e10vq

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 1934

For the quarterly period ended September 30, 2005


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

(Exact name of Registrant as specified in its charter)


California (State or other jurisdiction of incorporation or organization) 1951 Churn Creek Road Redding, California		94-2823865 (I.R.S. Employer Identification No.)

		96002
(Address of principal executive offices)		(Zip code)

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 No o

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act) Yes o No þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Outstanding shares of Common Stock, no par value, as of October 31, 2005: 8,654,896

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)


	September 30,			December 31,			September 30,
Amounts in thousands, except per share data	2005			2004			2004
ASSETS

Cash and due from banks	$	14,759		$	13,121		$	13,816
Federal funds sold and securities purchased under agreements to resell		8,550			6,120			12,155

Cash and cash equivalents		23,309			19,241			25,971
Securities available-for-sale (including pledged collateral of $52,988 at September 30, 2005, $33,345 at December 31, 2004 and $40,049 at September 30, 2004)		98,107			82,443			78,475
Securities held-to-maturity, at cost (estimated fair value of $5,834 at September 30, 2005, $487 at December 31, 2004 and $534 at September 30, 2004)		5,813			449			490
Loans, net of the allowance for loan losses of $4,251 at September 30, 2005, $3,866 at December 31, 2004 and $3,732 at September 30, 2004		342,004			318,801			306,531
Bank premises and equipment, net		5,547			5,484			5,589
Other assets		13,228			12,127			11,496


TOTAL ASSETS	$	488,008		$	438,545		$	428,552


LIABILITIES AND STOCKHOLDERS’ EQUITY

Demand — noninterest bearing	$	80,516		$	82,263		$	79,409
Demand — interest bearing		116,137			108,645			108,348
Savings		26,078			23,471			25,112
Certificates of deposits		150,260			138,500			139,104

Total deposits		372,991			352,879			351,973

Securities sold under agreements to repurchase		20,461			2,004			1,489
Federal Home Loan Bank borrowings		35,000			35,000			30,000
Other liabilities		5,809			8,379			4,266
Guaranteed Preferred Beneficial Interests in Company’s Junior Subordinated Debt payable to unconsolidated subsidiary grantor trust		15,310			5,000			5,000

Total Liabilities		449,571			403,262			392,728
Commitments and contingencies
Stockholders’ 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; 8,654,896 shares issued and outstanding at September 30, 2005, 8,502,831 at December 31, 2004 and 8,502,539 at September 30, 2004		10,998			10,537			10,714
Retained earnings		28,240			25,079			25,416
Accumulated other comprehensive (loss) , net of tax		(801	)		(333	)		(306	)

Total Stockholders’ equity		38,437			35,283			35,824


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	488,008		$	438,545		$	428,552

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

Three and nine months ended September 30, 2005 and 2004


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,			September 30,
Amounts in thousands, except for per share data	2005		2004		2005			2004
Interest income:
Interest and fees on loans	$	6,146	$	4,627	$	17,393		$	13,416
Interest on tax exempt securities		99		58		230			171
Interest on U.S. government securities		718		567		2,026			1,549
Interest on federal funds sold and securities purchased under agreements to resell		220		49		385			90
Interest on other securities		16		0		16			7

Total interest income		7,199		5,301		20,050			15,233

Interest expense:
Interest on demand deposits		276		114		688			314
Interest on savings deposits		56		26		127			79
Interest on time deposits		1,190		711		3,051			2,106
Securities sold under agreements to repurchase		146		0		264			2
Interest on FHLB and other borrowing expense		235		113		746			271
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trust		171		68		332			180

Total interest expense		2,074		1,032		5,208			2,952

Net interest income		5,125		4,269		14,842			12,281
Provision for loan losses		88		131		442			420

Net interest income after provision for loan losses		5,037		4,138		14,400			11,861

Noninterest income:
Service charges on deposit accounts		98		133		303			358
Payroll and benefit processing fees		81		81		264			260
Earnings on cash surrender value —
Bank owned life insurance		52		52		156			160
Net (loss) gain on sale of securities available-for-sale		0		0		(2	)		0
Net gain on sale of loans		23		2		91			38
Merchant credit card service income, net		91		139		268			330
Mortgage brokerage fee income		85		64		242			112
Other income		85		102		283			304

Total non-interest income		515		573		1,605			1,562

Noninterest expense:
Salaries and related benefits		1,750		1,500		5,088			4,261
Occupancy and equipment expense		437		395		1,173			1,127
FDIC insurance premium		11		11		36			36
Data processing fees		71		69		209			185
Professional service fees		199		177		577			619
Deferred compensation expense		85		71		234			207
Stationery and Supplies		40		48		159			156
Directors’ expense		45		67		188			225
Postage		30		25		84			73
Other expenses		427		278		1,154			856

Total non-interest expense		3,095		2,641		8,902			7,745

Income before income taxes		2,457		2,070		7,103			5,678
Provision for income taxes		897		803		2,696			2,138

Net Income	$	1,560	$	1,267	$	4,407		$	3,540

Basic earnings per share	$	0.18	$	0.15	$	0.51		$	0.43
Weighted average shares — basic		8,619		8,260		8,582			8,192
Diluted earnings per share	$	0.18	$	0.15	$	0.50		$	0.42
Weighted average shares — diluted		8,874		8,641		8,911			8,494

See accompanying notes to condensed consolidated financial statements .

