the multiple financial holdings of the Company as well as more
geographically open to expansion opportunities. On May 24, 2004 the Company was approved to list on the NASDAQ National Market under the trading
symbol BOCH (Bank of Commerce Holdings). The listing became live on June 15, 2004. On July 21,
2004, the Board of Directors declared a three-for-one stock split on the Companys common stock.
The decision to declare the stock split was intended to make it easier for our current and future
investors to enjoy ownership in our Company. The Board of Directors passed a resolution for a $0.23
per share cash dividend effective October 1, 2004 to be paid during the fourth quarter to
stockholders of record as of October 1, 2004 payable on October 22, 2004. On March 14, 2005, the Board of Directors declared a $0.06 cent per share quarterly dividend
payable to shareholders of record as of March 31, 2005 payable on April 8, 2005. The Holding Companys principal source of income is dividends from its subsidiaries. The Holding
Company conducts its corporate business operations at the administrative office of the Bank located
at 1951 Churn Creek Road, Redding, California 96002. The Company conducts its business operations
in two geographic market areas, Redding and Roseville, California. The Company considers Upstate
California to be the major market area of the Bank. The three Internet addresses of the Company
are reddingbankofcommerce.com, rosevillebankofcommerce.com, and bankofcommercemortgage.com. The Bank is principally supervised and regulated by the California Department of Financial
Institutions (DFI) and the Federal Deposit Insurance Corporation (FDIC), and conducts a general
commercial banking business in the counties of El Dorado, Placer, Shasta, and Sacramento,
California. Through the Bank and mortgage subsidiaries, the Company provides a wide range of
financial services and products. The services offered by the Bank include those traditionally
offered by commercial banks of similar size and character in California. Products such as checking,
interest-bearing checking (NOW) and savings accounts, money market deposit accounts, commercial,
construction, and term loans, travelers checks, safe deposit boxes, collection services and
electronic banking activities. 12




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) The primary focus of the Bank is to provide services to the business and professional
community of its major market area, including Small Business Administration loans, payroll and
accounting packages, benefit administration and billing services. The Bank currently does not
offer trust services or international banking services. The services offered by the Mortgage
Company include single and multi-family residential residence new financing, refinancing and equity
lines of credit. Most of the Banks customers are small to medium sized businesses, professionals and other
individuals with medium to high net worth, and most of the Banks deposits are obtained from such
customers. The Bank emphasizes servicing the needs of local businesses and professionals and
individuals requiring specialized services. The primary business strategy of the Bank is to focus
on its lending activities. The Banks principal lines of lending are (i) commercial, (ii) real
estate construction and (iii) commercial and residential real estate. The majority of the loans of
the Bank are direct loans made to individuals and small businesses in the major market area of the
Bank and are secured by real estate. See -Risk Factors That May Affect Results-Dependence on Real
Estate in the Companys 2004 Annual Report on Form 10-K. A relatively small portion of the loan
portfolio of the Bank consists of loans to individuals for personal, family or household purposes.
The Bank accepts real estate, listed and unlisted securities, savings and time deposits,
automobiles, machinery and equipment and other general business assets such as accounts receivable
and inventory as collateral for loans. The Companys goal is to be a premier provider of financial
services to the business and professional community of its major market area including Small
Business Administration (SBA) loans, commercial building financing, credit card services, payroll
and accounting packages, lockbox and billing programs. The Company measures premier performance by
monitoring key operating ratios to high performing peer information on a national level, and model
strategies to meet or exceed such goals. 
 Executive Overview Our Company was established to make a profitable return while serving the financial needs of the
business and professional communities of our markets. We are in the financial services business,
and no line of financial services is beyond our charter as long as it serves the needs of
businesses and professionals in our communities. The mission of our Company is to provide its
stockholders with a safe, profitable return on their investment, over the long term. Management
will attempt to minimize risk to our stockholders by making prudent business decisions, will
maintain adequate levels of capital and reserves, and will maintain effective communications with
stockholders. Our Companys most valuable asset is its customers. We will consider their needs first when we
design our products. High-quality customer service is an important mission of our Company, and how
well we accomplish this mission will have a direct influence on our profitability. Our vision is to embrace changes in the industry and develop profitable business strategies that
allow us to maintain our customer relationships and build new ones. Our competitors are no longer
just banks. We must compete with financial powerhouses that want our core business. The flexibility
provided by the Financial Holding Company Act will become increasingly important. We have
developed strategic plans that evaluate additional financial services and products that can be
delivered to our customers efficiently and profitably. Producing quality returns is, as always, a
top priority. The Companys long term success rests on the shoulders of the leadership team to effectively work
to enhance the performance of the Company. As a financial services company, we are in the business
of taking risk. Whether we are successful depends largely upon whether we take the right risks and
get paid appropriately for the risks we take. Our governance structure enables us to manage all
major aspects of the Companys business effectively through an integrated process that includes
financial, strategic, risk and leadership planning. We define risks to include not only credit, market and liquidity risk  the traditional concerns
for financial institutions  but also operational risks, including risks related to systems,
processes or external events, as well as legal, regulatory and reputation risks. 13




