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 March 31, 2006


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


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

Registrant’s telephone number, including area code: (530) 224-3333

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer 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 March 31, 2006: 8,716,872

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)


Dollars in thousands	March 31, 2006			Dec. 31,2005			March 31,2005
ASSETS

Cash and due from banks	$	11,819		$	17,436		$	14,167
Federal funds sold and securities purchased under agreements to resell		9,835			9,120			19,760

Cash and cash equivalents		21,654			26,556			33,927

Securities available-for-sale (including pledged collateral of $54,514 at March 31, 2006, $50,102 at December 31, 2005 and $38,884 at March 31, 2005)		93,645			94,014			77,276
Securities held-to-maturity, at cost (estimated fair value of $7,533 at March 31, 2006, $6,881 at Dec. 31, 2005 and $457 at March 31, 2005)		7,620			6,933			423
Loans, net of the allowance for loan losses of $4,295 at March 31, 2006, $4,316 at Dec. 31, 2005 and $4,044 at March 31, 2005		374,983			363,305			320,453
Bank premises and equipment, net		6,261			5,631			5,436
Other assets		18,733			15,205			13,207


TOTAL ASSETS	$	522,896		$	511,644		$	450,722


LIABILITIES AND STOCKHOLDERS’ EQUITY

Demand — noninterest bearing	$	74,519		$	86,219		$	75,393
Demand — interest bearing		102,003			109,101			111,723
Savings accounts		28,477			27,540			24,367
Certificates of deposit		173,106			149,256			144,051

Total deposits		378,105			372,116			355,534

Securities sold under agreements to repurchase		25,117			22,886			13,517
Federal Home Loan Bank borrowings		55,000			55,000			35,000
Other liabilities		8,864			7,194			5,705
Junior subordinated debt payable to unconsolidated subsidiary grantor trust		15,465			15,310			5,000

Total Liabilities		482,551			472,506			414,756
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, no par value, 2,000,000 authorized no shares issued and outstanding in 2006 and 2005		—			—			—
Common stock , no par value, 10,000,000 shares authorized; 8,716,872 shares issued and outstanding at March 31,2006, 8,657,896 at Dec. 31, 2005 and 8,571,781 at March 31, 2005		11,198			11,009			10,756
Retained earnings		30,535			29,419			26,067
Accumulated other comprehensive (loss), net of tax		(1,388	)		(1,290	)		(857	)

Total stockholders’ equity		40,345			39,138			35,966


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	522,896		$	511,644		$	450,722

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

Three months ended March 31, 2006 and 2005


	Three Months Ended
Dollars in thousands, except for per share data	March 31, 2006		March 31, 2005
Interest income:
Interest and fees on loans	$	7,230	$	5,407
Interest on tax exempt securities		123		54
Interest on U.S. government securities		862		651
Interest on federal funds sold and securities purchased under agreements to resell		130		79
Interest on other securities		44		0

Total interest income		8,389		6,191

Interest expense:
Interest on demand deposits		233		139
Interest on savings deposits		65		24
Interest on time deposits		1,549		830
Securities sold under agreements to repurchase		199		19
Interest on FHLB and other borrowings		672		246
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trust		258		77

Total interest expense		2,976		1,335

Net interest income		5,413		4,856
Provision for loan and lease losses		11		177

Net interest income after provision for loan and lease losses		5,402		4,679

Noninterest income:
Service charges on deposit accounts		88		103
Payroll and benefit processing fees		109		99
Earnings on cash surrender value — Bank owned life insurance		53		51
Net loss on sale of securities available-for-sale		0		(2	)
Net gain on sale of loans		1		19
Merchant credit card service income, net		77		99
Mortgage brokerage fee income		17		86
Other income		103		87

Total noninterest income		448		542

Noninterest expense:
Salaries and related benefits		1,878		1,693
Occupancy and equipment expense		435		387
FDIC insurance premium		12		12
Data processing fees		58		41
Professional service fees		204		205
Payroll processing fees		29		36
Deferred compensation expense		88		73
Stationery and supplies		60		59
Postage		31		28
Directors’ expense		60		74
Other expenses		382		312

Total noninterest expense		3,237		2,920

Income before income taxes		2,612		2,301
Provision for income taxes		1,020		925

Net income	$	1,592	$	1,376

Basic earnings per share	$	0.18	$	0.16
Weighted average shares — basic		8,680		8,533
Diluted earnings per share	$	0.17	$	0.16
Weighted average shares — diluted		8,880		8,780
Cash dividends per share	$	0.07	$	0.06

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Three months ended March 31, 2006 and 2005


Dollars in thousands	March 31, 2006			March 31, 2005
Cash flows from operating activities:
Net income	$	1,592		$	1,376
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan and lease losses		11			177
Provision for depreciation and amortization		147			140
Compensation expense associated with stock options		1			1
Loss (Gain) on sale of securities available-for-sale		0			2
Amortization of investment premiums and accretion of discounts, net		8			59
Gain on sale of loans		0			(19	)
Gain on sale of fixed assets		0			0
Proceeds from sale of loans		0			279
Loans originated for sale		0			(260	)
Effect of changes in:
Other assets		(3,371	)		(713	)
Deferred loan fees		(22	)		(72	)
Other liabilities		1,669			(2,548	)

Net cash from operating activities		35			(1,578	)


Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		1,232			5,000
Proceeds from sales of available-for-sale securities		0			141
Proceeds from maturities of held-to-maturity securities		186			2,065
Purchases of available-for-sale securities		(974	)		(2,965	)
Purchases of held-to-maturity securities		(869	)		0
Loan origination, net of principal repayments		(11,666	)		(1,758	)
Purchases of Bank premises and equipment, net		(777	)		(92	)

Net cash from investing activities		(12,868	)		2,391

Cash flows from financing activities:
Net increase (decrease) in deposit and savings accounts		(17,861	)		(2,895	)
Net increase (decrease) in certificates of deposit		23,850			5,551
Net increase in securities sold under agreement to repurchase		2,231			11,513
Proceeds from Federal Home Loan Bank advances		20,000			23,000
Repayments of Federal Home Loan Bank advances		(20,000	)		(23,000	)
Equity transactions, net		(289	)		(296	)

Net cash from financing activities		7,931			13,873

Net increase in cash and cash equivalents		(4,902	)		14,686

Cash and cash equivalents, beginning of period		26,556			19,241

Cash and cash equivalents, end of period	$	21,654		$	33,927

Supplemental disclosures:
Cash paid during the period for:
Income taxes	$	0		$	0
Interest		2,933			1,288

See accompanying notes to condensed consolidated financial statements.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Consolidation and Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Bank of Commerce Holdings (the “Holding Company”) and its subsidiaries Redding Bank of Commerce, Roseville Bank of Commerce and Sutter 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 preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for prior periods have been reclassified to conform to the current financial statement presentation.

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 2005 Annual Report on Form 10-K. The results of operations and cash flows for the 2006 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and repurchase agreements. Generally, federal funds are sold for a one-day period and securities purchased under agreements to resell are for no more than a 90-day period.

2. Recent Accounting pronouncements

On February 16, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007, with earlier adoption permitted. Management is currently evaluating the effect of the statement on the Company’s results of operations and financial condition.

On May 5, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (SFAS 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, SFAS 154 requires retrospective application to prior period 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 has adopted the provisions of FAS 154 effective January 1, 2006. There has been no material effect on the Company’s results of operations and financial condition.

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 Condensed Consolidated Financial Statements (Unaudited)

3. Earnings per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Stock options are considered to be common stock equivalents. The following table displays the computation of earnings per share for the three months ended March 31, 2006 and 2005.

