##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from __________ to __________
 Commission
file number 0-25135
 Bank of Commerce Holdings
  California
(State or other jurisdiction of incorporation or organization)
    
    94-2823865
(I.R.S. Employer Identification No.)
 1951 Churn Creek Road Redding, California
(Address of principal executive offices)
    
    96002
(Zip code)
   
 þ o
 o þ
    1




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##### Table of Contents



BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Index
to Form 10-Q
 
 Page:PART
I.
    
    FINANCIAL
INFORMATIONItem 1.
    
    Financial StatementsConsolidated
Condensed Balance SheetsJune 30, 2005, December 31, 2004 and June 30, 2004
    
    
    3Consolidated Condensed Statements of IncomeThree and six months ended June 30, 2005 and 2004
    
    
    4Consolidated Condensed Statements of Cash FlowsThree and six months ended June 30, 2005 and 2004
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Corporate Overview
    
    
    10Executive Overview
    
    
    12Sources of Income
    
    
    13Financial Highlights
 Results of Operations
    
    
    13Net Interest Income and Net Interest Margin
    
    
    13Liquidity
    
    
    14Capital Management
    
    
    14Short term borrowings
    
    
    15Provision for loan losses
    
    
    15Factors that may affect future results
    
    
    15Critical accounting policies
    
    
    16Average 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
    
    
    24Allowance for loan  and lease losses (ALLL)
    
    
    25Securities 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
    
    
    
    
    30,31,32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
 2




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##### Table of Contents



PART
I. FINANCIAL INFORMATION
 
 Item 1.
Financial Statements
 BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
(Unaudited)
 Dollar Amounts in thousands, except share data
    
    June 30, 2005
    

Dec. 31, 2004
    
    June 30, 2004ASSETSCash and due from banks
    
    $
    19,300
    
    
    $
    13,121
    
    
    $
    14,461Federal funds sold and securities purchased under agreements to
resell
    
    
    11,895
    
    
    
    6,120
    
    
    
    15,155Cash and cash equivalents
    
    
    31,195
    
    
    
    19,241
    
    
    
    29,616Securities available-for-sale (including pledged collateral of
$39,053 at June 30, 2005; $33,345 at December 31, 2004 and
$35,011 at June 30, 2004)
    
    
    72,709
    
    
    
    82,443
    
    
    
    74,257Securities held-to-maturity, at cost (estimated fair value of $5,934
at June 30, 2005, $487 at December 31, 2004
and $611 at June 30, 2004)
    
    
    5,889
    
    
    
    449
    
    
    
    566Loans, net of the allowance for loan losses of $4,148 at June 30,
2005, $3,866 at December 31, 2004 and $3,618 at June
30, 2004
    
    
    340,230
    
    
    
    318,801
    
    
    
    287,886Bank premises and equipment, net
    
    
    5,581
    
    
    
    5,484
    
    
    
    5,700Other assets
    
    
    12,611
    
    
    
    12,127
    
    
    
    11,847TOTAL ASSETS
    
    $
    468,215
    
    
    $
    438,545
    
    
    $
    409,872LIABILITIES AND STOCKHOLDERS EQUITYDemand  noninterest bearing
    
    $
    77,960
    
    
    $
    82,263
    
    
    $
    73,067Demand  interest bearing
    
    
    115,772
    
    
    
    108,645
    
    
    
    102,051Savings
    
    
    26,898
    
    
    
    23,471
    
    
    
    24,354Certificates of deposits
    
    
    148,507
    
    
    
    138,500
    
    
    
    132,640Total deposits
    
    
    369,137
    
    
    
    352,879
    
    
    
    332,112Securities sold under agreements to repurchase
    
    
    21,537
    
    
    
    2,004
    
    
    
    1,496Federal Home Loan Bank borrowings
    
    
    30,000
    
    
    
    35,000
    
    
    
    35,000Other liabilities
    
    
    5,119
    
    
    
    8,379
    
    
    