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) Our management processes, structures and policies help to ensure compliance with laws and
regulations and provide clear lines for decision-making and accountability. Results are important,
but equally important is how we achieve those results. Our core values and commitment to high
ethical standards is material to sustaining public trust and confidence in our Company. 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, 2004 under
the headingRisk Management. 
 Sources of Income The Company derives its income from two principal sources: (i) net interest income, which is the
difference between the interest income it receives on interest-earning assets and the interest
expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on
deposit services, income from SBA lending, electronic-based cash management services, mortgage
brokerage fee income and merchant credit card processing services. The income of the Company
depends to a great extent on net interest income. These interest rate factors are highly sensitive
to many factors, which are beyond the Companys control, including general economic conditions,
inflation, recession, and the policies of various governmental and regulatory agencies, in
particular, the Federal Reserve Board. Because of the Companys predisposition to variable rate
pricing and non-interest bearing demand deposit accounts, the Company is considered asset
sensitive. As a result, the Company is adversely affected by declining interest rates. 
 Financial Highlights  Results of Operations Net income for the first quarter of 2004 totaled $1,376,000 an increase of 23.7% from the
$1,112,000 reported for the same quarterly period of 2004. On the same basis, diluted earnings per
common share for the first quarter of 2005 were $0.16, compared to $0.13 for the same period of
2004, a 23.1% increase. Return on average assets (ROA) and return on average equity (ROE) for the
first quarter of 2005 were 1.24% and 15.89%, respectively, compared with 1.15% and 14.45%,
respectively, for the first quarter of 2004. 
 Net Interest Income and Net Interest Margin Net interest income is the primary source of the Companys income. Net interest income represents
the excess of interest and fees earned on interest-earning assets (loans, securities and federal
funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net
interest income expressed as a percentage of average earning assets. Net interest income for the
quarter ended March 31, 2005 was $4,856,000 compared with $3,925,000 for the same period in 2004 an
increase of 23.7%. Average earning assets for the three-months ended March 31, 2005 increased $61.2 million or 17.2%
compared with the same period in the prior year. Average net loans, the largest component of
earning assets, increased $38.1 million or 13.3% compared with the prior year period. Average
securities increased $20.1 million or 33.3% over the prior year period. Overall, the yield on
earning assets increased to 5.94% for the three-month period ended March 31, 2005 compared to 5.52%
for the same three-month period in the prior year, partially due to volume increases coupled with
rising interest rates during the period. The overall cost of interest-bearing liabilities (funding costs) for the first three months of 2005
was $1,335,000 compared with $979,000 for the first three months of 2004, a 36.4% increase. The
increase in funding costs was primarily a result of increases rates paid on time deposits and
extending term borrowings. The net effect of the changes discussed above resulted in an increase of
$931,000 or 23.7% in net interest income for the three-month period ended March 31, 2005 from the
same period in 2004. Net interest margin increased 24 basis points to 4.66% from 4.42% for the same
period a year ago. 14




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) 
 Liquidity The objective of liquidity management is to ensure that the Company can efficiently meet the
borrowing needs of its customers, withdrawals of its depositors and other cash commitments under
both normal operating conditions and under unforeseen and unpredictable circumstances of industry
or market stress. The Asset Liability Management Committee (ALCO) establishes and monitors liquidity guidelines
that require sufficient asset-based liquidity to cover potential funding requirements and to avoid
over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid
resources of cash and due from banks and federal funds sold and securities purchased under
agreements to resell, asset liquidity is supported by debt securities in the available-for-sale
securities portfolio and wholesale lines of credit with the Federal Home Loan Bank and borrowing
lines with other financial institutions. Customer core deposits have historically provided the
Company with a source of relatively stable and low-cost funds. Management monitors the sources and
uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to
liquidity from core deposits and repayments and maturities of loans and securities, the Company has
the ability to sell securities under agreements to repurchase, obtain Federal Home Loan Bank
advances or purchase overnight Federal Funds. The Companys consolidated liquidity position remains adequate to meet short-term and long-term
future contingencies. At March 31, 2005, the Company had overnight cash in investments of $33.9
million and available lines of credit of at the Federal Home Loan bank of approximately $74.6
million, and a Federal Funds borrowing line with two correspondent financial institutions of $15.0
million. To accommodate future growth and business needs, the Company develops an annual capital expenditure
budget during strategic planning sessions. The Company expects that the earnings of the Bank,
acquisition of core deposits and wholesale borrowing arrangements are sufficient to support
liquidity needs in 2005. 
 Capital Management The Company uses capital to fund organic growth, pay dividends and repurchase its shares. The
objective of effective capital management is to produce above market long-term returns by using
capital when returns are perceived to be high and issuing capital when costs are perceived to be
low. The Companys potential sources of capital include retained earnings, common and preferred
stock issuance and issuance of subordinated debt and trust notes. Total stockholders equity increased by $3.7 million to $35.9 million at March 31, 2005 over March
31, 2004. Well
    
    
    MinimumActual
    
    
    Capitalized
    
    
    CapitalCapital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    41,823,000
    
    
    
    9.29
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    41,823,000
    
    
    
    11.50
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    45,866,610
    
    
    
    12.61
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of
CommerceLeverage
    
    $
    39,813,861
    
    
    
    8.95
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    39,813,861
    
    
    
    10.95
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    43,857,472
    
    
    