(Dollars in thousands, except per share data)


	Three Months Ended
	March 31, 2006		March 31, 2005

Basic EPS calculation:

Numerator (net income)	$	1,592	$	1,376

Denominator (average common shares outstanding)		8,680		8,533

Basic EPS	$	0.18	$	0.16

Diluted EPS calculation:
Numerator (net income)	$	1,592	$	1,376
Denominator:
Average common shares outstanding		8,680		8,533
Dilutive effect of stock options		200		247

Adjusted weighted average common shares outstanding		8,880		8,780

Diluted EPS	$	0.18	$	0.16

4. Stock Option Plans

The Company adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” on January 1, 2006. The scope of FAS 123R includes a wide range of stock-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee stock purchase plans. FAS 123R requires that the Company measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost must be recognized in the income statement over the vesting period of the award. Under the ‘modified prospective’ transition method, awards that are granted, modified or settled beginning at the date of adoption will be measured and accounted for in accordance with FAS 123R. In addition, expense must be recognized in the income statement for unvested awards that were granted prior to the date of adoption. Prior to the adoption of FAS 123R and as permitted by FAS 123 and FAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure”, the Company elected to follow APB 25 and related interpretations in accounting for our employee stock options. The Company adopted FAS 123R using the modified prospective method. Under this transition method, stock option expense for the first quarter of 2006 included the cost for all share-based payments granted prior to, but not yet vested, as of January 1, 2006, as well as any share-based payments granted subsequent to December 31, 2005. This compensation expense is measured on the date of grant using an option-pricing model. The option-pricing model is based on certain assumptions and changes to those assumptions may result in different fair value estimates. Under APB25, the Company accounted for stock options using the intrinsic value method and no compensation expense was recognized, as the grant price was equal to the strike price. In accordance with SFAS 123R the Company provides disclosures as if it had adopted the fair value-based method of measuring all outstanding employee stock options during 2005.

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

For the first quarter of 2006, stock option compensation expense charged against income for the first time was $11,985 ($7,299 net of tax), or less than one cent per diluted share. At March 31, 2006, there was $94,691 of total unrecognized compensation costs related to non-vested share based payments which is expected to be recognized over a period of five years. No options were granted during the first quarter of 2006.

The following table illustrates the effect on net income and earnings per common share had the fair value-based method been applied to all outstanding and unvested awards for the first quarter 2005.


	Three Months Ended
	March 31, 2005
Net income as reported	$	1,376

Add:
Stock-based employee compensation expense recognized during the period, net of tax		0

Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(37	)

Pro forma net income	$	1,339

Earnings per share:

Basic — as reported	$	0.16

Basic — pro forma	$	0.16


Diluted — as reported	$	0.16

Diluted — pro forma	$	0.15

In determining the pro forma disclosures in the previous table, the fair value of options granted was estimated on the date of grant using an option-pricing model and assumptions appropriate to each plan. The weighted average grant fair values of the options granted are based on the assumptions below.


	March 31, 2006			March 31, 2005
Risk-free interest rate		4.99	%		3.92	%
Dividend Yield		2.82	%		2.49	%
Volatility		35.11	%		32.36	%
Expected lives (years)		7			7
Weighted average grant-date fair value per share of options granted	$	3.42		$	3.35

Description of stock-based compensation plans

On February 17, 1998, the Board of Directors adopted the 1998 Stock Option Plan (the “Plan”) which was approved by the Company’s stockholders on April 21, 1998. The Plan provides for awards in the form of options, which may constitute incentive stock options (“Incentive Options”) under Section 422(a) of the Internal Revenue Code of 1986, as amended (the “Code”), or non-statutory stock options (“NSOs”) to key personnel of the Company, including directors. The Plan provides that Incentive Options under the Plan may not be granted at less than 100% of fair market value of the Company’s common stock on the date of the grant. NSOs may not be granted at less than 85% of the fair market value of the common stock on the date of the grant.

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

The Company’s stock option plans provide for awards of incentive and nonqualified stock options. Incentive options must have an exercise price at or above fair market value of the stock at the date of the grant and a term of no more than 10 years. Options generally become exercisable over five years from the date of the grant. Nonqualified stock options must have an exercise price of no less than 85% of the fair market value of the stock at the date of the grant and at term of no more than 10 years. Nonqualified stock options generally become exercisable over five years from the date of the grant. Compensation expense for the difference between the fair market value of the stock and the 85% exercise price is recognized over the five year vesting period. A total of 1,782,000 shares of the Company’s common stock are reserved for grant under the Plan.

Activity in stock-based compensation plans

The following table presents the changes in outstanding stock options for the periods indicated:


				Weighted
				Average
	Number of Shares			Exercise Price

Options outstanding, January 1, 2006		608,316		$	5.20


Granted		0		$	0.00
Exercised		(58,976	)	$	2.97
Forfeited		(1,425	)	$	10.60

Options outstanding, March 31, 2006		547,915		$	3.91
Exercisable at March 31, 2006		515,889		$	4.15

At March 31, 2006, 124,740 shares were available for future grants under the Plan. As of March 31, 2006, 515,889 shares were available to be exercised. The weighted average grant date fair value at March 31, 2006 was $4.15.

Additional information regarding options outstanding as of March 31, 2006 is as follows:


			Weighted Average
			Remaining Contractual
Exercise Price	Options Outstanding		life (Years)		Options Exercisable

$ 2.75		219,600		1.3		219,600
$ 3.23		63,360		1.3		63,360
$ 5.42		29,250		4.4		29,250
$ 6.67		60,500		4.6		60,500
$ 7.30		55,130		5.5		44,104
$ 6.75		13,500		6.0		8,100
$10.72		7,500		7.4		7,500
$10.60		72,075		7.5		72,075
$10.76		3,000		7.9		3,000
$ 9.11		18,000		7.3		7,200
$11.59		3,500		8.4		700
$10.20		2,500		8.4		500

		547,915				515,889

During the three months ended March 31, 2006 and 2005 the Company realized income tax benefits of $133,984 and $125,765 respectively, related to the exercise of nonqualified stock options. The income tax benefit is reflected in net cash provided by financing activities in the consolidated statements of cash flow for the same period.

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

During the three months ended March 31, 2006 and 2005 the Company received cash of $175,112 and $217,608 respectively, upon exercise of stock-based compensation arrangements.

5. Comprehensive Income

The Company’s total comprehensive income was as follows:


(Dollars in thousands)	Three Months Ended
	March 31, 2006			March 31, 2005

Net income as reported	$	1,592		$	1,376
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities available for sale		(98	)		(524	)
Reclassification adjustment for gain on available for sale securities, net of tax		0			2

Total other comprehensive (loss) income		(98	)		(522	)

Total comprehensive income	$	1,494		$	854

6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust

During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware statutory business trust, Bank of Commerce Holdings Trust (the “grantor trust”), which issued $5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings’ junior subordinated debentures (the “trust notes”) to the public and $155,000 common securities to the Company. 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. The trust notes accrue and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (“LIBOR”) plus 3.30%. The rate at March 31, 2006 was 7.90%. 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 securities 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

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

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.

7. Commitments and Contingent Liabilities

Lease Commitments — The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all non-cancelable operating leases as of March 31, 2006 are below:

(Dollars in thousands)



2006	$	570
2007	$	602
2008	$	636
2009	$	562
2010	$	497
Thereafter	$	446

Total	$	3,313


Minimum rental due in the future Under noncancellable subleases	$	198

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 $55,000,000 as March 31, 2006 and $35,000,000 as of March 31, 2005. The FHLB advances bear fixed and floating rates of interest ranging from 4.58% to 4.88%. Interest is payable quarterly. FHLB advances due as follows: $5,000,000 maturing April 24, 2006 at 4.88%, $5,000,000 maturing April 27, 2006 at 4.58%, $10,000,000 maturing November 27, 2006 at 4.64%, $15,000,000 maturing November 30, 2007 at 4.64%, $10,000,000 maturing January 24, 2008 at 4.68% and $10,000,000 maturing on January 24, 2011 at 4.72%. 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 $3,080,300 and to pledge $46,749,320 of its real estate mortgage loans to the FHLB as collateral as of March 31, 2006. At March 31, 2006, the Bank had available borrowing lines at the FHLB of $72,301,250 and additional federal fund borrowing lines at two correspondent banks totaling $15,000,000.

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

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 are agreements to lend to customers.

These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but generally includes real estate, securities and cash. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Bank upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness, but may include cash and securities. Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements and Risk Factors

This discussion and information in the accompanying financial statements contains certain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated. These risks and uncertainties include the Company’s ability to maintain or expand its market share and net interest margins, or to implement its marketing and growth strategies. Further, actual results may be affected by the Company’s ability to compete on price and other factors with other financial institutions; customer acceptance of new products and services; and general trends in the banking and the regulatory environment, as they relate to the Company’s cost of funds and return on assets. The reader is advised that this list of risks is not exhaustive and should not be construed as any prediction by the Company as to which risks would cause actual results to differ materially from those indicated by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.