    3,964Guaranteed Preferred Beneficial Interests in Companys
Junior Subordinated Debt payable to unconsolidated subsidiary
grantor trust
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,000Total Liabilities
    
    
    430,793
    
    
    
    403,262
    
    
    
    377,572Commitments 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; 8,618,581 shares issued and
outstanding
at June 30,2005, 8,502,831 at December 31, 2004
and 8,192,724 at June 30, 2004
    
    
    10,894
    
    
    
    10,537
    
    
    
    9,745Retained earnings
    
    
    27,097
    
    
    
    25,079
    
    
    
    23,604Accumulated other comprehensive income (loss) gain, net of tax
    
    
    (569
    )
    
    
    (333
    )
    
    
    (1,049
    )Total Stockholders equity
    
    
    37,422
    
    
    
    35,283
    
    
    
    32,300TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    468,215
    
    
    $
    438,545
    
    
    $
    409,872
 See accompanying notes to condensed consolidated financial statements.
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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Income (Unaudited)
 Three and six months ended June 30, 2005 and 2004
 Three Months Ended
    
    Six Months EndedAmounts in thousands, except for per share data
    
    June 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004Interest income:Interest and fees on loans
    
    $
    5,840
    
    
    $
    4,442
    
    
    $
    11,247
    
    
    $
    8,789Interest on tax exempt securities
    
    
    77
    
    
    
    57
    
    
    
    131
    
    
    
    113Interest on U.S. government securities
    
    
    657
    
    
    
    505
    
    
    
    1,308
    
    
    
    982Interest on federal funds sold and
securities purchased under agreements to
resell
    
    
    86
    
    
    
    24
    
    
    
    165
    
    
    
    41Interest on other securities
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7Total interest income
    
    
    6,660
    
    
    
    5,028
    
    
    
    12,851
    
    
    
    9,932Interest expense:Interest on demand deposits
    
    
    273
    
    
    
    98
    
    
    
    412
    
    
    
    200Interest on savings deposits
    
    
    47
    
    
    
    24
    
    
    
    71
    
    
    
    53Interest on time deposits
    
    
    1,031
    
    
    
    672
    
    
    
    1,861
    
    
    
    1,395Securities sold under agreements to repurchase
    
    
    99
    
    
    
    0
    
    
    
    118
    
    
    
    2Interest on FHLB and other borrowing expense
    
    
    265
    
    
    
    91
    
    
    
    511
    
    
    
    158Interest on junior subordinated debt payable to
unconsolidated subsidiary
grantor trust
    
    
    84
    
    
    
    56
    
    
    
    161
    
    
    
    112Total interest expense
    
    
    1,799
    
    
    
    941
    
    
    
    3,134
    
    
    
    1,920Net interest income
    
    
    4,861
    
    
    
    4,087
    
    
    
    9,717
    
    
    
    8,012Provision for loan and lease losses
    
    
    177
    
    
    
    97
    
    
    
    354
    
    
    
    289Net interest income after provision for
loan losses
    
    
    4,684
    
    
    
    3,990
    
    
    
    9,363
    
    
    
    7,723Noninterest income:Service charges on deposit accounts
    
    
    102
    
    
    
    126
    
    
    
    205
    
    
    
    225Payroll and benefit processing fees
    
    
    84
    
    
    
    82
    
    
    
    183
    
    
    
    179Earnings on cash surrender value -Bank owned life insurance
    
    
    53
    
    
    
    54
    
    
    
    104
    
    
    
    108Net gain (loss) on sale of securities
available-for-sale
    
    
    0
    
    
    
    0
    
    
    
    (2
    )
    
    
    0Net gain on sale of loans
    
    
    49
    
    
    
    1
    
    
    
    68
    
    
    
    36Merchant credit card service income, net
    
    
    78
    
    
    
    94
    
    
    
    177
    
    
    
    191Mortgage brokerage fee income
    
    
    71
    
    
    
    32
    
    
    