    12.06
    %
    
    
    10.00
    %
    
    
    8.0
    %
 15




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) 
 Short and Long Term Borrowings The Company actively uses Federal Home Loan Bank (FHLB) advances as a source of wholesale funding
to support growth strategies as well as to provide liquidity. At March 31, 2005, all of the
Companys FHLB advances were a combination of fixed term and variable borrowings without call or
put option features. During the three months ended March 31, 2005, the average balance of short-term FHLB advances was
$36.0 million and the average interest rates during the period was 2.70%. The maximum outstanding
at any month-end during the three months ended March 31, 2005 was $38.0 million. The FHLB advances
are collateralized by loans and securities pledged to the FHLB. 
 Provision for Loan and Lease Losses The Companys most significant management accounting estimate is the appropriate level for the
allowance for loan losses. The Company follows a methodology for calculating the appropriate level
for the allowance for loan and lease losses as discussed under Asset Quality and Allowance for
Loan and Lease Losses (ALLL) in this document. Provision for loan and lease losses of $177,000 were provided for the three-months ended March 31,
2005 compared with $192,000 for the same period of 2004. The Companys allowance for loan and lease
losses was 1.25% of total loans at March 31, 2005 and 1.32% at March 31, 2004, while its ratio of
non-performing assets to total assets was 0.46% at March 31, 2005, compared to 1.06% at March 31,
2004. 
 Factors that may affect future results As a financial services company, our earnings are significantly affected by general business and
economic conditions. These conditions include short-term and long-term interest rates, inflation,
monetary supply, fluctuations in both debt and equity capital markets, and the strength of the
United States economy and local economies in which we operate. For example, an economic downturn,
increase in unemployment, or other events that negatively impact household and/or corporate incomes
could decrease the demand for the Companys loan and non-loan products and services and increase
the number of customers who fail to pay interest or principal on their loans. Geopolitical
conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United
States or other governments in response to acts or threats of terrorism and our military conflicts
including the aftermath of the war with Iraq, could impact business conditions in the United
States. The Board of Governors of the Federal Reserve System regulates the supply of money and credit in
the United States. Its policies determine in large part our cost of funds for lending and investing
and the return we earn on those loans and investments, both of which impact our net interest
margin, and can materially affect the value of financial instruments we hold. Its policies can also
affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in
Federal Reserve Board policies are beyond our control and hard to predict or anticipate. We operate in a highly competitive industry that could become even more competitive because of
legislative, regulatory and technological changes and continued consolidation. Banks, securities
firms and insurance companies can now merge creating a financial holding company that can offer
virtually any type of financial service, including banking, securities underwriting, insurance
(agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made
it possible for non-banks to offer products and services traditionally provided by banks, such as
automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and some have lower cost structures. 16




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) The holding company, subsidiary bank and nonbank subsidiary are heavily regulated at the
federal and state levels. This regulation is to protect depositors, federal deposit insurance funds
and the banking system as a whole, not investors. Congress and state legislatures and federal and
state regulatory agencies continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies including changes in
interpretation and implementation could affect us in substantial and unpredictable ways including
limiting the types of financial services and products we may offer. Our failure to comply with the
laws, regulations or policies could result in sanctions by regulatory agencies and damage our
reputation. For more information, refer to the Supervision and Regulation section in the
Companys 2004 Annual Report on Form 10-K. Our success depends, in part, on our ability to adapt our products and services to evolving
industry standards. There is increasing pressure on financial services companies to provide
products and services at lower prices. This can reduce our net interest margin and revenues from
fee-based products and services. In addition, the widespread adoption of new technologies,
including internet-based services, could require us to make substantial expenditures to modify or
adapt our existing products and services. Our success depends, in large part, on our ability to
attract and retain key people. Competition for the best people can be intense. The holding company is a separate and distinct legal entity from its subsidiaries. It receives
substantially all of its revenues from dividends from its subsidiaries. These dividends are the
principal source of funds to pay dividends on the holding companys common stock and interest and
principal on its debt. Various federal and state laws and regulations limit the amount of
dividends that our bank may pay to the holding company. For more information, refer to Dividends
and Other Distributions in the Companys 2004 Annual Report on Form 10-K. 
 Specific risks to operations in California Our operations are located entirely in California, which in recent years has experienced economic
disruptions that are unique to the state. We can offer no assurances that the critical impact of
the California economic changes will not have a material adverse effect on our customers or on
our business, financial condition and results of operations. 
 Critical Accounting Policies The Securities and Exchange Commission (SEC) issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require application of
managements most difficult, subjective or complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may change in future
periods. Our accounting policies are integral to understanding the results reported. Accounting policies are
described in detail in Note 2 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Companys
2004 Annual Report on Form 10-K. Not all of the significant accounting policies presented in Note 2
to the Consolidated Financial Statements contained in the Companys 2004 Annual Report on Form 10-K
require management to make difficult, subjective or complex judgements or estimates. Preparation of financial statements The preparation of these financial statements requires management to make estimates and judgements
that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis,
management evaluates the estimates used. Estimates are based upon historical experience, current
economic conditions and other factors that management considers reasonable under the circumstances. 17