For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 under the heading ”Risk factors that may affect results”. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following sections discuss significant changes and trends in financial condition, capital resources and liquidity of the Company from December 31, 2005 to March 31, 2006. Also discussed are significant trends and changes in the Company’s results of operations for the three months ended March 31, 2006, compared to the same period in 2005. The consolidated financial statements and related notes appearing elsewhere in this report are condensed and unaudited. The following discussion and analysis is intended to provide greater detail of the Company’s financial condition and results.

Corporate Overview

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, Roseville Bank of Commerce, Sutter Bank of Commerce and Bank of Commerce Mortgage, a California corporation and for other banking or banking-related subsidiaries which the Holding Company may establish or acquire (collectively the “Company”). The Holding Company also has an unconsolidated subsidiary, Bank of Commerce Holdings Trust. During the first quarter 2003, Bank of Commerce Holdings formed a wholly-owned Delaware statutory business trust, Bank of Commerce Holdings Trust (the “grantor trust”), which issued $5.0 million of guaranteed preferred beneficial interests in Bank of Commerce Holdings’ junior subordinated debentures (the “Trust Notes”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. The proceeds from the issuance of the Trust Notes were transferred from the grantor trust to the Holding Company and from the Holding Company to the Bank as surplus capital. The Trust Notes accrue and pay distributions on a quarterly basis at 3 month London Interbank Offered Rate (“LIBOR”) plus 3.30%. The rate at March 31, 2006 was 7.90%. 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. 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”).

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

$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. The issuance is priced at a fixed rate for the first five years at 6.115%.

The Company will provide free of charge upon request, or through links to publicly available filings accessed through its Internet website, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, as soon as reasonably practical after such reports have been filed with the Securities and Exchange Commission. The Internet addresses of the Company are www.reddingbankofcommerce.com, www.rosevillebankofcommerce.com, www.sutterbankofcommerce.com and www.bankofcommercemortgage.com. Reports may also be obtained through the Securities and Exchange Commission’s website at www.sec.gov.

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 has renamed the facility Roseville Bank of Commerce at Sunrise, a division of Redding Bank of Commerce. On February 22, 2002, the Roseville Bank of Commerce at Eureka Road, a division of Redding Bank of Commerce, relocated to its permanent location at 1504 Eureka Road, Suite 100, Roseville, California.

On March 18, 2004, RBC Mortgage Services, 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. The subsidiary has an affiliated business arrangement with the Bank of Walnut Creek (“BWC Mortgage Services”). Under the terms of the agreement, BWC Mortgage Services underwrites or brokers mortgage products, and manages the independent contractors, supporting staff and broker relationships with various secondary market lenders. Bank of Commerce Mortgage in turn provides office space, equipment and marketing support for the mortgage brokerage services. Bank of Commerce Mortgage, through this agreement, offers a full array of single-family and multi-family residential real estate mortgages including equity lines. Bank of Commerce Mortgage pays ten percent of gross premiums earned to BWC Mortgage Services. On July 1, 2004, Bank of Commerce Mortgage relocated to its permanent location at 1024 Mistletoe Lane, 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.

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

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. The office opened for business on Monday, April 10, 2006.

The Company plans to build an Administrative and Information Technology center during 2006. Ground breaking on the project began in February 2006 and is expected to take ten months to completion. The building will be approximately 12,000 square feet and will be built on property already owned by the Company. The budget for the building is approximately $3.7 million.

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. 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 four Internet addresses of the Company are reddingbankofcommerce.com, rosevillebankofcommerce.com, sutterbankofcommerce.com and bankofcommercemortgage.com.

The Bank is principally supervised and regulated by the California Department of Financial Institutions (“DFI”) and the Federal Deposit Insurance Corporation (“FDIC”), and conducts a general commercial banking business in the counties of El Dorado, Placer, Shasta, and Sacramento, California. Through the Bank and mortgage subsidiaries, the Company provides a wide range of financial services and products. The services offered by the Bank include those traditionally offered by commercial banks of similar size and character in California. Products such as checking, interest-bearing checking (“NOW”) and savings accounts, money market deposit accounts, commercial, construction, and term loans, travelers checks, safe deposit boxes, collection services and electronic banking activities.

The primary focus of the Bank is to provide services to the business and professional community of its major market area, including Small Business Administration loans, payroll and accounting packages, benefit administration and billing services. The Bank currently does not offer trust services or international banking services. The services offered by the Mortgage Company include single and multi-family residential residence new financing, refinancing and equity lines of credit.

Most of the Bank’s customers are small to medium sized businesses, professionals and other individuals with medium to high net worth, and most of the Bank’s deposits are obtained from such customers. The Bank emphasizes servicing the needs of local businesses and professionals and individuals requiring specialized services. The primary business strategy of the Bank is to focus on its lending activities. The Bank’s principal lines of lending are (i) commercial, (ii) real estate construction and (iii) commercial and residential real estate. The majority of the loans of the Bank are direct loans made to individuals and small businesses in the major market area of the Bank and are secured by real estate. See “Risk Factors That May Affect Results-Dependence on Real Estate” in the Company’s 2005 Annual Report on Form 10-K. A relatively small portion of the loan portfolio of the Bank consists of loans to individuals for personal, family or household purposes.

The Bank accepts real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and other general business assets such as accounts receivable and inventory as collateral for loans. The Company’s goal is to be a premier provider of financial services to the business and professional community of its major market area including Small Business Administration (“SBA”) loans, commercial building financing, credit card services, payroll and accounting packages, 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.

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

Lending Risks Associated with Commercial Banking and Construction Activities

The business strategy of the Company is to focus on commercial, single family and multi-family real estate loans, construction loans and commercial business loans. Loans secured by commercial real estate are generally larger and involve a greater degree of credit and transaction risk than residential mortgage (one-to-four family) loans. Because payments on loans secured by commercial and multi-family real estate properties are often dependent on successful operation or management of the underlying properties, repayment of such loans may be subject to a greater extent to the then prevailing conditions in the real estate market or the economy. Moreover, real estate construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Company may be confronted with a project which, when completed, has a value which is insufficient to assure full repayment of the construction loan. Although the Company manages lending risks through its underwriting and credit administration policies, no assurance can be given that such risks would not materialize, in which event the Company’s financial condition, results of operations, cash flows and business prospects could be materially adversely affected.

Dependence on Real Estate

At March 31, 2006, approximately 70% of the loans of the Company were secured by real estate. The value of the Company’s real estate collateral has been, and could in the future be adversely affected by any economic recession and any resulting adverse impact on the real estate market in California.

The Company’s primary lending focus has historically been commercial real estate, commercial lending and, to a lesser extent, construction lending. At March 31, 2006, commercial real estate and construction loans comprised approximately 39% and 29%, respectively, of the total loans in the portfolio of the Company. At March 31, 2006, all of the Company’s real estate mortgage, real estate construction loans, and commercial real estate loans, were secured fully or in part by deeds of trust on underlying real estate. The Company’s dependence on real estate increases the risk of loss in the loan portfolio of the Company and its holdings of other real estate owned if economic conditions in California deteriorate in the future. Deterioration of the real estate market in California could have a material adverse effect on the Company’s business, financial condition and results of operations.

Risks Specific 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. The fiscal and political uncertainty surrounding the state government’s financial condition, for example may have a material adverse effect on our customer’s businesses or on our business, financial condition and results of operations.

Interest Rate Risk

The income of the Company is highly dependent on “interest rate differentials” and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank’s interest-earning assets such as loans and securities, and the interest rates paid on the Bank’s interest-bearing liabilities such as deposits and borrowings). These rates 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 FRB. Because of the Company’s practice of using variable rate pricing and noninterest bearing demand deposit accounts, the Company is asset sensitive. As a result, the Company is generally adversely affected by declining interest rates. In addition, changes in monetary policy, including changes in interest rates, influence the origination of loans, the purchase of investments and the generation of deposits and affect the rates received on loans and securities and paid on deposits, which could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Quantitative and Qualitative Disclosure about Market Risk.”