    157
    
    
    
    48Other income
    
    
    111
    
    
    
    105
    
    
    
    198
    
    
    
    202Total non-interest income
    
    
    548
    
    
    
    494
    
    
    
    1,090
    
    
    
    989Noninterest expense:Salaries and related benefits
    
    
    1,645
    
    
    
    1,368
    
    
    
    3,338
    
    
    
    2,761Occupancy and equipment expense
    
    
    349
    
    
    
    363
    
    
    
    736
    
    
    
    732FDIC insurance premium
    
    
    13
    
    
    
    12
    
    
    
    25
    
    
    
    25Data processing fees
    
    
    97
    
    
    
    72
    
    
    
    138
    
    
    
    116Professional service fees
    
    
    173
    
    
    
    296
    
    
    
    378
    
    
    
    442Deferred compensation expense
    
    
    76
    
    
    
    69
    
    
    
    149
    
    
    
    136Stationery and Supplies
    
    
    45
    
    
    
    54
    
    
    
    119
    
    
    
    108Postage
    
    
    26
    
    
    
    27
    
    
    
    54
    
    
    
    48Directors expense
    
    
    84
    
    
    
    69
    
    
    
    143
    
    
    
    158Other expenses
    
    
    379
    
    
    
    310
    
    
    
    727
    
    
    
    578Total non-interest expense
    
    
    2,887
    
    
    
    2,640
    
    
    
    5,807
    
    
    
    5,104Income before income taxes
    
    
    2,345
    
    
    
    1,844
    
    
    
    4,646
    
    
    
    3,608Provision for income taxes
    
    
    874
    
    
    
    683
    
    
    
    1,799
    
    
    
    1,335Net Income
    
    $
    1,471
    
    
    $
    1,161
    
    
    $
    2,847
    
    
    $
    2,273Basic earnings per share
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.33
    
    
    $
    0.28Weighted average shares  basic
    
    
    8,591
    
    
    
    8,184
    
    
    
    8,563
    
    
    
    8,158Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.31
    
    
    $
    0.26Weighted average shares  diluted
    
    
    9,273
    
    
    
    8,811
    
    
    
    9,091
    
    
    
    8,744
  4




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 Six months ended June 30, 2005 and 2004
 Dollars in thousands
    
    June 30, 2005
    
    June 30, 2004Cash flows from operating activities:Net Income
    
    $
    2,847
    
    
    $
    2,273Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan and lease losses
    
    
    354
    
    
    
    289Provision for depreciation and amortization
    
    
    280
    
    
    
    323Compensation expense associated with stock options
    
    
    3
    
    
    
    0Loss on sale of securities available for sale
    
    
    2
    
    
    
    0Amortization of investment premiums and accretion of
discounts, net
    
    
    86
    
    
    
    94Gain on sale of loans
    
    
    (68
    )
    
    
    (36
    )Proceeds from sales of loans
    
    
    1,328
    
    
    
    636Loans originated for sale
    
    
    (1,260
    )
    
    
    (600
    )Effect of changes in:Other assets
    
    
    (86
    )
    
    
    2,992Deferred loan fees
    
    
    (315
    )
    
    
    (69
    )Other liabilities
    
    
    (3,059
    )
    
    
    (385
    )Net cash provided by operating activities
    
    
    112
    
    
    
    5,517Cash flows from investing activities:Proceeds from maturities of available-for-sale securities
    
    
    13,823
    
    
    
    20,204Proceeds from sales of available-for-sale securities
    
    
    141
    
    
    
    0Proceeds from maturities of held-to-maturity securities
    
    
    45
    
    
    
    819Purchases of available-for-sale securities
    
    
    (10,437
    )
    
    
    (26,297
    )Loan originations, net of principal repayments
    
    
    (21,469
    )
    
    
    (9,981
    )Purchases of premises and equipment
    
    
    (377
    )
    
    
    (210
    )Net cash used by investing activities
    
    
    (18,274
    )
    