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) Use of estimates These estimates result in judgements regarding the carrying values of assets and liabilities when
these values are not readily available from other sources, as well as assessing and identifying the
accounting treatments of contingencies and commitments. Actual results may differ from these
estimates under different assumptions or conditions. Accounting Principles Generally Accepted in the United States of America The Companys financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The Companys significant accounting policies
are presented in Note 2 to the Consolidated Financial Statements contained in the Companys 2004
Annual Report on Form 10-K. The Company follows accounting policies typical to the commercial banking industry and in
compliance with various regulations and guidelines as established by the Financial Accounting
Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA) and the
Banks primary federal regulator, the FDIC. The following is a brief description of the Companys
current accounting policies involving significant management judgements. Allowance for Loan and Lease Losses (ALLL) The allowance for loan and lease losses is managements best estimate of the probable losses that
may be sustained in our loan portfolio. The allowance is based on two basic principles of
accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring
and estimable and (2) SFAS No. 114, which requires that losses be accrued based on the differences
between that value of collateral, present value of future cash flows or values that are observable
in the secondary market and the loan balance. The Company performs periodic and systematic detailed
evaluations of its lending portfolio to identify and estimate the inherent risks and assess the
overall collectibility. These evaluations include general conditions such as the portfolio
composition, size and maturities of various segmented portions of the portfolio such as secured,
unsecured, construction, and Small Business Administration (SBA). Additional factors include concentrations of borrowers, industries, geographical sectors, loan
product, loan classes and collateral types; volume and trends of loan delinquencies and
non-accrual; criticized and classified assets and trends in the aggregate in significant credits
identified as watch list items. There are several components to the determination of the adequacy
of the ALLL. Each of these components is determined based upon estimates that can and do change
when the actual events occur. The Company estimates the SFAS No. 5 portion of the ALLL based on the
segmentation of its portfolio. For those segments that require an ALLL, the Company estimates loan
and lease losses on a monthly basis based upon its ongoing loan review process and analysis of loan
performance. The Company follows a systematic and consistently applied approach to select the most
appropriate loss measurement methods and support its conclusions and rationale with written
documentation. One method of estimating loan losses for groups of loans is through the application
of loss rates to the groups aggregate loan balances. Such rates typically reflect historical loss
experience for each group of loans, adjusted for relevant economic factors over a defined period of
time. The Company evaluates and modifies its loss estimation model as needed to ensure that the
resulting loss estimate is consistent with GAAP. For individually impaired loans, SFAS No. 114
provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114
states that when a loan is impaired, the Company should measure impairment based on the present
value of expected future principal and interest cash flows discounted at the loans effective
interest rate, except that as a practical expedient, a creditor may measure impairment based on a
loans observable market price or the fair value of collateral, if the loan is collateral
dependent. When developing the estimate of future cash flows for a loan, the Company considers all
available information reflecting past events and current conditions, including the effect of
existing environmental factors. 18




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) Revenue recognition The Companys primary sources of revenue are interest income. Interest income is recorded on an
accrual basis. Note 2 to the Consolidated Financial Statements contained in the Companys 2004
Annual Report on Form 10-K offers an explanation of the process for determining when the accrual of
interest income is discontinued on an impaired loan. Stock-based Compensation The Company applies Accounting Principles Board (APB) Opinion No. 25 and related interpretations
in accounting for stock options. Under APB No. 25, compensation cost for stock options is measured
as the excess, if any, of the fair market value of the Companys stock at the date of grant over
the amount the employee or director must pay to acquire the stock. Because the Companys stock
option plans provides for the issuance of options at a price of no less than the fair market value
at the date of grant, no compensation cost is required to be recognized for the stock option plans. Had compensation costs for the stock option plans been determined based upon the fair value at the
date of grant consistent with FASB Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based Compensation, the Companys net income and earnings per share would have
been reduced. The reduction in the Companys net income had compensation costs been determined in
accordance with SFAS No. 123 would have been $37,000 and $18,000 for the three-months ended March
31, 2005 and 2004, respectively. There would have been $0.01 per share decrease in diluted earnings
per share in 2005 and $0.01 per share decrease in 2004. The amount of the reduction for the fiscal years 2002 through 2004 is disclosed in Note 13 to the
Consolidated Financial Statements contained in the Companys 2004 Annual Report on Form 10-K, based
upon the assumptions listed therein. Accounting principles generally accepted in the United States
of America (GAAP), itself may change over time, having impact over the reporting of the Companys
financial activity. Although the economic substance of the Companys transactions would not
change, alterations in GAAP could affect the timing or manner of accounting or reporting. Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using currently enacted tax rates applied to such taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. If future income should prove non-existent or less than the amount of deferred
tax assets within the tax years to which they may be applied, the asset may not be realized and our
net income will be reduced. The Companys deferred tax assets are described further in Note 12 of
the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Companys 2004 Annual Report on Form 10-K. 19




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued) The following table presents the Companys daily average balance sheet information together
with interest income and yields earned on average earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily balances. 
 Table 1.
    
    Average Balances, Interest
Income/Expense and Yields/Rates Paid

(Unaudited, Dollars in thousands)
 Three Months
    
    
    
    
    
    
    
    Three MonthsEnded
    
    
    
    EndedMarch 31, 2005
    
    
    
    March 31, 2004Average
    
    
    
    
    
    
    Yield/
    
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    
    Balance
    
    
    Interest
    
    
    RateEarning AssetsPortfolio Loans
    
    $
    324,055
    
    
    $
    5,407
    
    
    
    6.67
    %
    
    
    $
    285,983
    
    
    $
    4,347
    
    
    
    6.08
    %Tax-exempt Securities
    
    
    6,447
    
    
    
    54
    
    
    
    3.35
    %
    
    
    
    6,506
    
    
    
    56
    
    
    
    3.44
    %US Government Securities
    
    
    31,966
    
    
    
    245
    
    
    
    3.07
    %
    
    
    
    20,830
    
    
    
    149
    
    
    
    2.86
    %Mortgage backed Securities
    
    
    42,055
    
    
    
    406
    
    
    
    3.86
    %
    
    
    
    33,024
    
    
    
    328
    
    
    
    3.97
    %Federal Funds Sold
    
    
    12,321
    
    
    
    79
    
    
    
    2.56
    %
    
    
    
    7,722
    
    
    
    17
    
    
    
    0.88
    %Other Securities
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %
    
    
    
    1,537
    
    
    
    7
    
    
    
    1.82
    %Average Earning Assets
    
    $
    416,844
    
    
    $
    6,191
    
    
    
    5.94
    %
    
    
    $
    355,602
    
    
    $
    4,904
    
    
    
    5.52
    %Cash & Due From Banks
    
    $
    15,255
    
    
    