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended September 30, 2005 and 2004


Amounts in thousands	September 30,			September 30,
	2005			2004
Cash flows from operating activities:
Net Income	$	4,407		$	3,540
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		442			420
Provision for depreciation and amortization		421			468
Compensation expense associated with stock options		4			2
Loss on sale of securities available for sale		2			0
Amortization of investment premiums and accretion of discounts, net		100			(189	)
Gain on sale of loans		(91	)		(38	)
Proceeds from sales of loans		2,351			638
Loans originated for sale		(2,260	)		(600	)
Effect of changes in:
Other assets		(231	)		2,660
Deferred loan fees		(302	)		136
Other liabilities		(2,266	)		546

Net cash provided by operating activities		2,577			7,583


Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		20,005			27,524
Proceeds from sales of available-for-sale securities		121			0
Proceeds from maturities of held-to-maturity securities		141			895
Purchases of available-for-sale securities		(42,426	)		(36,289	)
Loan originations, net of principal repayments		(23,343	)		(28,884	)
Purchases of premises and equipment		(484	)		(244	)

Net cash used by investing activities		(45,986	)		(36,998	)

Cash flows from financing activities:
Net increase in deposits		20,112			24,435
Net (decrease) increase in securities sold under agreement to repurchase		18,458			(2,260	)
Proceeds from Federal Home Loan Bank advances		38,000			90,000
Repayments of Federal Home Loan Bank advances		(38,000	)		(90,000	)
Proceeds from issuance of Junior Subordinated Debt		10,000			0
Common stock transactions, net		(1,094	)		1,172

Net cash provided by financing activities		47,476			23,347

Net (decrease) increase in cash and cash equivalents		4,068			(6,068	)

Cash and cash equivalents, beginning of period		19,241			32,039


Cash and cash equivalents, end of period	$	23,309		$	25,971


Supplemental disclosures:
Cash paid during the period for:
Income taxes	$	2,582		$	1,315
Interest		4,979			3,565

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

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

“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.

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.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

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 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.

On March 30, 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations — an Interpretation of FASB Statement No. 143 (FIN 47). FIN 47 was issued to address diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement of the obligation are conditional on a future event. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than December 31, 2005. Management believes that the adoption of this rule will not have a material impact on the Company’s results of operations or financial condition.

On May 5, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (FAS 154), replacing APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Unless specified in an accounting standard, FAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle and corrections of errors. APB Opinion 20 previously provided that most changes in accounting principle be recognized by including in net income the cumulative effect of changing to the new principle in the period of adoption. Management will adopt the provisions of FAS 154 effective January 1, 2006.

On August 11, 2005, The Financial Accounting Standards Board Issues Revised Exposure Draft on Accounting for Transfers of Financial Assets” —The Financial Accounting Standards Board issued a revised Exposure Draft, Accounting for Transfers of Financial Assets. The proposed statement seeks to clarify the derecognition requirements for financial assets that were developed initially in FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and revised in Statement 140, and to change and simplify the initial measurement of interest related to transferred financial assets held by a transferor. The proposed changes principally apply to securitizations and loan participations.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

3. Earnings per Share

Basic earnings per share exclude dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share 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. The following table displays the computation of earnings per share for the three and nine months ended September 30, 2005 and 2004.

(Amounts in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2005		2004		2005		2004

Basic EPS Calculation:

Numerator (net income)	$	1,560	$	1,267	$	4,407	$	3,540

Denominator (average common shares outstanding)		8,619		8,260		8,582		8,192

Basic earnings per Share	$	0.18	$	0.15	$	0.51	$	0.43

Diluted EPS Calculation:
Numerator (net income)	$	1,560	$	1,267	$	4,407	$	3,540
Denominator:
Average common shares outstanding		8,619		8,260		8,582		8,192
Options		255		381		329		302

		8,874		8,641		8,911		8,494

Diluted earnings per Share	$	0.18	$	0.15	$	0.50	$	0.42

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 Compensation as 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.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2005			2004			2005			2004
Net income
As reported	$	1,560		$	1,267		$	4,407		$	3,540
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(37	)		(37	)		(147	)		(112	)
Pro forma net income	$	1,523		$	1,230		$	4,260		$	3,428

Earnings per share:

Basic — as reported	$	0.18		$	0.15		$	0.51		$	0.43

Basic — pro forma	$	0.18		$	0.15		$	0.50		$	0.42


Diluted — as reported	$	0.18		$	0.15		$	0.50		$	0.42

Diluted — pro forma	$	0.17		$	0.14		$	0.48		$	0.40

The fair value of options granted during 2005 and 2004 is estimated using a binomial option-pricing model with the following assumptions: volatility of 32.36% and 30.88%, risk-free interest rate of 3.92% and 4.08% expected dividends of $0.24 per share per year, annual dividend rate of 2.00%, assumed forfeiture rate of zero and an expected life of seven years.