    
    (15,465
    )Cash flows from financing activities:Net increase in deposits
    
    
    16,260
    
    
    
    4,573Net increase (decrease) in securities sold under
agreement to repurchase
    
    
    19,533
    
    
    
    (2,253
    )Proceeds from Federal Home Loan Bank advances
    
    
    23,000
    
    
    
    70,000Repayments of Federal Home Loan Bank advances
    
    
    (28,000
    )
    
    
    (65,000
    )Common stock transactions, net
    
    
    (677
    )
    
    
    205Net cash provided by financing activities
    
    
    30,116
    
    
    
    7,525Net increase (decrease) in cash and cash equivalents
    
    
    11,954
    
    
    
    (2,423
    )Cash and cash equivalents, beginning of period
    
    
    19,241
    
    
    
    32,039Cash and cash equivalents, end of period
    
    $
    31,195
    
    
    $
    29,616Supplemental disclosures:Cash paid during the period for:Income taxes
    
    $
    1,814
    
    
    $
    1,147Interest
    
    
    3,040
    
    
    
    1,813
  5




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 
 Notes to Unaudited Condensed Consolidated Financial Statements
 1. Consolidation and Basis of Presentation
     2. Recent Accounting pronouncements
 Statement of Financial Accounting Standards No. 123 (revised 2004)  Accounting for Stock Based Compensation. Accounting for Stock Issued to Employees,
    6




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
   3. Earnings per Share
   Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Basic EPS Calculation:Numerator (net income)
    
    $
    1,471
    
    
    $
    1,161
    
    
    $
    2,847
    
    
    $
    2,273Denominator (average common
shares outstanding)
    
    
    8,591
    
    
    
    8,184
    
    
    
    8,563
    
    
    
    8,158Basic earnings per Share
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.33
    
    
    $
    0.28Diluted EPS Calculation:Numerator (net income)
    
    $
    1,471
    
    
    $
    1,161
    
    
    $
    2,847
    
    
    $
    2,273Denominator:Average common shares outstanding
    
    
    8,591
    
    
    
    8,184
    
    
    
    8,563
    
    
    
    8,158Options
    
    
    682
    
    
    
    627
    
    
    
    528
    
    
    
    5869,273
    
    
    
    8,811
    
    
    
    9,091
    
    
    
    8,744Diluted earnings per Share
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.31
    
    
    $
    0.26
 7




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 4. Stock Option Plans
 Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation Accounting for Stock-Based Compensation -
Transition and Disclosure, Accounting for Stock-Based Compensation,
 Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Net incomeAs reported
    
    $
    1,471
    
    
    $
    1,161
    
    
    $
    2,847
    
    
    $
    2,273Deduct:Total
stock-based
employee
compensation
expense
determined
under fair
value based
method for
all awards,
net of related
tax effects
    
    
    (37
    )
    
    
    (31
    )
    
    
    (74
    )
    
    
    (62
    )Pro forma net income
    
    $
    1,434
    
    
    $
    1,130
    
    
    $
    2,773
    
    
    $
    2,211Earnings per share:Basic  as reported
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.33
    
    
    $
    0.28Basic  pro forma
    
    $
    0.17
    
    
    $
    0.14
    
    
    $
    0.32
    
    
    $
    0.27Diluted  as reported
    
    $
    0.16
    
    
    $
    0.13
    
    
    $
    0.31
    
    
    $
    0.26Diluted  pro forma
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.31
    
    
    $
    0.25
  5. Comprehensive Income
  Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Net Income as reported
    
    $
    1,471
    
    
    $
    1,161
    
    
    $
    2,847
    
    
    $
    2,273Other comprehensive income
net of tax:Unrealized holding gain (loss)
on
securities available for sale
    
    
    287
    
    
    
    (1,249
    )
    
    
    (237
    )
    
    
    (784
    )Reclassification adjustment for
loss on available for sale
securities
    
    
    0
    
    
    
    (0
    )
    