    
    
    
    
    
    
    
    
    $
    19,757Bank Premises
    
    
    5,481
    
    
    
    
    
    
    
    
    
    
    
    
    5,762Allowance for Loan Losses
    
    
    ( 3,954
    )
    
    
    
    
    
    
    
    
    
    
    
    ( 3,763
    )Other Assets
    
    
    11,411
    
    
    
    
    
    
    
    
    
    
    
    
    11,025Average Total Assets
    
    $
    445,037
    
    
    
    
    
    
    
    
    
    
    
    $
    388,383Interest Bearing LiabilitiesDemand Interest Bearing
    
    $
    111,227
    
    
    $
    139
    
    
    
    0.50
    %
    
    
    $
    94,723
    
    
    $
    102
    
    
    
    0.43
    %Savings Deposits
    
    
    23,852
    
    
    
    24
    
    
    
    0.40
    %
    
    
    
    21,723
    
    
    
    29
    
    
    
    0.53
    %Certificates of Deposit
    
    
    143,705
    
    
    
    830
    
    
    
    2.31
    %
    
    
    
    140,156
    
    
    
    723
    
    
    
    2.06
    %Borrowings
    
    
    41,642
    
    
    
    342
    
    
    
    3.29
    %
    
    
    
    25,383
    
    
    
    125
    
    
    
    1.97
    %320,426
    
    
    $
    1,335
    
    
    
    1.67
    %
    
    
    
    281,985
    
    
    $
    979
    
    
    
    1.39
    %Noninterest bearing demand
    
    
    79,489
    
    
    
    
    
    
    
    
    
    
    
    
    66,292Other Liabilities
    
    
    5,494
    
    
    
    
    
    
    
    
    
    
    
    
    4,319Stockholders Equity
    
    
    39,628
    
    
    
    
    
    
    
    
    
    
    
    
    35,787Average Liabilities and
Stockholders Equity
    
    $
    445,037
    
    
    
    
    
    
    
    
    
    
    
    $
    388,383Net Interest Income and Net Interest Margin
    
    
    
    
    
    $
    4,856
    
    
    
    4.66
    %
    
    
    
    
    
    
    $
    3,925
    
    
    
    4.42
    %
 20




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) The following tables set forth changes in interest income and interest expense for each major
category of earning assets and interest-bearing liabilities, and the amount of change attributable
to volume and rate changes for the periods indicated. Changes attributable to rate/volume have
been allocated to volume changes. 
 Table 2.
              
              
  Analysis of Changes in Net Interest Income and Interest Expense March 31, 2005
    
    
    over
    
    
    March 31, 2004(Dollars in thousands)
    
    Volume
    
    
    Rate
    
    
    TotalIncrease (Decrease) In
Interest IncomePortfolio Loans
    
    $
    635
    
    
    $
    425
    
    
    $
    1,060Tax-exempt Securities
    
    
    0
    
    
    
    (2
    )
    
    
    (2
    )US Government Securities
    
    
    85
    
    
    
    11
    
    
    
    96Mortgage back Securities
    
    
    87
    
    
    
    (9
    )
    
    
    78Federal Funds Sold
    
    
    29
    
    
    
    33
    
    
    
    62Other Securities
    
    
    0
    
    
    
    (7
    )
    
    
    (7
    )Total Increase
(Decrease)
    
    $
    836
    
    
    $
    451
    
    
    $
    1,287Increase (Decrease) In
Interest ExpenseInterest Bearing Demand
    
    $
    21
    
    
    $
    16
    
    
    $
    37Savings Deposits
    
    
    2
    
    
    
    (7
    )
    
    
    (5
    )Certificates of Deposit
    
    
    20
    
    
    
    87
    
    
    
    107Borrowings
    
    
    134
    
    
    
    83
    
    
    
    217Total Increase
(Decrease)
    
    $
    177
    
    
    $
    179
    
    
    $
    356Net Increase
    
    $
    659
    
    
    $
    272
    
    
    $
    931
 Net interest income was $4.9 million for the first three-months of 2005 compared with $3.9 million
for the same period in 2004, a 23.7% increase (Tables 1 and 2). The increase is attributed to an
increase in the volume of earning assets coupled with increases in interest rates during the
period. Average earning assets for the first three-months of 2005 were $416.8 million compared with
$355.6 million for the same period in 2004, an increase of $61.2 million or 17.2%. The single
largest component of increased earning assets was in the loan portfolio. Average loans increased
$38.1 million or 13.3% over the same three-month period in 2004. Coupled with the asset growth,
yields on earning assets increased to 5.94% compared with 5.52% over the same three-month period in
2004, a gain of 42 basis points. Average interest bearing liabilities also increased by $38.4 million or 13.5% for the first
three-months of 2005 to $320.4 million in 2005 compared with $281.9 million for the same period in
2004. The cost of interest bearing liabilities or funding increased to 1.67% in 2005 compared to
1.39% in 2004, an increase in interest expense of $356,000 or 36.4%. The significant segment of
deposit growth was centered in lower cost core deposits (demand and savings) partially offsetting
the rising interest rate environment. As a result of these changes, the interest spread (the difference between the yield on earning
assets and the cost of interest bearing liabilities) increased 24 basis points to 4.66% for the
three-months ended March 31, 2004 compared with 4.42% for the same three-month period in the prior
year. 21




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 
 Noninterest Income The Companys noninterest income consists of service charges on deposit accounts, other fee income,
processing fees for credit card payments and gains or losses on security sales. The following table
sets forth a summary of noninterest income for the periods indicated. (Dollars in thousands)
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Noninterest incomeService charges on deposit accounts
    