5. Comprehensive Income

The Company’s total comprehensive income was as follows:


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2005			2004			2005			2004
Net Income as reported	$	1,560		$	1,267		$	4,407		$	3,540
Other comprehensive income net of tax:
Unrealized holding (loss)gain on securities available for sale		(232	)		743			(468	)		(41	)
Reclassification adjustment for loss on available for sale securities		(0	)		(0	)		2			(0	)

Total other comprehensive income		(232	)		743			(466	)		(41	)
Total comprehensive income	$	1,328		$	2,010		$	3,941		$	3,499

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

6. Junior Subordinated Debentures (Trust Preferred Securities)

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 September 30, 2005 was 4.90%. The rate increase is capped at 2.75% annually and the lifetime cap is 12.5%. The final maturity on the Trust Notes is March 18, 2033, and the debt allows for prepayment after five years on the quarterly payment date.

On July 29, 2005, Bank of Commerce Holdings (the “Company”) participated in a private placement to an institutional investor of $10 million of fixed rate trust preferred securities (the “Trust Preferred Securities”), through a newly formed Delaware trust affiliate, Bank of Commerce Holdings Trust II (the “Trust”). The Trust Preferred Securities mature on September 15, 2035, and are redeemable at the Company’s option on any March 15, June 15, September 15 or December 15 on or after September 15, 2010. In addition, the Trust Preferred Securities require quarterly distributions by the Trust to the holder of the Trust Preferred Securities at a rate of 6.115%, until September 10, 2010 after which the rate will reset quarterly to equal LIBOR plus 1.58%. The Trust simultaneously issued $310,000 of the Trust’s common shares of beneficial interest to the Company.

The proceeds from the sale of the Trust Preferred Securities were used by the Trust to purchase from the Company the aggregate principal amount of $10,310,000 of the Company’s floating rate junior subordinate notes (the “Notes”). The net proceeds to the Company from the sale of the Notes to the Trust will be used by the Company for general corporate purposes, including funding the growth of the Company’s various financial services.

The Notes were issued pursuant to a Junior Subordinated Indenture (the “Indenture”), dated July 29, 2005, by and between the Company and J.P. Morgan Chase Bank, National Association, as trustee. Like the Trust Preferred Securities, the Notes bear interest at a floating rate, at 6.115% until September 10, 2010, after which the rate will reset on a quarterly basis to equal LIBOR plus 1.58%. The interest payments by the Company will be used to pay the quarterly distributions payable by the Trust to the holder of the Trust Preferred Securities. However, so long as no event of default, as described below, has occurred under the Notes, the Company may, at any time and from time to time, defer interest payments on the Notes (in which case the Trust will be entitled to defer distributions otherwise due on the Trust Preferred Securities) for up to twenty (20) consecutive quarters.

The Notes are subordinated to the prior payment of other indebtedness of the Company that, by its terms, is not similarly subordinated. Although the Notes will be recorded as a long term liability on the Company’s balance sheet, for regulatory purposes, the Notes are expected to be treated as Tier 1 or Tier 2 capital under rulings of the Federal Reserve Board, the Company’s primary federal regulatory agency.

The Notes mature on September 15, 2035, but may be redeemed at the Company’s option at any time on or after September 15, 2010 or at any time upon certain events, such as a change in the regulatory capital treatment of the Notes, the Trust being deemed to be an investment company or the occurrence of certain adverse tax events. In each case, the Company may redeem the Notes for their aggregate principal amount, plus accrued interest, if any.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

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 September 30, 2005 are below:


(Dollars in thousands)

2005	$	93
2006	$	456
2007	$	464
2008	$	472
2009	$	430
Thereafter	$	1,246

Total	$	3,161

		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 September 30, 2005 and $35,000,000 as of September 30, 2004. The FHLB advances bear fixed or floating rates of interest ranging from 2.87% to 3.78%. Interest is payable on a monthly basis. FHLB advances are due as follows: $15,000,000 maturing on October 31, 2005, $10,000,000 maturing November 24, 2005 at 2.87%, $10,000,000 maturing January 24, 2008 at current prime rate minus 281 basis points floating, currently 3.69%. 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 $1,902,900 and to pledge $44,906,728 of its real estate mortgage loans to the FHLB as collateral as of September 30, 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. Commitments to extend credit were $125,925,924 and $102,617,680 as of September 30, 2005 and 2004, respectively. Standby letters of credit outstanding were $10,029,239 and $6,877,706 as of September 30, 2005 and 2004, respectively.

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 September 30, 2005. Also discussed are significant trends and changes in the Company’s results of operations for the three and nine-months ended September 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

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 two unconsolidated subsidiaries, Bank of Commerce Holdings Trust, and Bank of Commerce Holdings Trust II. 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. During the third quarter 2005, Bank of Commerce Holdings formed a wholly-owned Delaware statutory business trust, Bank of Commerce Holdings Trust II (the “grantor trust”), which issued $10.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings’ junior subordinated debentures (the “Trust Notes”). $5 million of the issuance will qualify as Tier 1 capital under Federal Reserve Board guidelines. $5 million of 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 and $5 million of the issuance is retained at the Holding Company for investment purposes.