    
    2
    
    
    
    (0
    )Total other comprehensive income
    
    
    287
    
    
    
    (1,249
    )
    
    
    (235
    )
    
    
    (784
    )Total comprehensive income
    
    $
    1,758
    
    
    
    ($87
    )
    
    $
    2,612
    
    
    $
    1,224
 8




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BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
 Notes to Unaudited Condensed Consolidated Financial Statements
 6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust
  7. Commitments and contingent liabilities
 Lease Commitments 
 (Dollars in thousands)2005
    
    $
    1792006
    
    $
    3712007
    
    $
    3772008
    
    $
    3832009
    
    $
    340Thereafter
    
    $
    1,238Total
    
    $
    2,888Minimum rental due in the future
under non-cancelable subleases
    
    $
    8
 Legal Proceedings 
 FHLB
Advances 
 Off-Balance Sheet Financial Instruments 
 9




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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 June 30, 2005. Also discussed are
significant trends and changes in the Companys results of operations for the three and six months
ended June 30, 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
   10




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
         11




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
   
 Executive Overview
      12




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
  
 Sources of Income
  
 Financial Highlights  Results of Operations
   
 Net Interest Income and Net Interest Margin
   13




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
   
 Liquidity
    
 Capital Management
   14




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
 Well
    
    
    MinimumJune 30, 2005
    
    
    
    
    
    Actual
    
    
    Capitalized
    
    
    CapitalCapital
    
    
    Ratio
    
    
    Requirement
    
    
    RequirementThe CompanyLeverage
    
    $
    42,991,000
    
    
    
    9.25
    %
    
    
    n/a
    
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    42,991,000
    
    
    
    11.15
    %
    
    
    n/a
    
    
    
    4.0
    %Total Risk-Based
    
    
    47,138,567
    
    
    
    12.23
    %
    
    
    n/a
    
    
    
    8.0
    %Redding Bank of
CommerceLeverage
    
    $
    41,512,879
    
    
    
    9.09
    %
    
    
    5.0
    %
    
    
    4.0
    %Tier 1 Risk-Based
    
    
    41,512,879
    
    
    
    10.77
    %
    
    
    6.0
    %
    
    
    4.0
    %Total Risk-Based
    
    
    45,660,446
    
    
    
    11.85
    %
    
    
    10.00
    %
    
    
    8.0
    %
 
 Short and Long Term Borrowings
   
 Provision for Loan and Lease Losses
   
 Factors that may affect future results
  15




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
      Specific Risks to operations in California
  
 Critical Accounting Policies
   16




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
 Preparation of financial statements
  Use of estimates
  Generally Accepted Accounting Principles in the United States of America
   Allowance for Loan and Lease Losses (ALLL)
   17




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
  Revenue recognition
  Stock-based Compensation
  Accounting for Stock Based Compensation
  Income Taxes
  18




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
  
 Table 1. Average Balances, Interest Income/Expense and Yields/Rates Paid
 (Unaudited, Dollars in thousands)
 Six Months Ended
    
    
    
    Six Months EndedJune 30, 2005
    
    
    
    June 30, 2004Average
    
    
    
    
    
    
    Yield/
    
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    
    Balance
    
    
    Interest
    
    
    RateEarning AssetsPortfolio Loans
    
    $
    331,057
    
    
    $
    11,247
    
    
    
    6.79
    %
    
    
    $
    289,533
    
    
    $
    8,789
    
    
    
    6.07
    %Tax-exempt Securities
    
    
    7,910
    
    
    
    131
    
    
    
    3.31
    %
    
    
    
    6,612
    
    
    
    113
    
    
    
    3.42
    %US Government Securities
    
    
    72,160
    
    
    
    1,308
    
    
    
    3.63
    %
    
    
    
    57,045
    
    
    
    982
    
    
    
    3.44
    %Federal Funds Sold
    
    
    12,196
    
    
    
    165
    
    
    