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

Potential Volatility of Deposits

At March 31, 2006, time certificates of deposit in excess of $100,000 represented approximately 30% of the dollar value of the total deposits of the Company. As such, these deposits are considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits could adversely affect the liquidity of the Company, profitability, business prospects, results of operations and cash flows. The Company monitors activity of volatile liability deposits on a quarterly basis. Approximately $55.3 million of the $114.5 million in time certificates of deposit over $100,000 act as core deposits with over five years history of rollover with the Company.

Dividends

Because the Company conducts no other significant activity than the management of its investment in the Bank and Mortgage Company, the Company is dependent on these subsidiaries for income. The ability of the Bank and Mortgage Company to pay cash dividends in the future depends on the profitability, growth and capital needs of the Bank and Mortgage Company. In addition, the California Financial Code restricts the ability of the Bank to pay dividends. No assurance can be given that the Company or the Bank will pay any dividends in the future or, if paid, such dividends will not be discontinued.

Government Regulation and Legislation

The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation, which govern almost all aspects of the operations of the Company and the Bank. The business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Such laws are subject to change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance funds and not for the protection of shareholders of the Company. The Company cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on the business and prospects of the Company, but it could be material and adverse.

Economic Conditions and Geographic Concentration

The Company’s operations are located and concentrated in California, particularly the counties of El Dorado, Placer, Shasta and Sacramento, and are likely to remain so for the foreseeable future. At March 31, 2006, approximately 70% of the Bank’s loan portfolio consisted of real estate related loans, most of which were related to collateral located in California. A change in California economic and business conditions may adversely affect the performance of these loans. Deterioration in economic conditions could have a material adverse effect on the quality of the loan portfolio of the Bank and the demand for its products and services. In addition, during periods of economic slowdown or recession, the Bank may experience a decline in collateral values and an increase in delinquencies and defaults. A decline in collateral values and an increase in delinquencies and defaults increase the possibility and severity of losses. California real estate is also subject to certain natural disasters, such as earthquakes, floods and mudslides, which are typically not covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may make it difficult or impossible for borrowers to repay loans made by the Company.

Reliance on Key Employees and Others

As of March 31, 2006, the Company employed 121 employees. The Company considers employee relations to be excellent. A collective bargaining group represents none of the employees of the Company or its subsidiaries. Failure of the Company to attract and retain qualified personnel could have an adverse effect on the Company’s business, financial condition and results of operations. The Company does maintain life insurance with respect to five of its officers in conjunction with a salary continuation plan.

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

Adequacy of Allowance for Loan and Lease Losses (ALLL)

The Company’s allowance for loan and lease losses was approximately $4.3 million, or 1.13% of total loans at March 31, 2006. Material future additions to the allowance for loan losses might be necessary if material adverse changes in economic conditions occur and the performance of the loan portfolio of the Company deteriorates. In addition, future additions to the Company’s allowance for loan and lease losses on other real estate owned may also be required in order to reflect changes in the markets for real estate in which the Company’s other real estate owned is located and other factors which may result in adjustments which are necessary to ensure that the Company’s foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose of the properties. Moreover, the FDIC and the DFI, as an integral part of their examination process, periodically review the Company’s allowance for loan and lease losses and the carrying value of its assets. The Bank was most recently examined by the DFI in this regard during the first quarter of 2005. Increases in the provisions for loan losses and foreclosed assets could adversely affect the Bank’s financial condition and results of operations.

Certain Ownership Restrictions under California and Federal Law

Federal law prohibits a person or group of persons “acting in concert” from acquiring “control” of a bank holding company unless the FRB has been given 60 days prior written notice of such proposed acquisition and within that time period the FRB has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days, the period during which such a disapproval may be issued. An acquisition may be made before the expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the action. Under a rebuttal presumption established by the FRB, the acquisition of more than 10% of a class of voting stock of a bank with a class of securities registered under Section 12 of the Exchange Act (such as the common stock), would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any “company” would be required to obtain the approval of the FRB under the BHCA, before acquiring 25% (5% in the case of an acquirer that is, or is deemed to be, a bank holding company) or more of the outstanding shares of the Company’s common stock, or such lesser number of shares as constitute control. See “Supervision and Regulation and Regulation and Supervision of Bank Holding Companies” in the Company’s 2005 Annual Report on Form 10-K.

Under the California Financial Code, no person shall, directly or indirectly, acquire control of a California licensed bank or a bank holding company unless the Commissioner has approved such acquisition of control. A person would be deemed to have acquired control of the Company and the Bank under this state law if such person, directly or indirectly, has the power (i) to vote 25% or more of the voting power of the Company or (ii) to direct or cause the direction of the management and policies of the Company. For purposes of this law, a person who directly or indirectly owns or controls 10% or more of the common stock would be presumed to direct or cause the direction of the management and policies of the Company and thereby control the Company.

Shares Eligible for Future Sale

As of March 31, 2006, the Company had 8,716,872 shares of Common Stock outstanding, of which 5,712,008 shares are eligible for sale in the public market without restriction and 2,950,888 shares are eligible for sale in the public market pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Future sales of substantial amounts of the Company’s common stock, or the perception that such sales could occur, could have a material adverse effect on the market price of the common stock. In addition, options to acquire 515,889 shares of the issued and outstanding shares of common stock at exercise prices ranging from $2.75 to $11.59 have been issued to directors and certain employees of the Company under the Company’s 1998 Stock Option Plan. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Company’s common stock.

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

Technology and Computer Systems

Advances and changes in technology can significantly affect the business and operations of the Company. The Company faces many challenges including 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. In addition, 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.

During 2006 the Company will build an Administrative and Information Technology center on property already owned adjacent to the Churn Creek office. Ground breaking began in February 2006 and the project is expected to take ten months. The budget for this project is approximately $3.7 million.

Environmental Risks

The Company, in its ordinary course of business, acquires real property securing loans that are in default, and there is a risk that hazardous substance or waste, contaminants or pollutants could exist on such properties. The Company may be required to remove or remediate such substances from the affected properties at its expense, and the cost of such removal or remediation may substantially exceed the value of the affected properties or the loans secured by such properties. Furthermore, the Company may not have adequate remedies against the prior owners or other responsible parties to recover its costs. Finally, the Company may find it difficult or impossible to sell the affected properties either before or following any such removal. In addition, the Company may be considered liable for environmental liabilities concerning its borrowers’ properties, if, among other things, it participates in the management of its borrowers’ operations. The occurrence of such an event could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Dilution

The Company has issued options to purchase shares of the Company’s common stock at prices equal to 85% to 100% of the fair market value of the Company’s Common Stock on the date of grant. As of March 31, 2006, the Company had outstanding options to purchase an aggregate of 515,889 shares of Common Stock at exercise prices ranging from $2.75 to $11.59 per share, or a weighted average exercise price per share of $5.20. To the extent such options are exercised, stockholders of the Company will experience dilution.

UNRESOLVED STAFF COMMENTS

No comments to report.

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

Executive Overview

Our Company was established to make a profitable return while serving the financial needs of the business and professional communities of our markets. We are in the financial services business, and no line of financial services is beyond our charter as long as it serves the needs of businesses and professionals in our communities. The mission of our Company is to provide its stockholders with a safe, profitable return on their investment, over the long term. Management will attempt to minimize risk to our stockholders by making prudent business decisions, will maintain adequate levels of capital and reserves, and will maintain effective communications with stockholders.

Our Company’s most valuable asset is its customers. We will consider their needs first when we design our products. High-quality customer service is an important mission of our Company, and how well we accomplish this mission will have a direct influence on our profitability.

Our vision is to embrace changes in the industry and develop profitable business strategies that allow us to maintain our customer relationships and build new ones. Our competitors are no longer just banks. We must compete with financial powerhouses that want our core business. The flexibility provided by the Financial Holding Company Act will become increasingly important. We have developed strategic plans that evaluate additional financial services and products that can be delivered to our customers efficiently and profitably. Producing quality returns is, as always, a top priority.