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 First Plus Bank at Citrus Heights, California and 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 February 16, 2004, Redding Service Corporation, 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 July 1, 2004, Bank of Commerce Mortgage relocated to its permanent location at 1024 Mistletoe Lane in Redding, California.

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.

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. On June 22, 2005, the Board of Directors declared a $0.06 cent per share quarterly dividend payable to shareholders of record as of June 30, 2005, payable on July 8, 2005. On September 20, 2005, the Board of Directors declared a $0.06 cent per share quarterly dividend payable to shareholders of record as of September 30, 2005, payable on October 7, 2005.

On August 26, 2005, the Company received approval from the Federal Deposit Insurance Corporation to open a branch in the Yuba City market. The branch will be entitled “Sutter Bank of Commerce, a division of Redding Bank of Commerce.” A lease has been secured for 950 Tharp Road, Suite 800, Yuba City, California 95992. The office is scheduled to open during the first quarter of 2006.

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.

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

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, Yuba, Sutter, 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.

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 and equity term loans.

The majority 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 accounting packages, lock box 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, professionals and consumers 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.

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

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. 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 of “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 Bank 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 Bank’s predisposition to variable rate pricing and non-interest bearing demand deposit accounts, the Bank 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 third quarter of 2005 totaled $1,560,000 an increase of 23.1% from the $1,267,000 reported for the same quarterly period of 2004. On the same basis, diluted earnings per common share for the third quarter of 2005 were $0.18, compared to $0.15 for the same period of 2004. Return on average assets (ROA) and return on average equity (ROE) for the third quarter of 2005 were 1.31% and 17.75%, respectively, compared with 1.21% and 15.11%, respectively, for the third quarter of 2004.

Net income for the nine-month period ended September 30, 2005 totaled $4,407,000, an increase of 24.5% over net income reported for the same nine-month period ended September 30, 2004. On the same basis, diluted earnings per common share for the nine-months ended September 30, 2005 was $0.50, compared to $0.42 for the same nine-month period in 2004. ROA was 1.28% and ROE was 18.50% for the first nine-months of 2005 compared with 1.17% and 14.71%, respectively, for the same nine-month period 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 September 30, 2005 was $5.13 million compared with $4.27 million for the same period in 2004 an increase of 20.1%. Net interest income for the nine-months ended September 30, 2005 was $14.84 million compared with $12.28 million for the same nine-month period in 2004, an increase of 20.9%.

Average earning assets for the nine-months ended September 30, 2005 increased $61.0 million or 16.5% compared with the same period in the prior year. Average loans, the largest component of earning assets, increased $39.4 million or 13.4% on average compared with the prior year period. Average securities increased $15.2 million or 22.4 % over the prior period. Overall, the yield on earning assets increased to 6.19% for the nine-month period compared to 5.47% for the same period in the prior year. The increase is primarily due to increased loan production and rising interest rates.

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

Average interest-bearing liabilities for the nine-months ended September 30, 2005 increased $43.3 million or 14.9% compared with the prior year period. Of this increase, $15.1 million was in core deposit growth (interest-bearing demand, money market and savings accounts), generally the least expensive deposit categories. Certificates of deposit also increased by $10.2 million, or 7.4%. Non-interest bearing demand deposits increased by $9.2 million or 13.2% over the prior nine-month period. Average Federal Home Loan Bank borrowings increased $17.9 million compared with the prior year period. The Company’s strategy is to replace higher costing funding sources (certificates of deposit) with increases in core deposits and borrowings to supplement loan growth and to leverage into securities to improve the spread in the margin. Borrowings are kept short and repaid as core deposit growth increases.

The overall cost of interest-bearing liabilities for the first nine-months 2005 was 2.08% compared with 1.36% for the first nine-months of 2004, an increase of 72 basis points. The increase was primarily a result of increasing deposit costs.

The net effect of the changes discussed above resulted in an increase of $2,561,000 or 20.9% in net interest income for the nine-month period ended September 30, 2005 from the same period in 2004. Net interest margin increased 17 basis points to 4.58% from 4.41% for the same period a year ago.

Liquidity

The objective of liquidity management is to ensure that the Company can efficiently meet the borrowing needs of our customers, withdrawals of our 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, asset liquidity is supported by debt securities in the available for sale security 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. During 2004, the Company formed an Internal ALCO Roundtable that meets on an every two to four-week basis to monitor economic conditions and establish strategies to maintain and increase the net interest margin while monitoring appropriate liquidity levels.

The Company’s consolidated liquidity position remains adequate to meet short-term and long-term future contingencies. At September 30, 2005, the Company had overnight investments of $8.6 million and available lines of credit of at the Federal Home Loan bank of approximately $82.0 million, and two federal funds borrowing lines with correspondent banks of $15.0 million.

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 preferred securities.

Total shareholder equity increased from December 31, 2004 by $3.2 million to $38.4 million at September 30, 2005. The increase was a result of earnings of $4.4 million, $766,000 from exercises of stock options, including tax benefits, dividend payouts of $1.5 million and a decrease in accumulated other comprehensive income of approximately $468,000.