    $
    103
    
    
    $
    99Payroll and benefit processing fees
    
    
    99
    
    
    
    97Earnings on cash surrender value -
Bank owned life insurance
    
    
    51
    
    
    
    54Net gain on sale of securities available-for-sale
    
    
    (2
    )
    
    
    0Net gain on sale of loans
    
    
    19
    
    
    
    35Merchant credit card service income, net
    
    
    99
    
    
    
    97Mortgage brokerage fee income
    
    
    86
    
    
    
    16Other income
    
    
    87
    
    
    
    97Total noninterest income
    
    $
    542
    
    
    $
    495
 Noninterest income increased $47,000 or 9.5% for the quarter ended March 31, 2005 over March 31,
2004. Service charges on deposit accounts increased modestly at 4.0% or $4,000 due to growth in
core deposits and implementation of account analysis fees. Net gain on sale of loans decreased
$16,000 over the prior years quarter due to fewer sales of SBA loans during the quarter. One
available-for-sale security was sold during the period posting a modest loss on investment of
$2,000. Mortgage brokerage fee income increased by $70,000 for the first quarter 2005 over the same
period in 2004, due to increases in mortgage loan volume. 
 Noninterest Expense Three Months Ended(Dollars in thousands)
    
    March 31, 2005
    
    
    March 31, 2004Noninterest expenseSalaries and related benefits
    
    $
    1,693
    
    
    $
    1,393Occupancy and equipment expense
    
    
    387
    
    
    
    369FDIC insurance premium
    
    
    12
    
    
    
    13Data processing fees
    
    
    41
    
    
    
    44Professional service fees
    
    
    205
    
    
    
    146Deferred compensation expense
    
    
    73
    
    
    
    67Stationery and supplies
    
    
    59
    
    
    
    54Postage
    
    
    28
    
    
    
    21Directors expense
    
    
    74
    
    
    
    89Other expenses
    
    
    348
    
    
    
    268Total noninterest expense
    
    $
    2,920
    
    
    $
    2,464
 Noninterest expense for the quarter ended March 31, 2005 was $2.9 million, an increase of $456,000
or 18.5% over the same period a year ago. Salaries and employee benefits represent most of the
increase of $300,000 or 21.5% over the same period a year ago. Increases are related to increases
in staffing to support volume increases. Professional service fees have increased 40.4% or $59,000
over the same period a year ago and are attributed to the additional professional support necessary
to comply with the Sarbanes Oxley Section 404 Certification requirements. 22




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 
 Income Taxes The Companys effective tax rate varies with changes in the relative amounts of its non-taxable
income and non-deductible expenses. The increase in the Companys tax provision is attributable to
decreases in non-taxable income related to a reduction in the municipal security portfolio and
reclassification of enterprise zone qualified credits. The following table reflects the Companys tax provision and the related effective tax rate for the
periods indicated. (Dollars in thousands)
    
    Three Months EndedIncome Taxes
    
    March 31, 2005
    
    
    March 31, 2004Tax provision
    
    $
    925
    
    
    $
    652Effective tax rate
    
    
    40.2
    %
    
    
    37.0
    %
 The Companys provision for income taxes includes both federal and state income taxes and reflects
the application of federal and state statutory rates to the Companys net income before taxes. The
principal difference between statutory tax rates and the Companys effective tax rate is the
benefit derived from investing in tax-exempt securities and enterprise zone qualifying loans.
Increases and decreases in the provision for taxes reflect changes in the Companys net income
before tax. 
 Asset Quality The Company concentrates its lending activities primarily within in El Dorado, Placer, Sacramento
and Shasta Counties, California, and the location of the Banks four full service branches,
specifically identified as Upstate California. The Company manages its credit risk through diversification of its loan portfolio and the
application of underwriting policies and procedures and credit monitoring practices. Although the
Company has a diversified loan portfolio, a significant portion of its borrowers ability to repay
the loans is dependent upon the professional services and commercial real estate development
industry sectors. Generally, the loans are secured by real estate or other assets and are expected
to be repaid from the cash flows of the borrower or proceeds from the sale of collateral. The following table sets forth the amounts of loans outstanding by category as of the dates
indicated: (Dollars in thousands)Portfolio Loans
    
    March 31, 2005
    
    
    December 31, 2004Commercial and financial loans
    
    $
    100,192
    
    
    $
    105,545Real estate-construction loans
    
    
    84,439
    
    
    
    77,439Real estate-commercial
    
    
    135,432
    
    
    
    135,260Real estate-mortgage
    
    
    4,247
    
    
    
    4,423Installment
    
    
    305
    
    
    
    300Other loans
    
    
    463
    
    
    
    353Less:Net deferred loan fees
    
    
    (581
    )
    
    
    (653
    )Allowance for loan losses
    
    
    (4,044
    )
    
    
    (3,866
    )Total net loans
    
    $
    320,453
    
    
    $
    318,801
 23




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) The Companys practice is to place an asset on nonaccrual status when one of the following
events occur: (i) any installment of principal or interest is 90 days or more past due (unless in
managements opinion the loan is well secured and in the process of collection). (ii) Management
determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of
the loan have been renegotiated due to a serious weakening of the borrowers financial condition.
Nonperforming loans are loans that are on nonaccrual, are 90 days past due and still accruing or
have been restructured. Net portfolio loans increased $1.7 million or 0.52% at March 31, 2005 over December 31, 2004. The
portfolio mix remains consistent with the mix at December 31, 2004. The balance of the portfolio
remains relatively consistent with the mix at December 31, 2004, with commercial and financial
loans of approximately 31%, real estate construction of approximately 26% and commercial real
estate of approximately 42%. Impaired loans are loans for which it is probable that the Company
will not be able to collect all amounts due and payable. The Company had outstanding balances of
$2,056,000 and $2,383,000 in impaired loans that had impairment allowances of $769,569 and $867,590
as of March 31, 2005 and December 31, 2004, respectively. The following table sets forth a summary of the Companys nonperforming assets as of the dates
indicated: (Dollars in thousands)Non performing assets
    