The Company’s long term success rests on the shoulders of the leadership team to effectively work to enhance the performance of the Company. As a financial services company, we are in the business of taking risk. Whether we are successful depends largely upon whether we take the right risks and get paid appropriately for the risks we take. Our governance structure enables us to manage all major aspects of the Company’s business effectively through an integrated process that includes financial, strategic, risk and leadership planning.

We define risks to include not only credit, market and liquidity risk — the traditional concerns for financial institutions — but also operational risks, including risks related to systems, processes or external events, as well as legal, regulatory and reputation risks.

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, 2005, under the heading “Risk Management”.

Sources of Income

The Company derives its income from two principal sources: (i) net interest income, which is the difference between the interest income it receives on debt securities, loans (including yield-related loan fees) and other interest-earning assets minus the interest expense it pays for deposits and long-term and short-term debt, 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 net interest margin is the average yield on earning assets minus the average interest rate paid for deposits and other sources of funding.

The income of the Company depends to a great extent on net interest income. These interest rate factors are highly sensitive to many factors, which are beyond the Company’s control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Because of the Company’s predisposition to variable rate pricing and non-interest bearing demand deposit accounts, the Company is considered asset sensitive. As a result, the Company is adversely affected by declining interest rates.

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

Financial Highlights — Results of Operations

Net income for the first quarter of 2006 totaled $1,592,000 an increase of 15.7% from the $1,376,000 reported for the same quarterly period of 2005. On the same basis, diluted earnings per common share for the first quarter of 2006 were $0.18, compared to $0.16 for the same period of 2005, a 12.5% increase. Return on average assets (ROA) and return on average equity (ROE) for the first quarter of 2006 were 1.24% and 15.18%, respectively, compared with 1.24% and 14.89%, respectively, for the first quarter of 2005.

Net Interest Income and Net Interest Margin

Net interest income is the primary source of the Company’s income. Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, securities and federal funds sold) over the interest paid on deposits and borrowed funds. Net interest margin is net interest income expressed as a percentage of average earning assets. Net interest income for the quarter ended March 31, 2006 was $5,413,000 compared with $4,856,000 for the same period in 2005, an increase of 11.5%.

Average earning assets for the three-months ended March 31, 2006 increased $67.4 million or 16.2% compared with the same period in the prior year. Average net loans, the largest component of earning assets, increased $45.5 million or 14.1% compared with the prior year period. Average securities increased $18.6 million or 23.1% over the prior year period. Overall, the yield on earning assets increased to 6.93% for the three-month period ended March 31, 2006 compared to 5.94% for the same three-month period in the prior year, partially due to volume increases coupled with rising interest rates during the period.

The overall cost of interest-bearing liabilities (funding costs) for the first three months of 2006 was $2,976,000 compared with $1,335,000 for the first three months of 2005, a 122.9% increase. The increase in funding costs was primarily a result of increases rates paid on time deposits and extending term borrowings, including a second trust preferred issuance. The net effect of the changes discussed above resulted in an increase of $557,000 or 11.5% in net interest income for the three-month period ended March 31, 2006 from the same period in 2005. Net interest margin decreased 19 basis points to 4.47% from 4.66% 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 its customers, withdrawals of its depositors and other cash commitments under both normal operating conditions and under unforeseen and unpredictable circumstances of industry or market stress.

The Asset Liability Management Committee (“ALCO”) establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid resources of cash and due from banks, federal funds sold and securities purchased under agreements to resell, asset liquidity is supported by debt securities in the available-for-sale securities portfolio and wholesale lines of credit with the Federal Home Loan Bank and other financial institutions. Customer core deposits have historically provided the Company with a source of relatively stable and low-cost funds. Management monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and repayments and maturities of loans and securities, the Company has the ability to sell securities under agreements to repurchase, obtain Federal Home Loan Bank advances or purchase overnight Federal Funds.

The Company’s consolidated liquidity position remains adequate to meet short-term and long-term future contingencies. At March 31, 2006, the Company had overnight cash in investments of $21.7 million and available lines of credit of at the Federal Home Loan bank of approximately $72.3 million, and a Federal Funds borrowing line with two correspondent financial institutions of $15.0 million.

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

To accommodate future growth and business needs, the Company develops an annual capital expenditure budget during strategic planning sessions. The Company expects that the earnings of the Bank, acquisition of core deposits and wholesale borrowing arrangements are sufficient to support liquidity needs in 2006.

Capital Management

The Company uses capital to fund organic growth, pay dividends and repurchase its shares. The objective of effective capital management is to produce above market long-term returns by using capital when returns are perceived to be high and issuing capital when costs are perceived to be low. The Company’s potential sources of capital include retained earnings, common and preferred stock issuance and issuance of subordinated debt and trust notes.

Total stockholders’ equity increased by $4.4 million to $40.3 million at March 31, 2006 over March 31, 2005.


						Well			Minimum
			Actual			Capitalized			Capital
	Capital		Ratio			Requirement			Requirement

The Company Leverage	$	51,733,000		10.05	%		n/a			4.0	%
Tier 1 Risk-Based		51,733,000		12.00	%		n/a			4.0	%
Total Risk-Based		56,433,245		13.09	%		n/a			8.0	%

Redding Bank of Commerce Leverage	$	51,991,151		10.14	%		5.0	%		4.0	%
Tier 1 Risk-Based		51,991,151		12.06	%		6.0	%		4.0	%
Total Risk-Based		56,691,396		13.15	%		10.00	%		8.0	%

Short and Long Term Borrowings

The Company actively uses Federal Home Loan Bank (“FHLB”) advances as a source of wholesale funding to support growth strategies as well as to provide liquidity. At March 31, 2006, all of the Company’s FHLB advances were a combination of fixed term and variable borrowings without call or put option features.

During the three months ended March 31, 2006, the average balance of FHLB advances was $57.6 million and the average interest rates during the period was 4.61%. The maximum outstanding at any month-end during the three months ended March 31, 2006 was $65.0 million. The FHLB advances are collateralized by loans and securities pledged to the FHLB.

Provision for Loan and Lease Losses

The Company’s most significant management accounting estimate is the appropriate level for the allowance for loan losses. The Company follows a methodology for calculating the appropriate level for the allowance for loan and lease losses as discussed under “Asset Quality” and “Allowance for Loan and Lease Losses (ALLL)” in this document.

Provision for loan and lease losses of $11,000 were provided for the three-months ended March 31, 2006 compared with $177,000 for the same period of 2005. The Company’s allowance for loan and lease losses was 1.13% of total loans at March 31, 2006 and 1.25% at March 31, 2005, while its ratio of non-performing assets to total assets was 0.02% at March 31, 2006, compared to 0.46% at March 31, 2005.

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

Factors that may affect future results

As a financial services company, our earnings are significantly affected by general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the United States economy and local economies in which we operate. For example, an economic downturn, increase in unemployment, or other events that negatively impact household and/or corporate incomes could decrease the demand for the Company’s loan and non-loan products and services and increase the number of customers who fail to pay interest or principal on their loans. Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and our military conflicts including the aftermath of the war with Iraq, could impact business conditions in the United States.

The Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States. Its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which impact our net interest margin, and can materially affect the value of financial instruments we hold. Its policies can also affect our borrowers, potentially increasing the risk of failure to repay their loans. Changes in Federal Reserve Board policies are beyond our control and hard to predict or anticipate.

We operate in a highly competitive industry that could become even more competitive because of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can now merge creating a financial holding company that can offer virtually any type of financial service, including banking, securities underwriting, insurance (agency and underwriting) and merchant banking. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

The holding company, subsidiary bank and non-bank 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 2005 Annual Report on Form 10-K.

Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure on financial services companies to provide products and services at lower prices. This can reduce our net interest margin and revenues from fee-based products and services. In addition, the widespread adoption of new technologies, including internet-based services, could require us to make substantial expenditures to modify or adapt our existing products and services. Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people can be intense.

The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that our bank may pay to the holding company. For more information, refer to “Dividends and Other Distributions” in the Company’s 2005 Annual Report on Form 10-K.

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 2005 Annual Report on Form 10-K. Not all of the significant accounting policies presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2005 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.

Accounting Principles Generally Accepted in the United States of America

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s significant accounting policies are presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2005 Annual Report on Form 10-K.