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


						Well			Minimum
			Actual			Capitalized			Capital
September 30, 2005	Capital		Ratio			Requirement			Requirement

The Company Leverage	$	49,238,000		10.05	%		n/a			4.0	%
Tier 1 Risk-Based		49,238,000		12.36	%		n/a			4.0	%
Total Risk-Based		53,489,548		13.43	%		n/a			8.0	%

Redding Bank of Commerce Leverage	$	48,397,051		10.14	%		5.0	%		4.0	%
Tier 1 Risk-Based		48,397,051		12.15	%		6.0	%		4.0	%
Total Risk-Based		52,648,600		13.22	%		10.00	%		8.0	%

Short term borrowings

The Bank 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 September 30, 2005, all of the bank’s FHLB advances were fixed term borrowings without call or put option features, two fixed rate and one floating rate tied to prime.

At September 30, 2005, the Bank had $35 million in FHLB advances outstanding at an average rate of 3.12% compared to $30 million at an average rate of 1.30% at September 30, 2004.

Provision for loan losses

The Company’s most significant management accounting estimate is the appropriate level for the allowance for loan and lease 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 losses of $442,000 were provided for the nine-months ended September 30, 2005 compared with $420,000 for the same period of 2004. Redding Bank of Commerce’s allowance for loan losses was 1.23% of total loans at September 30, 2005 and 1.20% at September 30, 2004, while its ratio of non-performing assets to total assets was 0.44% at September 30, 2005, compared to 0.98% at September 30, 2004. Year-to-date net charge-offs of $56,950 compared to net charge-offs of $363,384 in the same period last year.

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.

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

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.

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 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 Form 10-K.

Advances and changes in technology can significantly affect the business and operations of the Company. The Company faces many challenges included the increased demand for providing computer access to bank accounts and the systems to perform banking transactions electronically. The Company’s ability to compete depends on its ability to continue to adapt its technology on a timely and cost-effective basis to meet these requirements. The Company’s business and operations are susceptible to negative impacts from computer system failures, communication and energy disruption and unethical individuals with the technological ability to cause disruptions or failures of the Company’s data processing systems.

Specific Risks to operations in California

Our operations are located entirely in the State of 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 crisis will not have a material adverse affect on our customer’s or on our business and results of operations.

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

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 judgments, 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 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 judgments or estimates.

Preparation of financial statements

The preparation of these financial statements requires management to make estimates and judgments 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.

Use of estimates

These estimates result in judgments 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.

Generally Accepted Accounting Principles 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 community commercial banking industry and in compliance with various regulations and guidelines as established by the Financial Accounting Standards Board (“FASB”) and the Bank’s primary federal regulator, the FDIC. The following is a brief description of our current accounting policies involving significant management judgments. 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.

Allowance for Loan and Lease Losses (“ALLL”)

The Allowance for loan 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 on impaired loans 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”).

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

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 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.

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.

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 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 FAS No. 123 would have been $147,000 and $112,000 for the nine-months ended September 30, 2005 and 2004, respectively. There would have been $0.01 per share decrease in diluted earnings per share in 2005 and $0.02 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 2004 Annual Report on Form 10-K, based upon the assumptions listed therein.

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

Income Taxes

The Company accounts for income taxes under the asset 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. Our 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.

The following table presents the Company’s daily average balance sheet information together with interest income and yields earned on average interest-bearing 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)


				Nine Months Ended					Nine Months Ended
				September 30, 2005					September 30, 2004
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Earning Assets
Portfolio Loans	$	332,476		$	17,393		6.98	%	$	293,101		$	13,416		6.10	%
Tax-exempt Securities		9,235			230		3.32	%		6,604			171		3.45	%
US Government Securities		73,162			2,026		3.69	%		61,106			1,549		3.38	%
Federal Funds Sold		16,818			385		3.05	%		10,324			90		1.16	%
Other Securities		488			16		4.37	%		0			7		0.00	%

Average Earning Assets	$	432,179		$	20,050		6.19	%	$	371,135		$	15,233		5.47	%


Cash & Due From Banks	$	15,211							$	17,935
Bank Premises		5,543								5,718
Allowance for Loan and Lease Losses		(4,091	)							( 3,789	)
Other Assets		11,188								10,981

Average Total Assets	$	460,030							$	401,980


Interest Bearing Liabilities
Demand Interest Bearing	$	112,259		$	688		0.82	%	$	99,796		$	314		0.42	%
Savings Deposits		25,884			127		0.65	%		23,176			79		0.45	%
Certificates of Deposit		147,834			3,051		2.75	%		137,621			2,106		2.04	%
Borrowings		47,682			1,342		3.75	%		29,785			453

															2.03	%

		333,659		$	5,208		2.08	%		290,378		$	2,952		1.36	%

Non interest Demand		79,612								70,373
Other Liabilities		15,003								9,140
Stockholder Equity		31,756								32,089

Average Liabilities and Stockholders’ Equity	$	460,030							$	401,980

Net Interest Income and Net Interest Margin				$	14,842		4.58	%				$	12,281		4.41	%