    March 31, 2005
    
    
    December 31, 2004Nonaccrual loans
    
    $
    2,056
    
    
    $
    2,38390 days past due and still accruing
interest
    
    
    0
    
    
    
    0Total nonaccrual loans
    
    
    2,056
    
    
    
    2,383Other Real Estate Owned
    
    
    0
    
    
    
    0Total non performing assets
    
    $
    2,056
    
    
    $
    2,383
 
 Allowance for Loan and Lease Losses (ALLL) The allowance for loan and lease losses is managements estimate of the amount of probable loan
losses in the loan portfolio. The Company determines the allowance for loan losses based on an
ongoing evaluation. The evaluation is inherently subjective because it requires material estimates,
including the amounts and timing of cash flows expected to be received on impaired loans. Those
estimates may be susceptible to significant change. The Company makes provisions to the ALLL on a
regular basis through charges to operations that are reflected in the Companys statements of
income as a provision for loan losses. When a loan is deemed uncollectible, it is charged against
the allowance. Any recoveries of previously charged-off loans are credited back to the allowance.
There is no precise method of predicting specific losses or amounts that ultimately may be
charged-off on particular categories of the loan portfolio. The Companys allowance for loan losses is the accumulation of various components that are
calculated based upon independent methodologies. All components of the allowance for loan losses
represent an estimation performed pursuant to SFAS No. 5, Accounting for Contingenciesor SFAS No.
114, Accounting by Creditors for Impairment of a Loan.Managements estimate of each SFAS No. 5
Accounting for Contingenciescomponent is based on certain observable data that management believes
is the most reflective of the underlying loan losses being estimated. Changes in the amount of each
component of the allowance for loan losses are directionally consistent with changes in the
observable data, taking into account the interaction of the SFAS No. 5 components over time. An essential element of the methodology for determining the allowance for loan losses is the
Companys loan risk evaluation process, which includes loan risk grading individual commercial,
construction, commercial real estate and most consumer loans. Loans are assigned loan risk grades
based on the Companys assessment of conditions that affect the borrowers ability to meet its
contractual obligations under the loan agreement. That process includes reviewing borrowers
current financial information, historical payment experience, loan documentation, public
information, and other information specific to each individual borrower. Loans are reviewed on an
annual or rotational basis or as management become aware of information affecting the borrowers
ability to fulfill its obligations. Loan risk grades carry a dollar weighted risk percentage. 24




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) The ALLL is a general reserve available against the total loan portfolio. It is maintained
without any interallocation to the categories of the loan portfolio, and the entire allowance is
available to cover loan losses. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of the examination process,
periodically review the Companys ALLL. Such agencies may require the Company to provide additions
to the allowance based on their judgment of information available to them at the time of their
examination. Accordingly, it is not possible to predict the effect future economic trends may have
on the level of the provision for loan losses in future periods. In addition to the ALLL, an
allowance for unfunded loan commitments and letters of loan is determined using estimates of the
probability of funding. This reserve is carried as a liability on the condensed consolidated
balance sheet. The ALLL should not be interpreted as an indication that charge-offs in future periods will occur
in the stated amounts or proportions. The following table summarizes the activity in the ALLL reserves for the periods indicated. (Dollars in thousands)Allowance for Loan and Lease Losses
    
    March 31, 2005
    
    
    March 31, 2004Beginning balance for Loan and Lease Losses
    
    $
    3,866
    
    
    $
    3,675Provision for Loan and Lease Losses
    
    
    177
    
    
    
    192Charge offs:Commercial
    
    
    (0
    )
    
    
    (0
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )Other
    
    
    (0
    )
    
    
    (0
    )Total Charge offs
    
    
    (0
    )
    
    
    (0
    )Recoveries:Commercial
    
    
    1
    
    
    
    3Real Estate
    
    
    0
    
    
    
    0Total Recoveries
    
    
    1
    
    
    
    3Ending Balance
    
    $
    4,044
    
    
    $
    3,870ALLL to total loans
    
    
    1.25
    %
    
    
    1.32
    %Net Charge offs to average loans
    
    
    0.00
    %
    
    
    0.00
    %
 25




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued) 
 Securities Portfolio The securities portfolio is comprised of U.S. Treasury securities, U.S. Agency securities,
mortgage-backed securities, and obligations of states and political subdivisions. Securities
classified as available for sale are recorded at fair value, while securities classified as held to
maturity are recorded at cost. Unrealized gains or losses on available for sale securities, net of
the deferred tax effect, are reported as increases or decreases in stockholders equity. Portions
of the securities portfolio are used for pledging requirements for deposits of state and local
subdivisions, securities sold under repurchase agreements, and FHLB advances. The Company does not
include federal funds sold as securities. These investments are included in cash and cash
equivalents. Total available-for-sale securities increased $21.6 million or 38.9% at March 31, 2005 compared to
March 31, 2004. As of March 31, 2005, the Company has pledged $1.0 million of securities for treasury, tax and loan
accounts, $9.4 million for deposits of public funds, approximately $13.5 million for collateralized
repurchase agreements and $15.0 million towards Federal Home Loan Bank borrowings. The following table summarizes the amortized cost of the Companys available-for-sale securities
held on the dates indicated. (Dollars in thousands)
    