The Company follows accounting policies typical to the commercial banking industry and in compliance with various regulations and guidelines as established by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”) and the Bank’s primary federal regulator, the Federal Deposit Insurance Corporation (“FDIC”). The following is a brief description of the Company’s current accounting policies involving significant management judgments.

Allowance for Loan and Lease Losses (“ALLL”)

The allowance for loan and lease losses is management’s best estimate of the probable losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, which requires that losses be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

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

The Company performs periodic and systematic detailed evaluations of its lending portfolio to identify and estimate the inherent risks and assess the overall collectibility. These evaluations include general conditions such as the portfolio composition, size and maturities of various segmented portions of the portfolio such as secured, unsecured, construction, and Small Business Administration (“SBA”).

Additional factors include concentrations of borrowers, industries, geographical sectors, loan product, loan classes and collateral types; volume and trends of loan delinquencies and non-accrual; criticized and classified assets and trends in the aggregate in significant credits identified as watch list items. There are several components to the determination of the adequacy of the ALLL. Each of these components is determined based upon estimates that can and do change when the actual events occur. The Company estimates the SFAS No. 5 portion of the ALLL based on the segmentation of its portfolio. For those segments that require an ALLL, the Company estimates loan and lease losses on a monthly basis based upon its ongoing loan review process and analysis of loan performance. The Company follows a systematic and consistently applied approach to select the most appropriate loss measurement methods and support its conclusions and rationale with written documentation. One method of estimating loan losses for groups of loans is through the application of loss rates to the groups’ aggregate loan balances. Such rates typically reflect historical loss experience for each group of loans, adjusted for relevant economic factors over a defined period of time. The Company evaluates and modifies its loss estimation model as needed to ensure that the resulting loss estimate is consistent with GAAP. For individually impaired loans, SFAS No. 114 provides guidance on the acceptable methods to measure impairment. Specifically, SFAS No. 114 states that when a loan is impaired, the Company should measure impairment based on the present value of expected future principal and interest cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price or the fair value of collateral, if the loan is collateral dependent. When developing the estimate of future cash flows for a loan, the Company considers all available information reflecting past events and current conditions, including the effect of existing environmental factors.

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 2005 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

Statement of Financial Accounting Standards No. 123 (revised 2004); Accounting for Stock Based Compensation was adopted by the Company as of January 1, 2006, using the modified prospective transition method. Under the modified prospective 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 amount of the reduction for the fiscal years 2003 through 2005 is disclosed in Note 13 to the Consolidated Financial Statements contained in the Company’s 2005 Annual Report on Form 10-K, based upon the assumptions listed therein. Accounting principles generally accepted in the United States of America (GAAP), itself may change over time, having impact over the reporting of the Company’s financial activity. Although the economic substance of the Company’s transactions would not change, alterations in GAAP could affect the timing or manner of accounting or reporting.

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

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. The Company’s deferred tax assets are described further in Note 12 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company’s 2005 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 earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.

Table 1. Average Balances, Interest Income/Expense and Yields/Rates Paid

(Unaudited, Dollars in thousands)


	Three Months Ended								Three Months Ended
	March 31, 2006								March 31, 2005
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Earning Assets
Portfolio Loans	$	369,589		$	7,230		7.82	%	$	324,055		$	5,407		6.67	%
Tax-exempt Securities		14,099			123		3.49	%		6,447			54		3.35	%
US Government Securities		43,052			423		3.93	%		31,966			245		3.07	%
Mortgage backed Securities		41,910			439		4.19	%		42,055			406		3.86	%
Federal Funds Sold		11,587			130		4.49	%		12,321			79		2.56	%
Other Securities		4,049			44		4.35	%		0			0		0.00	%

Average Earning Assets	$	484,286		$	8,389		6.93	%	$	416,844		$	6,191		5.94	%

Cash & Due From Banks	$	13,937							$	15,255
Bank Premises		5,943								5,481
Allowance for Loan Losses		( 4,364	)							( 3,954	)
Other Assets		12,877								11,411

Average Total Assets	$	512,679							$	445,037

Interest Bearing Liabilities
Demand Interest Bearing	$	103,500		$	233		0.90	%	$	111,227		$	139		0.50	%
Savings Deposits		28,093			65		0.93	%		23,852			24		0.40	%
Certificates of Deposit		164,752			1,549		3.76	%		143,705			830		2.31	%
Repurchase Agreements		24,057			199		3.31	%		5,642			19		1.35	%
FHLB Borrowings		57,611			672		4.67	%		36,000			243		2.70	%
Trust Preferred Borrowings		15,000			258		6.88	%		5,000			80		6.40	%

		393,013		$	2,976		3.03	%		325,426		$	1,335		1.64	%

Noninterest bearing demand		78,339								79,489
Other Liabilities		4,376								5,494
Stockholders’ Equity		36,951								34,628

Average Liabilities and Stockholders’ Equity	$	512,679							$	445,037

Net Interest Income and Net Interest Margin				$	5,413		4.47	%				$	4,856		4.66	%

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

The following tables set forth changes in interest income and interest expense for each major category of earning assets and interest-bearing liabilities, and the amount of change attributable to volume and rate changes for the periods indicated. Changes attributable to rate/volume have been allocated to volume changes.

Table 2. Analysis of Changes in Net Interest Income and Interest Expense


	March 31, 2006 over March 31, 2005
(Dollars in thousands)	Volume			Rate		Total
Increase (Decrease) In Interest Income
Portfolio Loans	$	891		$	932	$	1,823
Tax-exempt Securities		67			2		69
US Government Securities		109			69		178
Mortgage back Securities		(2	)		35		33
Federal Funds Sold		(8	)		59		51
Other Securities		44			0		44

Total Increase (Decrease)	$	1,101		$	1,097	$	2,198


Increase (Decrease) In Interest Expense
Interest Bearing Demand	$	(17	)	$	111	$	94
Savings Deposits		10			31		41
Certificates of Deposit		198			521		719
Repurchase Agreements		152			28		180
FHLB Borrowings		252			177		429
Trust Preferred Borrowings		172			6		178

Total Increase (Decrease)	$	767		$	874	$	1,641


Net Increase	$	334		$	223	$	557

Net interest income was $5.4 million for the first three-months of 2006 compared with $4.9 million for the same period in 2005, an 11.5% increase (Tables 1 and 2). The increase is attributed to an increase in the volume of earning assets coupled with increases in interest rates during the period. Average earning assets for the first three-months of 2006 were $484.3 million compared with $416.8 million for the same period in 2005, an increase of $67.4 million or 16.2%. The single largest component of increased earning assets was in the loan portfolio. Average loans increased $45.5 million or 14.1% over the same three-month period in 2005. Coupled with the asset growth, yields on earning assets increased to 6.93% compared with 5.94% over the same three-month period in 2005, a gain of 99 basis points.

Average interest bearing liabilities also increased by $57.6 million or 18.0% for the first three-months of 2006 to $378.0 million in 2006 compared with $320.4 million for the same period in 2005. The cost of interest bearing liabilities or funding increased to 3.03% in 2006 compared to 1.64% in 2005, an increase in interest expense of $1.6 million or 122.9%. The increase in interest expense is primarily due to the second trust preferred issuance, coupled with increased volume in time accounts.

As a result of these changes, the interest spread (the difference between the yield on earning assets and the cost of interest bearing liabilities) decreased 19 basis points to 4.47% for the three-months ended March 31, 2006 compared with 4.66% for the same three-month period in the prior year.

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

Noninterest Income

The Company’s noninterest income consists of service charges on deposit accounts, other fee income, processing fees for credit card payments and gains or losses on security sales. The following table sets forth a summary of noninterest income for the periods indicated.


	Three Months Ended
(Dollars in thousands)	March 31, 2006		March 31, 2005

Noninterest income

Service charges on deposit accounts	$	88	$	103
Payroll and benefit processing fees		109		99
Earnings on cash surrender value — Bank owned life insurance		53		51
Net gain on sale of securities available-for-sale		0		(2	)
Net gain on sale of loans		1		19
Merchant credit card service income, net		77		99
Mortgage brokerage fee income		213		86
Other income		102		87

Total noninterest income	$	643	$	542

Noninterest income increased $101,000 or 18.6% for the quarter ended March 31, 2006 over March 31, 2005. Net gain on sale of loans decreased $18,000 over the prior years’ quarter due to no sales of SBA loans during the quarter. Mortgage brokerage fee income increased by $127,000 for the first quarter 2006 over the same period in 2005, due to increases in mortgage brokerage fees and volume.