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

The following tables set forth changes in interest income and 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


	September 30, 2005		over			September 30, 2004
(Dollars in thousands)	Volume		Rate			Total
Increase(Decrease) In Interest Income
Portfolio Loans	$	2,699	$	1,278		$	3,977
Tax-exempt Securities		63		(4	)		59
US Government Securities		382		95			477
Federal Funds Sold		197		98			295
Other Securities		9		0			9

Total Increase (Decrease)	$	3,350	$	1,467		$	4,817


Increase(Decrease) In Interest Expense
Interest Bearing Demand	$	176	$	198		$	374
Savings Deposits		25		23			48
Certificates of Deposit		456		489			945
Borrowings		632		257			889

Total Increase (Decrease)	$	1,289	$	967		$	2,256


Net Increase	$	2,061	$	500		$	2,561

Net interest income was $14.84 million for the first nine-months of 2005 compared with $12.28 million for the same period in 2004 (Tables 1 and 2). The increase in net interest income is primarily related to the volume increases of earning assets, coupled with a rising interest rate environment.

Average earning assets for the first nine-months of 2005 were $432.2 million compared with $371.1 million for the same period in 2004, an increase of $61.0 million or 16.5%. Portfolio loans is the single largest component of earning assets and average portfolio loans increased $39.4 million or 13.4% over the same period in 2004. Average securities increased $15.2 million or 22.4% over the prior period.

While the average volume of earning assets increased, the average yield increased to 6.19% in 2005 from 5.47% in 2004. The increase is primarily due to increased loan production coupled with a higher interest rate environment.

Partially offsetting the increase in yield on earning assets was the increase in the cost of interest bearing liabilities to 2.08% in 2005 compared to 1.36% in 2004. The increase was primarily due to increases in the rate paid on deposit liabilities and borrowing costs.

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 to 4.58% for the nine-months ended September 30, 2005 compared with 4.41% for the same period in the prior year.

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

Noninterest Income

The Company’s non-interest 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.


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,			September 30,
	2005		2004		2005			2004
Noninterest income

Service charges on deposit accounts	$	98	$	133	$	303		$	358
Payroll and benefit processing fees		81		81		264			260
Earnings on cash surrender value - Bank owned insurance		52		52		156			160
Net (loss) gain on sale of securities available-for-sale		0		0		(2	)		0
Net gain on sale of loans		23		2		91			38
Merchant credit card service income, net		91		139		268			330
Mortgage brokerage fee income		85		64		242			112
Other Income		85		102		283			304

Total Noninterest income	$	515	$	573	$	1,605		$	1,562

Noninterest income decreased $58,000 or 10.1% for the quarter ended September 30, 2005 over the same quarter ended September 30, 2004. The decrease relates to decreased service charges on business deposit accounts largely offset by an increase in the earnings rate on analysis fees. Merchant credit card service income decreased by $48,000 or 34.5% related to a reduction in processing.

Noninterest income increased $43,000 or 2.8% for the nine-months ended September 30, 2005 over September 30, 2004. The increase for the nine-month period is primarily related to the increased volume of mortgage brokerage activities and related fee income.

Noninterest Expense

(Dollars in Thousands)


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2005		2004		2005		2004
Noninterest Expense

Salaries and related benefits	$	1,750	$	1,500	$	5,088	$	4,261
Occupancy and equipment expense		437		395		1,173		1,127
FDIC insurance premium		11		11		36		36
Data processing fees		71		69		209		185
Professional service fees		199		177		577		619
Deferred compensation expense		85		71		234		207
Stationery and Supplies		40		48		159		156
Directors’ expense		45		67		188		225
Postage		30		25		84		73
Business Development		38		18		83		51
Telephone		35		35		111		95
Payroll processing expense		24		18		86		28
Off balance sheet provisions		89		0		89		0
Other expenses		241		207		785		682

Total Noninterest expense	$	3,095	$	2,641	$	8,902	$	7,745

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

Noninterest expense for the quarter ended September 30, 2005 was $3.1 million, an increase of $454,000 or 17.2% over the same period a year ago. Salaries and employee benefits increased $250,000 or 16.7% over the same period a year ago. Professional service expense increased $22,000 or 12.4% for the quarter ended September 30, 2005 over the quarter ended September 30, 2004. Professional service expense consists of assessments, audit expenses, legal expenses and other outside services. Off balance sheet loan provisions are allocated to cover increases in unfunded lines of credit and outstanding letters of credit.

Non-interest expense for the nine-months ended September 30, 2005 was $8.9 million, an increase of $1,157,000 or 14.9% over the same nine-month period a year ago. The most significant increase is in salaries and employee benefits of $827,000 or 19.4% over the same nine-month period a year ago and represents staffing increases to support volume increases.

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 Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
Income Taxes	2005			2004			2005			2004
Tax provision	$	897		$	803		$	2,696		$	2,138
Effective tax rate		36.5	%		38.8	%		38.0	%		37.7	%

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.

Income tax expense through the third quarter 2005 was $2,696,000 as compared to $2,138,000 through the third quarter period in 2004. The increase in tax expense is attributed to increased income for the period.