    2.71
    %
    
    
    
    8,466
    
    
    
    41
    
    
    
    0.97
    %Other Securities
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %
    
    
    
    0
    
    
    
    7
    
    
    
    0.00
    %Average Earning Assets
    
    $
    423,323
    
    
    $
    12,851
    
    
    
    6.07
    %
    
    
    $
    361,656
    
    
    $
    9,932
    
    
    
    5.49
    %Cash & Due From Banks
    
    $
    15,032
    
    
    
    
    
    
    
    
    
    
    
    $
    19,383Bank Premises
    
    
    5,526
    
    
    
    
    
    
    
    
    
    
    
    
    5,754Allowance for Loan and Lease Losses
    
    
    ( 4,042
    )
    
    
    
    
    
    
    
    
    
    
    
    ( 3,848
    )Other Assets
    
    
    11,230
    
    
    
    
    
    
    
    
    
    
    
    
    10,938Average Total Assets
    
    $
    451,069
    
    
    
    
    
    
    
    
    
    
    
    $
    393,883Interest Bearing LiabilitiesDemand Interest Bearing
    
    $
    111,006
    
    
    $
    412
    
    
    
    0.74
    %
    
    
    $
    96,462
    
    
    $
    200
    
    
    
    0.41
    %Savings Deposits
    
    
    25,361
    
    
    
    71
    
    
    
    0.56
    %
    
    
    
    22,301
    
    
    
    53
    
    
    
    0.48
    %Certificates of Deposit
    
    
    145,370
    
    
    
    1,861
    
    
    
    2.56
    %
    
    
    
    138,313
    
    
    
    1,395
    
    
    
    2.02
    %Borrowings
    
    
    46,756
    
    
    
    790
    
    
    
    3.38
    %
    
    
    
    28,785
    
    
    
    272
    
    
    
    1.89
    %328,493
    
    
    $
    3,134
    
    
    
    1.91
    %
    
    
    
    285,861
    
    
    $
    1,920
    
    
    
    1.34
    %Non interest Demand
    
    
    75,631
    
    
    
    
    
    
    
    
    
    
    
    
    67,527Other Liabilities
    
    
    6,928
    
    
    
    
    
    
    
    
    
    
    
    
    4,141Shareholder Equity
    
    
    40,017
    
    
    
    
    
    
    
    
    
    
    
    
    36,354Average Liabilities and
Stockholders Equity
    
    $
    451,069
    
    
    
    
    
    
    
    
    
    
    
    $
    393,883Net Interest Income and Net
Interest Margin
    
    
    
    
    
    $
    9,717
    
    
    
    4.59
    %
    
    
    
    
    
    
    $
    8,012
    
    
    
    4.43
    %
   19




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
  
 Table
2. Analysis of Changes in Net Interest Income and Interest Expense
 (Dollars in thousands)
    
    June 30, 2005 over June 30, 2004Volume
    
    
    Rate
    
    
    TotalIncrease(Decrease) In Interest
IncomePortfolio Loans
    
    $
    1,412
    
    
    $
    1,047
    
    
    $
    2,459Tax-exempt Securities
    
    
    21
    
    
    
    (3
    )
    
    
    18US Government Securities
    
    
    274
    
    
    
    52
    
    
    
    326Federal Funds Sold
    
    
    50
    
    
    
    73
    
    
    
    123Other Securities
    
    
    (7
    )
    
    
    0
    
    
    
    (7
    )Total Increase
    
    $
    1,750
    
    
    $
    1,169
    
    
    $
    2,919Increase(Decrease) In
Interest ExpenseInterest Bearing Demand
    
    $
    54
    
    
    $
    158
    
    
    $
    212Savings Deposits
    
    
    9
    
    
    
    9
    
    
    
    18Certificates of Deposit
    
    
    90
    
    
    
    376
    
    
    
    466Borrowings
    
    
    304
    
    
    
    214
    
    
    