    
    
    
    
    as of March 31, 2005Amortized Costs
    
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    EstimatedU.S. government & agencies
    
    $
    31,957
    
    
    $
    0
    
    
    $
    (679
    )
    
    $
    31,278Obligations of state and
political subdivisions
    
    
    6,373
    
    
    
    39
    
    
    
    (150
    )
    
    
    6,262Mortgage backed securities
    
    
    40,402
    
    
    
    0
    
    
    
    (666
    )
    
    
    39,736Total
    
    $
    78,732
    
    
    $
    39
    
    
    $
    (1,495
    )
    
    $
    77,276
 (Dollars in thousands)
    
    
    
    
    
    as of March 31, 2004Amortized Costs
    
    
    Unrealized Gains
    
    
    Unrealized Losses
    
    
    EstimatedU.S. government & agencies
    
    $
    17,507
    
    
    $
    126
    
    
    $
    (221
    )
    
    $
    17,412Obligations of state and
political subdivisions
    
    
    6,718
    
    
    
    126
    
    
    
    (8
    )
    
    
    6,836Mortgage backed securities
    
    
    31,069
    
    
    
    317
    
    
    
    0
    
    
    
    31,386Total
    
    $
    55,294
    
    
    $
    569
    
    
    $
    (229
    )
    
    $
    55,634
 26




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company considers interest rate, credit and operation risk as the most significant risks
affecting the Company. Other types of market risk, such as foreign exchange risk and commodity
price risk, do not affect the Company in the normal course of operations. Fluctuation in interest rates will ultimately affect both the level of interest income and interest
expense recorded as revenue. The fundamental objective of the Companys management of its assets
and liabilities is to enhance the economic value of the Company while maintaining adequate
liquidity and an exposure to interest rate risk deemed acceptable by the Companys management. The simulation model used includes measures of the expected repricing characteristics of
administered rate (NOW, savings and money market accounts) and non-related products (demand deposit
accounts, other assets and other liabilities). These measures recognize the relative sensitivity of
these accounts to changes in market interest rates, as demonstrated through current and historical
experience, recognizing the timing differences of rate changes. In simulation of net interest
margin and net income the forecast balance sheet is processed against five rate scenarios. These
five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in
the future and four additional rate ramp scenarios ranging for +
200 to - 200 basis points in 100
basis point increments, unless the rate environment cannot move in these basis point increments
before reaching zero. The formal policies and practices adopted by the Company to monitor and manage interest rate risk
exposure measure risk in two ways: (i) repricing opportunities for earning assets and
interest-bearing liabilities and (ii) changes in net interest income for declining interest rate
shocks of 100 to 200 basis points. Because of the Companys predisposition to variable rate,
pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a
result, management anticipates that, in a declining interest rate environment, the Companys net
interest income and margin would be expected to decline, and, in an increasing interest rate
environment, the Companys net interest income and margin would be expected to increase. However,
no assurance can be given that under such circumstances the Company would experience the described
relationships to declining or increasing interest rates. Because the Company is asset sensitive,
the Company is adversely affected by declining rates rather than rising rates. At March 31, 2005, the estimated annualized reduction in net interest income attributable to a 50
and 100 basis point decline in the federal funds rate was $896,000 and $1,782,000, respectively. At
March 31, 2005, the estimated annual increase in net interest income attributable to a 100 and 200
basis point increase in the federal funds rate was $675,000 and $1,350,000. At December 31, 2004,
the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point
decline in the federal funds rate was $1,478,000 and $3,057,915, respectively, with a similar and
opposite result attributable to a 100 and 200 basis point increase in the federal funds rate. 27




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ITEM 4. CONTROLS AND PROCEDURES As required by SEC rules the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys President and Chief
Executive Officer and with the Companys Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures, pursuant to Exchange Act
Rule 13a-14. As part of the disclosure controls and procedures, management has formed the SEC Disclosure
Committee. This committee reviews the quarterly filing to a disclosure checklist to ensure that all
functional areas of the Company have participated in the disclosure review. In addition,
operational and accounting audits are performed ongoing throughout the year by the Companys
internal auditors to support the control structure. Based upon that evaluation, the Companys President and Chief Executive Officer along with the
Companys Chief Financial Officer concluded that the Companys disclosure controls and procedures
are effective in timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in this Form 10-Q. There have been no significant changes in the Companys internal controls, or in other factors,
which would significantly affect internal controls subsequent to the date the Company carried out
its evaluation. 28




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PART II. Other Information 
 Item 1. Legal proceedings The Company is involved in various pending and threatened legal actions arising in the ordinary
course of business. The Company maintains reserves for losses from legal actions, which are both
probable and estimable. In the opinion of management, the disposition of claims, currently pending
will not have a material adverse affect on the Companys financial position or results of
operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds N/A 
 Item 3. Defaults upon Senior Securities N/A. 
 Item 4. Submission of Matters to a vote of Security Holders N/A 
 Item 5. Other Information N/A 
 Item 6A. Exhibits (31) Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002
(32) Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Item 6B. Reports on Form 8-K March 18, 2005 8-K Press release announcing quarterly dividend $0.06 per share
April 15, 2005 8-K Press release announcing first quarter earnings 
 SIGNATURES Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANK OF COMMERCE HOLDINGS
(Registrant) Date: May 05, 2005 /s/ Linda J. Miles
Linda J. Miles
Executive Vice President &
Chief Financial Officer 29