Noninterest Expense


	Three Months Ended
(Dollars in thousands)	March 31, 2006		March 31, 2005

Noninterest expense
Salaries and related benefits	$	2,052	$	1,693
Occupancy and equipment expense		435		387
FDIC insurance premium		12		12
Data processing fees		58		41
Professional service fees		204		205
Payroll processing fees		29		36
Deferred compensation expense		88		73
Stationery and supplies		60		59
Postage		31		28
Directors’ expense		60		74
Other expenses		404		312

Total noninterest expense	$	3,433	$	2,920

Noninterest expense for the quarter ended March 31, 2006 was $3.4 million, an increase of $513,000 or 17.6% over the same period a year ago. Salaries and employee benefits represent most of the increase of $359,000 or 21.2% over the same period a year ago. Increases are related to increases in staffing to support volume increases and in preparation of opening the Sutter Bank of Commerce division.

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

Income Taxes

The Company’s effective tax rate varies with changes in the relative amounts of its non-taxable income and non-deductible expenses. The increase in the Company’s tax provision is attributable to decreases in non-taxable income related to a reduction in the municipal security portfolio and reclassification of enterprise zone qualified credits.

The following table reflects the Company’s tax provision and the related effective tax rate for the periods indicated.


	Three Months Ended
(Dollars in thousands)	March 31, 2006			March 31, 2005

Income Taxes
Tax provision	$	1,020		$	925
Effective tax rate		39.1	%		40.2	%

The Company’s provision for income taxes includes both federal and state income taxes and reflects the application of federal and state statutory rates to the Company’s net income before taxes. The principal difference between statutory tax rates and the Company’s effective tax rate is the benefit derived from investing in tax-exempt securities and enterprise zone qualifying loans. Increases and decreases in the provision for taxes reflect changes in the Company’s net income before tax.

Asset Quality

The Company concentrates its lending activities primarily within in El Dorado, Placer, Sacramento, Shasta, Tehama, Sutter and Yuba Counties, California, and the location of the Bank’s five 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)	March 31, 2006			December 31, 2005

Portfolio Loans
Commercial and financial loans	$	116,310		$	115,401
Real estate-construction loans		105,908			100,786
Real estate-commercial		137,390			133,510
Real estate- other		14,442			13,790
Real estate-mortgage		3,593			3,669
Installment		96			439
Other loans		1,937			446
Less:
Net deferred loan fees		(398	)		(420	)
Allowance for loan losses		(4,295	)		(4,316	)

Total net loans	$	374,983		$	363,305

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

The Company’s practice is to place an asset on nonaccrual status when one of the following events occur: (i) any installment of principal or interest is 90 days or more past due (unless in management’s opinion the loan is well secured and in the process of collection). (ii) Management determines the ultimate collection of principal or interest to be unlikely or (iii) the terms of the loan have been renegotiated due to a serious weakening of the borrower’s financial condition. Nonperforming loans are loans that are on nonaccrual, are 90 days past due and still accruing or have been restructured.

Net portfolio loans increased $11.7 million or 3.22% at March 31, 2006 over December 31, 2005. The portfolio mix remains consistent with the mix at December 31, 2004. The balance of the portfolio remains relatively consistent with the mix at December 31, 2005, with commercial and financial loans of approximately 31%, real estate construction of approximately 29% and commercial real estate of approximately 39%. Impaired loans are loans for which it is probable that the Company will not be able to collect all amounts due and payable. The Company had outstanding balances of $120,000 and $372,000 in impaired loans that had impairment allowances of $108,000 and $291,723 as of March 31, 2006 and December 31, 2005, respectively.

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


(Dollars in thousands)	March 31, 2006		December 31, 2005

Non performing assets
Nonaccrual loans	$	120	$	372
90 days past due and still accruing interest		0		0

Total nonaccrual loans		120		372
Other Real Estate Owned		0		0

Total non performing assets	$	120	$	372

Allowance for Loan and Lease Losses (ALLL)

The allowance for loan and lease losses is management’s estimate of the amount of probable loan losses in the loan portfolio. The Company determines the allowance for loan losses based on an ongoing evaluation. The evaluation is inherently subjective because it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. The Company makes provisions to the ALLL on a regular basis through charges to operations that are reflected in the Company’s statements of income as a provision for loan losses. When a loan is deemed uncollectible, it is charged against the allowance. Any recoveries of previously charged-off loans are credited back to the allowance. There is no precise method of predicting specific losses or amounts that ultimately may be charged-off on particular categories of the loan portfolio.

The Company’s allowance for loan losses is the accumulation of various components that are calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed pursuant to SFAS No. 5, Accounting for 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 losses is the Company’s loan risk evaluation process, which includes loan risk grading individual commercial, construction, commercial real estate and most consumer loans. Loans are assigned loan risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrower’s current financial information, historical payment experience, loan documentation, public information, and other information specific to each individual borrower. Loans are reviewed on an annual or rotational basis or as management become aware of information affecting the borrower’s ability to fulfill its obligations. Loan risk grades carry a dollar weighted risk percentage.

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

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

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


(Dollars in thousands)	March 31, 2006			March 31, 2005

Allowance for Loan and Lease Losses
Beginning balance for Loan and Lease Losses	$	4,316		$	3,866
Provision for Loan and Lease Losses		11			177
Charge offs:
Commercial		(149	)		(0	)
Real Estate		(0	)		(0	)
Other		(0	)		(0	)

Total Charge offs		(149	)		(0	)

Recoveries:
Commercial		116			1
Real Estate		0			0
Other		1			0

Total Recoveries		117			1

Ending Balance	$	4,295		$	4,044
ALLL to total loans		1.13	%		1.25	%
Net Charge offs to average loans		0.01	%		0.00	%

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

Securities Portfolio

The securities portfolio is comprised of U.S. Treasury securities, U.S. Agency securities, mortgage-backed securities, and obligations of states and political subdivisions. Securities classified as available for sale are recorded at fair value, while securities classified as held to maturity are recorded at cost. Unrealized gains or losses on available for sale securities, net of the deferred tax effect, are reported as increases or decreases in stockholders’ equity. Portions of the securities portfolio are used for pledging requirements for deposits of state and local subdivisions, securities sold under repurchase agreements, and FHLB advances. The Company does not include federal funds sold as securities. These investments are included in cash and cash equivalents.

Total available-for-sale securities increased $16.4 million or 21.2% at March 31, 2006 compared to March 31, 2005. As of March 31, 2006, the Company has pledged $1.0 million of securities for treasury, tax and loan accounts, $8.4 million for deposits of public funds, approximately $25.1 million for collateralized repurchase agreements and $20.0 million towards Federal Home Loan Bank borrowings.

The following table summarizes the amortized cost of the Company’s available-for-sale securities held on the dates indicated.


(Dollars in thousands)	as of March 31, 2006
	Amortized		Unrealized		Unrealized			Estimated
	Costs		Gains		Losses		Fair Value

U.S. government & agencies	$	42,316	$	0	$	(957	)	$	41,359
Obligations of state and political subdivisions		7,316		29		(171	)		7,174
Mortgage backed securities		42,318		0		(1,220	)		41,098
Corporate Bonds		4,054		0		(40	)		4,014

Total	$	96,004	$	29	$	(2,388	)	$	93,645


(Dollars in thousands)	as of March 31, 2005
	Amortized		Unrealized		Unrealized				Estimated
	Costs		Gains		Losses			Fair Value

U.S. government & agencies	$	31,957	$	0	$	(679	)		$	31,278
Obligations of state and political subdivisions		6,373		39		(150	)			6,262
Mortgage backed securities		40,402		0		(666	)			39,736


Total	$	78,732	$	39	$	(1,495	)		$	77,276

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as market movements. The risk is inherent in the financial instruments associated with our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt and derivatives. Market-sensitive assets and liabilities are generated through loans and deposits associated with our banking business, our Asset Liability Management (“ALM”) process, and credit risk mitigation activities. Traditional loan and deposit products are reported at amortized cost for assets or the amount owed for liabilities. These positions are subject to changes in economic value based on varying market conditions. Interest rate risk is the effect of changes in economic value of our loans and deposits, as well as our other interest rate sensitive instruments and is reflected in the levels of future income and expense produced by these positions versus levels that would be generated by current levels of interest rates. We seek to mitigate interest rate risk as part of the ALM process.