    518Total Increase
    
    $
    457
    
    
    $
    757
    
    
    $
    1,214Net Increase
    
    $
    1,293
    
    
    $
    412
    
    
    $
    1,705
     20




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Noninterest Income
  (Dollars in Thousands)
    
    Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Noninterest incomeService charges on deposit accounts
    
    $
    102
    
    
    $
    126
    
    
    $
    205
    
    
    $
    225Payroll and benefit processing fees
    
    
    84
    
    
    
    82
    
    
    
    183
    
    
    
    179Earnings on cash surrender value -
Bank owned insurance
    
    
    53
    
    
    
    54
    
    
    
    104
    
    
    
    108Net gain on sale of securities available-for-sale
    
    
    0
    
    
    
    0
    
    
    
    (2
    )
    
    
    0Net gain on sale of loans
    
    
    49
    
    
    
    1
    
    
    
    68
    
    
    
    36Merchant credit card service income, net
    
    
    78
    
    
    
    94
    
    
    
    177
    
    
    
    191Mortgage brokerage fee income
    
    
    71
    
    
    
    32
    
    
    
    157
    
    
    
    48Other Income
    
    
    111
    
    
    
    105
    
    
    
    198
    
    
    
    202Total Noninterest income
    
    $
    548
    
    
    $
    494
    
    
    $
    1,090
    
    
    $
    989
   
 Noninterest
Expense
 Three Months Ended
    
    
    Six Months Ended(Dollars in Thousands)
    
    June 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Noninterest ExpenseSalaries and related benefits
    
    $
    1,645
    
    
    $
    1,368
    
    
    $
    3,338
    
    
    $
    2,761Occupancy and equipment expense
    
    
    349
    
    
    
    363
    
    
    
    736
    
    
    
    732FDIC insurance premium
    
    
    13
    
    
    
    12
    
    
    
    25
    
    
    
    25Data processing fees
    
    
    97
    
    
    
    72
    
    
    
    138
    
    
    
    116Professional service fees
    
    
    173
    
    
    
    296
    
    
    
    378
    
    
    
    442Deferred compensation expense
    
    
    76
    
    
    
    69
    
    
    
    149
    
    
    
    136Stationery and Supplies
    
    
    45
    
    
    
    54
    
    
    
    119
    
    
    
    108Postage
    
    
    26
    
    
    
    27
    
    
    
    54
    
    
    
    48Directors expense
    
    
    84
    
    
    
    69
    
    
    
    143
    
    
    
    158Other expenses
    
    
    379
    
    
    
    310
    
    
    
    727
    
    
    
    578Total Noninterest expense
    
    $
    2,887
    
    
    $
    2,640
    
    
    $
    5,807
    
    
    $
    5,104
 21




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
   
 Income
Taxes
    Three Months Ended
    
    
    Six Months EndedIncome Taxes
    
    June 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Tax provision
    
    $
    874
    
    
    $
    683
    
    
    $
    1,799
    
    
    $
    1,335Effective tax rate
    
    
    37.3
    %
    
    
    37.0
    %
    
    
    38.7
    %
    
    
    37.0
    %
   22




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Asset
Quality
     Portfolio Loans
    
    June 30, 2005
    
    
    December 31, 2004Commercial and financial
    
    $
    110,811
    
    
    $
    105,545Real estate-construction
    
    
    81,505
    
    
    
    77,439Real estate-commercial
    
    
    147,768
    
    
    
    135,260Real estate  mortgage
    
    
    3,931
    
    
    
    4,423Installment
    
    
    411
    
    
    
    300Other loans
    
    
    290
    
    
    
    353Less:Net deferred loan fees
    
    
    (338
    )
    
    
    (653
    )Allowance for loan losses
    
    
    (4,148
    )
    
    
    (3,866
    )Total net loans
    
    $
    340,230
    
    
    $
    318,801
    23




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
 
 Non-performing assets
    
    June 30, 2005
    
    
    December 31, 2004Non-accrual loans
    
    $
    2,059
    
    
    $
    2,38390 days past due and still
accruing interest
    
    
    0
    
    
    