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

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	September 30, 2005			December 31, 2004

Commercial and financial	$	115,220		$	105,545
Real estate—construction		82,911			77,439
Real estate—commercial		144,628			135,260
Real estate—mortgage		3,093			4,423
Installment		237			300
Other loans		517			353
Less:
Net deferred loan fees		(351	)		(653	)
Allowance for loan losses		(4,251	)		(3,866	)


Total net loans	$	342,004		$	318,801

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 have increased $23.2 million or 7.3% at September 30, 2005 over $318.8 million at December 31, 2004. The current mix of the portfolio remains relatively consistent with the mix at December 31, 2004, with commercial and financial loans of approximately 34%, real estate construction of 24% and commercial real estate at 42%. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due and payable. The Bank had outstanding balances of $1,502,462 and $2,383,000 in impaired loans that had impairment allowances of $472,264 and $867,590 as of September 30, 2005 and December 31, 2004, respectively.

The Bank’s allowance for loan and lease losses was 1.23% of total loans at September 30, 2005 and 1.20% at September 30, 2004, while its ratio of non-performing assets to total assets was 0.44% at September 30, 2005, compared to 0.98% at September 30, 2004. Year-to-date net charge-offs of $56,950 compared to net charge-offs of $363,384 in the same period last year.

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

The following table sets forth a summary of the Company’s nonperforming assets as of the dates indicated:

(Dollars in thousands)



Non—performing assets	September 30, 2005		December 31, 2004

Non-accrual loans	$	1,502	$	2,383
90 days past due and still accruing interest		0		0

		1,502		2,383
Other Real Estate Owned		0		0

Total non-performing assets	$	1,502	$	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 and lease 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 and lease 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 Contingencies or SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Management’s estimate of each SFAS No. 5 Accounting for Contingencies component 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 and lease 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 becomes aware of information affecting the borrower’s ability to fulfill its obligations. Loan risk grades carry a dollar weighted risk percentage.

The ALLL is a general reserve available against the total loan portfolio. It is maintained without any inter-allocation 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.

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

The following table summarizes the activity in the ALLL reserves for the periods indicated.

(Dollars in thousands)


	Three Months Ended						Nine Months Ended
Allowance for Loan Losses	September 30,			September 30,			September 30,			September 30,
	2005			2004			2005			2004

Beginning balance for Loan Losses	$	4,148		$	3,618		$	3,866		$	3,675
Provision for Loan Losses		88			131			442			420
Charge offs:
Commercial		(3	)		(18	)		(80	)		(367	)
Real Estate		(0	)		(0	)		0			0
Other		(0	)		(0	)		0			0

Total Charge offs		(3	)		(18	)		(80	)		(367	)

Recoveries:
Commercial		18			1			23			4
Real Estate		0			0			0			0

Total Recoveries		18			1			23			4

Ending Balance	$	4,251		$	3,732		$	4,251		$	3,732
ALLL to total loans		1.23	%		1.20	%		1.23	%		1.20	%
Net Charge offs to average loans		0.02	%		0.12	%		0.02	%		0.12	%

Available-for-Sale Securities Portfolio

The securities portfolio is integral to our asset liability management process. The decision to purchase or sell securities is based upon current assessment of economic and financial conditions, including the interest rate environment, liquidity and regulatory requirements, and the relative mix of cash on hand. Our available-for-sale securities portfolio includes both debt and marketable equity securities. We hold debt securities available-for-sale primarily for liquidity, interest rate risk management and yield enhancement purposes. Accordingly, this portfolio primarily includes very liquid, high-quality federal government and agency debt securities. At September 30, 2005, we held $87.8 million of debt securities available-for-sale, compared with $76.0 million at December 31, 2004, with a net unrealized loss of $1,271,000 and $524,000 for the same periods. In addition, we held $10.3 million of marketable equity securities available for sale at September 30, 2005, and $6.5 million at December 31, 2004, with a net unrealized loss of $91,000 and $42,000 for the same periods.

The weighted-average expected maturity of debt securities available-for-sale was 3.5 years at September 30, 2005. Since 44% of this portfolio is mortgage-backed securities, the expected remaining maturity may differ from contractual maturity because borrowers may have the right to prepay obligations before the underlying mortgages mature.

Total available-for-sale securities increased $15.6 million or 19.0% since December 31, 2004. For the nine-months ended September 30, 2005, there were thirty-two purchases totaling $42.4 million, maturities and principal payments totaling $20.0 million. Purchases to the portfolio were primarily in the U.S. Government Agency and Mortgage Back sectors.

As of September 30, 2005, the Company has pledged $1.0 million of securities for treasury, tax and loan accounts, $6.5 million for deposits of public funds and approximately $20.5 million for collateralized repurchase agreements.