Interest rate risk represents the most significant market risk exposure to our financial instruments. Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not adversely affect net interest income. Interest rates risk is measured as the potential volatility in our net interest income caused by changes in market interest rates. Lending and deposit taking create interest rate sensitive positions on our balance sheet. Interest rate risk from these activities as well as the impact of ever changing market conditions is mitigated using the ALM process. The Company does not operate a trading account, currently does not hold any financial derivatives and does not hold a position with exposure to foreign currency exchange or commodities. The Company faces market risk through interest rate volatility.

The Board of Directors has overall responsibility for the Company’s interest rate risk management policies. The Company has an Asset/Liability Management Committee (“ALCO”) which establishes and monitors guidelines to control the sensitivity of earnings to changes in interest rates. The internal ALCO Roundtable group maintains a net interest income forecast using different rate scenarios utilizing a simulation model. This group updates the net interest income forecast for changing assumptions and differing outlooks based on economic and market conditions.

The simulation model used includes measures of the expected repricing characteristics of administered rate (NOW, savings and money market accounts) and non-related products (demand deposit accounts, other assets and other liabilities). These measures recognize the relative sensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experience, recognizing the timing differences of rate changes. In the simulation of net interest margin and net income the forecast balance sheet is processed against five rate scenarios. These five rate scenarios include a flat rate environment, which assumes interest rates are unchanged in the future and four additional rate ramp scenarios ranging for + 200 to — 200 basis points in 100 basis point increments, unless the rate environment cannot move in these basis point increments before reaching zero.

The formal policies and practices adopted by the Company to monitor and manage interest rate risk exposure measure risk in two ways: (i) repricing opportunities for earning assets and interest-bearing liabilities and (ii) changes in net interest income for declining interest rate shocks of 100 to 200 basis points. Because of the Company’s predisposition to variable rate, pricing and noninterest bearing demand deposit accounts the Company is asset sensitive. As a result, management anticipates that, in a declining interest rate environment, the Company’s net interest income and margin would be expected to decline, and, in an increasing interest rate environment, the Company’s net interest income and margin would be expected to increase. However, no assurance can be given that under such circumstances the Company would experience the described relationships to declining or increasing interest rates. Because the Company is asset sensitive, the Company is adversely affected by declining rates rather than rising rates. At March 31, 2006 the Company remained positioned for future rising interest rates and curve flattening.

To estimate the effect of interest rate shocks on the Company’s net interest income, management uses a model to prepare an analysis of interest rate risk exposure. Such analysis calculates the change in net interest income given a change in the federal funds rate of 100 or 200 basis points up or down. All changes are measured in dollars and are compared to projected net interest income. At March 31, 2005, the estimated annualized reduction in net interest income attributable to a 50 and 100 basis point decline in the federal funds rate was $896,000 and $1,782,000, respectively. At March 31, 2006, the estimated annual increase in net interest income attributable to a 100 and 200 basis point increase in the federal funds rate was $1,025,066 and $2,858,261. At December 31, 2005, the estimated annualized reduction in net interest income attributable to a 100 and 200 basis point decline in the federal funds rate was $1,480,382 and $3,139,893, respectively, with a similar and opposite result attributable to a 100 and 200 basis point increase in the federal funds rate.

The ALCO has established a policy limitation to interest rate risk of -14% of net interest margin and -12% of the present value of equity.

The securities portfolio is integral to our asset liability management process. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity, regulatory requirements and the relative mix of our cash positions.

The Company’s approach to managing interest rate risk may include the use of derivatives. This helps to minimize significant, unplanned fluctuations in earnings, fair values of assets and liabilities and cash flows caused by interest rate volatility. This approach involves modifying the repricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on the net interest margin and cash flows. As a result of interest rate fluctuations, hedged assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect of this unrealized gain or loss will generally be offset by income or loss on the derivatives linked to the hedged assets and liabilities. For a cash flow hedge, the change in the fair value of the derivative to the extent that it is effective is recorded through other comprehensive income.

We may use derivatives as part of our interest rate risk management, including interest rate swaps, caps and floors. At inception, the relationship between hedging instruments and hedged items is formally documented with our risk management objective, strategy and our evaluation of effectiveness of the hedge transactions. This includes linking all derivatives designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific transactions. Periodically, as required, we formally assess whether the derivative we designated in the hedging relationship is expected to be and has been highly effective in offsetting changes in fair values or cash flows of the hedged item.

Our derivative activities are monitored by the Directors ALCO committee. At the March 2006 Board of Directors meeting the committee approved a cash flow hedge up to $100 million for a 24 month period, trading floating for fixed interest rates on loans. The ALCO Roundtable has the authority to place the hedge in one or more increments over the next several months.

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 1a. Risk Factors

There have been no material changes from the risk factors previously disclosed in the registrant’s Form 10-K.

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

N/A

Item 3. Defaults upon Senior Securities

N/A.

Item 4. Submission of Matters to a vote of Security Holders

N/A

Item 5. Other Information

N/A

Item 6A. Exhibits

(31.1) Certification of Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002

(31.2) Certification of Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002

(32) Certification of Chief Executive Officer and Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002

Item 6B. Reports on Form 8-K

Form 8-K dated 4/18/06 Sutter office opening announcement

Form 8-K dated 3/22/06 Dividend announcement $0.07 per share

Form 8-K dated 2/10/06 Company business strategies presentation

Form 8-K dated 1/31/06 Earnings press release for 12/31/05

SIGNATURES

Following the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BANK OF COMMERCE HOLDINGS
(Registrant)

Date: May 04, 2006


		/s/ Linda J. Miles
		Linda J. Miles
		Executive Vice President &
		Chief Financial Officer


/s/ Michael C. Mayer		/s/ Linda J. Miles
Michael C. Mayer		Linda J. Miles
President & Chief Executive Officer		Executive VP & Chief Financial Officer

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance SheetsMarch 31, 2006, December 31, 2005 and March 31, 2005		4
Condensed Consolidated Statements of Income Three months ended March 31, 2006 and 2005		5
Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2006 and 2005		6
Notes to Condensed Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Forward Looking Statements and Risk Factors		14
Corporate Overview		14
Lending Risks associated with Commercial Banking and Construction activities		17
Dependence on Real Estate		17
Risks specific to Operations in California		17
Interest Rate Risk		17
Potential Volatility of Deposits		18
Dividends		18
Government Regulation and Legislation		18
Economic Conditions and Geographic Concentration		18
Reliance on Key Employees and Others		18
Adequacy of Allowance for Loan and Lease Losses (ALLL)		19
Certain Ownership Restrictions under California and Federal Law		19
Shares Eligible for Future Sale		19
Technology and Computer Systems		20
Environmental Risks		20
Dilution		20
Unresolved Staff Comments		20
Executive Overview		21
Sources of Income		21
Financial Highlights — Results of Operations		22
Net Interest Income and Net Interest Margin		22
Liquidity		22
Capital Management		23
Short term borrowings		23
Provision for loan losses		23
Factors that may affect future results		24
Critical accounting policies		25
Average balances, Interest Income/Expense and yields/rates paid		27
Analysis of changes in net interest income and interest expense		28
Noninterest Income		29
Noninterest Expense		29
Income taxes		30
Asset quality		30
Allowance for loan losses (ALLL)		31
Securities portfolio		33
Item 3. Quantitative and Qualitative Disclosure about Market Risk		34


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Item 4. Controls and Procedures		36

PART II. OTHER INFORMATION

Item 1. Legal proceedings		37
Item 1a. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 4. Submission of Matters to a Vote of Security Holders		37
Item 5. Other Information		37
Item 6. Exhibits		37
SIGNATURES		37
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

	1.		The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, and

	2.		Information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of the Company.