    02,059
    
    
    
    2,383Other Real Estate Owned
    
    
    0
    
    
    
    0Total non-performing assets
    
    
    2,059
    
    
    $
    2,383
 
 Allowance
for Loan and Lease Losses (ALLL)
  Accounting for Contingencies Accounting by Creditors for Impairment of a Loan. Accounting for Contingencies
    24




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
  (Dollars in thousands)
    
    Three Months Ended
    
    
    Six Months EndedAllowance for Loan Losses
    
    June 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Beginning balance for Loan Losses
    
    $
    4,043
    
    
    $
    3,870
    
    
    $
    3,866
    
    
    $
    3,675Provision for Loan Losses
    
    
    177
    
    
    
    97
    
    
    
    354
    
    
    
    289Charge offs:Commercial
    
    
    (77
    )
    
    
    (349
    )
    
    
    (77
    )
    
    
    (349
    )Real Estate
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    0Other
    
    
    (0
    )
    
    
    (0
    )
    
    
    (0
    )
    
    
    0Total Charge offs
    
    
    (77
    )
    
    
    (349
    )
    
    
    (77
    )
    
    
    (349
    )Recoveries:Commercial
    
    
    5
    
    
    
    0
    
    
    
    5
    
    
    
    3Real Estate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total Recoveries
    
    
    5
    
    
    
    0
    
    
    
    5
    
    
    
    3Ending Balance
    
    $
    4,148
    
    
    $
    3,618
    
    
    $
    4,148
    
    
    $
    3,618ALLL to total loans
    
    
    1.20
    %
    
    
    1.24
    %
    
    
    1.20
    %
    
    
    1.24
    %Net Charge offs to average loans
    
    
    0.02
    %
    
    
    0.12
    %
    
    
    0.02
    %
    
    
    0.12
    %
 
 Securities
Portfolio
    (Dollars in thousands)
    
    
    
    
    
    as of June 30, 2005Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCosts
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueU.S. government & agencies
    
    $
    28,940
    
    
    $
    4
    
    
    $
    (509
    )
    
    $
    28,435Obligations of state and
political subdivisions
    
    
    6,369
    
    
    
    44
    
    
    
    (97
    )
    
    
    6,316Mortgage backed securities
    
    
    38,366
    
    
    
    0
    
    
    
    (408
    )
    
    
    37,958Total
    
    $
    73,675
    
    
    $
    48
    
    
    $
    (1,014
    )
    
    $
    72,709
 25




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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
 (Dollars
in thousands)
    
    as of June 30, 2004Amortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCosts
    
    Gains
    
    Losses
    
    Fair ValueU.S. government & agencies
    
    $
    35,848
    
    
    $
    40
    
    
    $
    (733
    )
    
    $
    35,155Obligations of state and
political subdivisions
    
    
    6,716
    
    
    
    31
    
    
    
    (324
    )
    
    
    6,423Mortgage backed securities
    
    
    33,476
    
    
    
    0
    
    
    
    (797
    )
    
    
    32,679Total
    
    $
    76,040
    
    
    $
    71
    
    
    $
    (1,854
    )
    
    $
    74,257
  26




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##### Table of Contents








ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.












27



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##### Table of Contents








ITEM 4. CONTROLS AND PROCEDURES










28



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##### Table of Contents








PART II. Other Information





Item 1. Legal proceedings







Item 2. Unregistered Sales of Equity Securities and Use of Proceeds








Item 3. Defaults upon Senior Securities


Item 4. Submission of Matters to a vote of Security Holders
 
 
 Item 5. Other Information
 
 
 Item 6. Exhibits
 
 
 SIGNATURES
  BANK OF COMMERCE HOLDINGS
 Date: July 28, 2005
    
    /s/ Linda J. MilesLinda J. MilesExecutive Vice President &Chief Financial Officer
 29