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

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 September 30, 2005
	Amortized		Unrealized		Unrealized			Estimated
	Costs		Gains		Losses			Fair Value

U.S. government & agencies	$	44,772	$	1	$	(583	)	$	44,190
Obligations of state and political subdivisions		6,351		39		(123	)		6,267
Mortgage backed securities		44,306		0		(689	)		43,617
Corporate bonds		4,040		0		(7	)		4,033

Total	$	99,469	$	40	$	(1,402	)	$	98,107


(Dollars in thousands)	as of December 31, 2004
	Amortized		Unrealized		Unrealized			Estimated
	Costs		Gains		Losses			Fair Value

U.S. government & agencies	$	34,013	$	14	$	(436	)	$	33,591
Obligations of state and political subdivisions		6,517		60		(102	)		6,475
Mortgage backed securities		42,479		42		(144	)		42,377

Total	$	83,009	$	116	$	(682	)	$	82,443

Economic factors may affect market pricing over the stated maturity of the security. The Company recognizes an impairment charge when the decline in the fair value of its investments below the cost basis is judged to be other than temporary. As of September 30, 2005 sixty securities were in a loss position. The Company has determined the loss position to be temporary and no impairment charges have occurred. Security income is accrued when earned and included in interest income. The Company requires a credit rating of A or higher on its initial acquisition of investments and maintains an average rating of AAA on the overall portfolio. The Company believes it has the ability to hold available-for-sale securities to maturity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the potential loss due to adverse changes in the market value or yield of a position. This risk is inherent in the financial instruments associated with loans, deposits, securities, short-term borrowings, long-term debt and derivatives. Market-sensitive assets and liabilities are generated through traditional banking business.

Interest rate risk represents the most significant market risk exposure. The goal of the Asset Liability Management (“ALCO”) Roundtable is to manage interest rate sensitivity so that movements in interest rates do not adversely affect net interest income. Interest rate risk is measured as the potential volatility in our net interest income caused by changes in market interest rates. Lending and deposit gathering create interest rate sensitive positions on our balance sheet.

Fluctuation in interest rates will ultimately affect both the level of interest income and interest expense recorded as revenue. The fundamental objective of the ALCO Roundtable 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.

To estimate the effect of interest rate shock on the Company’s net interest income, management uses a model to prepare an analysis of interest rate risk. An enhanced model was implemented during the third quarter 2004. The Risk Analytics Interest Rate Risk Management model is a cash flow simulation model using detailed securities, loan and deposit and market rate information. The income pro-forma and present value equity calculations are performed in nine different interest rate scenarios. All interest rate scenarios are immediate and parallel with sustained shocks to all market rates in the model.

The new model takes information feeds from the loan portfolio, deposit portfolio, investment portfolio, balance sheet and income statement capturing optionality in on-balance sheet assets and liabilities. Variables in interest rate assumptions and budget information are updated on a quarterly basis.

Such analysis calculates the change in net interest income given a change in the federal funds rate of 100, 200 and 300 basis points up or down. All changes are measured in dollars and percentages and are compared to projected net interest income.

At September 30, 2005, the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point decline in the federal funds rate was $602,000 and $1,205,000, respectively. A similar and opposite result would result attributable to a 100 or 200 basis point increase in the federal funds rate. 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 $1,379,000 and $2,638,000, respectively, with a similar and opposite result attributable to a 100 and 200 basis point increase in the federal funds rate.

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.

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

None

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

Form 8-K dated October 28, 2005, announcement of third quarter earnings

Form 8-K dated October 27, 2005, Standard Form of Agreement between Owner and Contractor AIA Document

Form 8-K dated September 23, 2005 Sutter lease agreement

Form 8-K dated September 21, 2005 announcing third quarter dividend

Form 8-K dated August 16, 2005 announcing application for Sutter Bank of Commerce

Form 8-K dated July 29, 2005 announcement of placement of Trust Preferred Securities

Form 8-K dated July 22, 2005 announcement of second 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: November 10, 2005
				/s/ Linda J. Miles
				Linda J. Miles
				Executive Vice President &
				Chief Financial Officer

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	Page:
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets September 30, 2005, December 31, 2004 and September 30, 2004		3
Consolidated Condensed Statements of Income Three and nine months ended September 30, 2005 and 2004		4
Consolidated Condensed Statements of Cash Flows Three and nine months ended September 30, 2005 and 2004		5
Notes to Consolidated Condensed Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Corporate Overview		12
Executive Overview		14
Sources of Income		15
Financial Highlights — Results of Operations		15
Net Interest Income and Net Interest Margin		15
Liquidity		16
Capital Management		16
Short term borrowings		17
Provision for loan losses		17
Factors that may affect future results		17
Specific risks to operations in California		18
Critical accounting policies		19
Average balances, Interest Income/Expense rates and yields		20
Volume/ Rate analysis		23
Noninterest Income		23
Noninterest Expense		24
Income taxes		25
Asset quality		26
Allowance for loan and lease losses (ALLL)		26
Securities portfolio		27
Item 3. Quantitative and Qualitative Disclosure about Market Risk		29

Item 4. Controls and Procedures		30

PART II. OTHER INFORMATION

Item 1. Legal proceedings		31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3. Defaults Upon Senior Securities		31
Item 4. Submission of Matters to a Vote of Security Holders		31
Item 5. Other Information		31
Item 6. Exhibits		31

SIGNATURES		31

EXHIBITS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 31.2